Jonny Rogers explores how new regulations on financial disclosures for the UK’s largest companies aim to redistribute wealth towards sustainable initiatives.
Photo by Alexander Kotlyar
On 6th April 2022, the British government enforced mandatory climate-related financial disclosures for the UK’s largest companies.
These new regulations require listed companies to provide a clear description of how they identify, assess and manage climate-related risks and opportunities, thereby helping investors better understand their financial vulnerability to the challenges posed by climate change. Marking the first time a G20 country has enshrined recommendations from the Taskforce on Climate-Related Financial Disclosures (TCFD), the new laws are seen as a pivotal move in the transition towards a greener financial system. As Greg Hands, Minister of State for Business, Energy and Clean Growth, explains:
“If the UK is to meet our ambitious net-zero commitments by 2050, we need our thriving financial system, including our largest businesses and investors, to put climate change at the heart of their activities and decision making” - Greg Hands, GOV.UK.
The Scope of the New Regulations
While companies listed on the London Stock Exchange’s premium segment have been required to declare their climate-related disclosures since December 2020, the new regulations significantly increase their scope. Those included under the new requirements include all UK-registered companies and LLPs (Limited Liability Partnerships) which have more than 500 employees and a turnover exceeding £500m. This accounts for over 1,300 of the largest UK-registered companies and financial institutions. While these mandatory financial disclosures do not require companies to detail the environmental impact of their operations, they still aim to incentivise investment in organisations which can demonstrate greater adaptability to the demands of a rapidly-changing planet. Vice versa, businesses which depend on diminishing natural resources or heavily polluting practises are less likely to receive long-term investment if investors are suitably informed about their investee’s climate-related risks.
“To meet our ambitions to mitigate and adapt to the impacts of climate change and tackle biodiversity loss, we need to realign the way our economy interacts with the natural environment.” – George Eustice MP, Secretary of State for Environment, Food and Rural Affairs
Roadmap to Green Finance
In September 2021, the UN’s Intergovernmental Panel on Climate Change (IPCC) published its Sixth Assessment Report, consolidating the latest scientific evidence on climate change. Without large-scale reductions in CO2 and other greenhouse gas emissions, the report concluded, the global temperature will continue to rise, and the atmosphere will become increasingly hostile to the flourishing of both human and non-human life. In the lead up to COP26, hosted in Glasgow last November, the UK declared their intentions to become a world leader in mitigating the impact of climate change - including a plan to cut emissions by 78% by 2035, on top of plans to achieve net-zero emissions by 2050. As stated in the government’s Roadmap to Sustainable Investing (published in October 2021), the demands of the IPCC report will not be achieved without the prioritisation of sustainable investment: “The financial system is […] critical to achieving net zero and protecting the UK’s natural environment.”
Shortcomings and Opportunities
Nevertheless, mandatory climate-related financial disclosures will not alone redeem a broken economy. The new regulations, for example, only have power over UK-registered companies, and thus hold no accountability for those looking to invest wealth abroad; and there is no legal penalty for investors choosing to invest in unsustainable companies with full knowledge of potential or likely ecological consequences. However, while every individual arguably has an obligation to align their lifestyle and patterns of consumption with the interests of the planet and its inhabitants, it cannot be ignored that environmental responsibility is disproportionally congregated around wealth; the UNEP’s Emissions Gap Report, published in 2020, found that the richest 1% of the global population are responsible for over double the quantity of carbon emissions than the poorest 50%. As such, any legislation that aims to shift the flow of wealth towards sustainable initiatives should be welcomed; not as a scapegoat for environmental accountability, but as a blueprint – or perhaps a greenprint – for how governments can incentivise ethical and sustainable investment. Similar: Conscious Investing: New Finance is Supporting Sustainability
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