With headlines of Brexit, COVID-19 lockdowns and US election results to contend with, you may have missed an important announcement by the Financial Conduct Authority (“FCA”) in December 2020, introducing a new ‘comply or explain’ reporting requirement for those in scope of the rules.
Environmental, social and governance (“ESG”) factors have been a hot topic for a number of years now. Society’s awareness of these issues has steadily increased and turned to activism. Individuals have looked at their own impact and how their own capital is deployed. Nowhere is this more evident than in the pension sector which has faced unprecedented pressure from contributors to provide ESG investments.
With limited regulations, international standards or principles to govern ESG investing, asset managers and financial services providers have developed their own criteria. To address this, various organisations developed frameworks such as the UN Principles of Responsible Investment (which covers c.$82trn of assets under management from over 2,000 signatories), Sustainability Development Goals, the OECD Guidelines for Multinational Enterprises, the IFC’s Sustainability Policies and Standards and many more. Eventually a number of regulators have launched programs to develop common criteria and that is where we find ourselves today, although not yet in the Isle of Man.
Right now, many companies could be forgiven for not understanding what rules are in place and how to apply them. In December, the UK FCA announced that for periods beginning 1 January 2021, premium listed companies (not closed-ended investment funds with a premium listing) will have to report or explain any non-compliance on “climate-related financial disclosures consistent with the TCFD Recommendations and Recommended Disclosures”. This comply or explain requirement is a big step change in ESG reporting and will pose a significant challenge to those in scope entities who will have to gather data and start reporting. Notably it does apply to non-UK companies with premium listings, so will be of interest in the Crown Dependencies and further afield. Equally this should be seen as the first step on the path for the UK requiring all businesses to report on climate related matters.
The TCFD was a Taskforce on Climate related Financial Disclosures set up by the Financial Stability Board. The taskforce was headed by Michael Bloomberg and sought to address the lack of disclosure from companies on climate risk. The published guidance focuses on disclosures which identify specific climate related risks or opportunities to the company and the Board’s response. Specific guidance for the financial sector was also provided, broken down into the insurance, asset management, asset owning and banking sectors
In our experience, a premium listed company may find it more appropriate to provide them in a separate document to make these disclosures comprehensively. The demand for ESG related information has created a trend for organisations to present an ESG report separately to their annual report. Many leading examples of these reports are running to 100+ pages, so separating the documents gives each report a clearer focus. Equally, separating it from the financial statements allows preparers to obtain assurance opinions just on the ESG measures.
Also, of note is the direction of travel signalled by both the UK Government and the FCA. This government have put climate risk high on their agenda. The roll out of TCFD is part of this but we can expect to see more activity over the coming year in the run up to COP26 in November 2021. The UK’s hosting of the UN Climate Change conference is seen as a significant opportunity by the government post Brexit. It puts the UK centre stage and the recent announcement that Business Secretary, Alok Sharma, has stepped down but will stay in Cabinet to focus solely on preparations for the conference only highlights its importance.
The FCA have noted that during the first half of 2021 they expect to issue a consultation on TCFD application – which would include life insurers, asset managers and regulated pension plans. What stands out about these organisations is the sheer scale of their activity. To establish reporting lines sufficient to produce a comprehensive TCFD report is a somewhat daunting task. Regardless, the UK government made it clear that this is the direction of travel – as seen by the introduction of mandatory ESG considerations in the statement of investment principles for both defined benefit and defined contribution schemes over the last couple of years.
The increasing challenges of ESG reporting and managing climate change for our clients has led KPMG to launch KPMG IMPACT. A global initiative acting as an umbrella under which we can bring together all our ESG related expertise. This encompasses strategic work to adapt business models, product offerings, operations, measurement and reporting of impact and assurance on reporting. Within financial services our clients are incorporating ESG screening into their investment strategies, determining their ESG risk appetite, reviewing their existing portfolios and reporting to investors. KPMG IMPACT pulls together our global expertise. This makes it easier for us to bring our skills and experience to bear for our clients and, with leading climate scientists in the team, provide a new level of insight.
ESG may have been talked about for a while but it is very clear we are entering into the Green era, with this firmly high up on the Board agenda. In KPMG’s 2020 CEO survey, 65% of respondents noted that managing climate-related risks will play a part in whether they keep their jobs or not. It is clear we are still at the beginning of this journey, more law and regulation is to come and it will come quickly. Our expectation is that there will be convergence in approaches and regulation around TCFD, so businesses across all sectors would do well to expect and prepare for change in this arena.