In the lead up to the COP26 Climate Conference in Glasgow last year, the UK Government released a flurry of climate-related announcements. The most notable were the UK’s Net Zero Strategy, and a date to enshrine Mandatory Climate Disclosures (MCD) into UK law. The adoption of the MCD regulations would make the UK the first country in the G-20 to promulgate legally binding legislation requiring the disclosure of climate-related risks.
The MCD regulations, which also follow the publication of the UK’s Net Zero Strategy that sets out how the UK government plans to deliver its emissions targets of net zero by 2050 and a 78% reduction from 1990 levels by 2035, will also make the UK the first G-20 nation to require disclosures aligned with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (the “TCFD”) recommendations.
In this article, we will analyze the contents of MCD and what they mean for UK companies and investors. We will also look at some of the criticisms leveled at the UK government's new approach to reaching net zero emissions and what carbon pricing instruments have potential to accelerate the path towards decarbonization.
Mandatory Climate Disclosures are aimed at the largest traded companies, banks and insurers operating in the country. The regulations, which also apply to private companies with over 500 employees and £500 million in turnover, will require UK companies to publicly document their exposure to climate-risk. In practice, the regulations will legally require companies to publish data and analysis relating to how their activities contribute towards climate change, and how their operations may become vulnerable to increasingly uncertain weather events.
MCDs are intended to become adopted by markets around the world in order to help investors and businesses better understand the impacts of their exposure to climate change, and to embed these considerations more deeply in their practices and decision making. The TCFD’s goal is also to inform more accurate pricing of climate-related risks and opportunities across financial markets.
UK's strategy challenged
“By mandating large businesses to disclose their climate risks and opportunities – the first G20 country to do so – we are showing global leadership by making our financial system the greenest in the world.” Energy and Climate Change Minister Greg Hands has said.
However, some have criticized the UK’s approach, noting its lack of policies relating to energy efficient homes, agriculture, meat consumption and air travel, issues that more directly contribute to the UK’s greenhouse gas (GHG) output. The Guardian reports that Chris Stark, chief executive of the Government’s own Climate Change Committee has called it “a very market-led strategy,” noting that “We shall see how that fares.”
Further and more intense disapproval has come from organizations ClientEarth (CE) and Friends of the Earth (FoE), who are suing the UK Government on separate grounds relating to its net zero strategy, which was published in October of last year. Both claim the UK has failed to outline specific policies that will enable it to enact the strategy, with CE arguing that failure to meet legal carbon budgets will impact the younger generation’s right to life and family life, as outlined in the Human Rights Act.
The position the UK Government seems to have adopted is that the TCFD’s recommendations create an adequate correcting mechanism to the economy’s GHG emissions. However, the net zero strategy contains worrying admissions, such as “The government has not quantified the effect of each policy and proposal on emissions. So … it is not clear how the mix of policies will deliver on its ambitions.”
While MCDs are a significant and helpful step in economic evolution towards net zero emissions, without a clear vision enshrined in comprehensive policy change, many remain skeptical that the UKs ‘light touch’ approach will have the depth of impact required to meet the demands of the climate crisis.
Future implications for the UK's Mandatory Climate Disclosures
MCD regulations fail in different ways. In particular, regulations do not specify which specific climate-related scenarios a company must use in its assessment of the company’s business model and strategy resilience, only that it intends to make clear in the guidance that “a qualitative assessment of resilience against different scenarios will be sufficient to meet the obligation.”. Regulations are designed such that they are aligned with the four overarching pillars of the TCFD recommendations (governance, strategy, risk management and metrics & targets), and represent an important step in the journey to mitigate climate change as they mandate climate-risk disclosure, with not yet binding requirements to be setting out GHG emission reduction targets.
The impact of the MCD regulations and action resulting from it, are to be combined with other policy tools such as the UK Emission Trading Scheme (ETS), as well as from the continued development of the domestic voluntary carbon market as UK companies move from disclosure to net zero corporate action. The government established the UK ETS in 2021, the country’s compliance emissions trading scheme imposed on the UK’s largest emitters. Further, the UK is one of only a few countries to have domestic carbon standards in place for woodland creation and peatland restoration: the Woodland Carbon Code (WCC) and Peatland Code (PC) - which supports UK companies, or global companies with UK operations, to voluntarily offset their emissions in the country through the purchase of carbon credits sourced from projects developed in the country.
Disclosure regulation in the form of MCD’s is a useful tool, bringing transparency to investors on carbon emissions and related climate-risks. However, we should remain skeptical that MCDs, without the immediate impact of net zero corporate action, or stricter and highly focussed climate policy, will be enough to tackle the climate crisis. Effective carbon policy can facilitate cost effective decarbonisation, maintain competitiveness of the UK, and provide a smooth transition.