On 9 November 2020, the UK Government announced a series of new green finance-related measures as part of its wider strategy to ensure that the UK remains a competitive international centre for financial services following the end of the Brexit transition period and to demonstrate the UK's position as a world leader in green finance ahead of COP26 in 2021. On the same day the Bank of England and the FCA both published statements supporting the Government's proposals.
The measures announced by Rishi Sunak, the Chancellor of the Exchequer, included proposals to issue the UK's first sovereign green bond and introduce a taxonomy for determining whether activities are environmentally sustainable, as well as a commitment to becoming the world's first country to introduce a mandatory climate-related financial disclosures framework for a wide range of financial institutions and corporates. In its announcement, the UK Government has highlighted the key role that financial services has and will continue to have in meeting the UK's climate-change commitments. Further information is set out below on the key new green finance-related measures announced most recently:
Sovereign Green Bonds
Mr Sunak confirmed that (subject to market conditions) the UK Government will issue its first sovereign green bond in 2021, following in the footsteps of other countries who have already issued similar instruments, such as France, Germany, Ireland and Hong Kong. The proceeds of the bond will be used to finance projects that will help to address climate change and assist the UK in meeting its 2050 net zero carbon emissions target. The bond proceeds will also be used to fund investment in key infrastructure projects and to stimulate the growth of green jobs around the UK. The UK Government confirmed that further sovereign green bond issuances would follow to meet growing investor demand for green investments.
Climate-related Financial Disclosures
The Chancellor also announced the introduction of mandatory climate-related financial disclosure requirements (aligning with the recommendations of the Financial Stability Board's Task Force for Climate-related Financial Disclosures (TCFD)) to ensure that investors and businesses have sufficient information on climate related risks and opportunities.
This announcement goes beyond the Government's previous statement in its 2019 Green Finance Strategy which set out an "expectation" that all UK listed issuers and large asset owners would be making disclosures in accordance with the TCFD's recommendations by 2022.
According to the Government announcement, the disclosure framework will be mandatory in the UK by 2025, with a significant number of requirements applying by 2023. The joint Government Regulator TCFD Taskforce has published an interim report together with a detailed roadmap setting out an indicative approach to implementing mandatory TCFD-aligned disclosures in the UK across a wide range of financial sectors. The report notes that initial steps have already been taken by the FCA, PRA and the Department for Work and Pensions (DWP) to introduce climate-related financial disclosure requirements for certain entities, and proposes that TCFD-type disclosures apply to a wide range of corporates and financial institutions including:
- listed commercial companies: The FCA has confirmed that TCFD-aligned disclosure rules will apply for commercial companies whose equity has a premium listing on the London Stock Exchange from 1 January 2021, and the FCA is expected to publish its final rules on this before the end of this year. The FCA will also publish a consultation in the first half of 2021, setting out its proposals to extend the scope of the rules to other issuers and to require asset managers, life insurers and pension providers to comply with TCFD obligations.
- UK-registered large private companies: The Government is expected to consult upon amendments to the Companies Act 2006 which would introduce a requirement upon UK registered large private companies for TCFD disclosures in the strategic report of companies' annual report and accounts; these requirements would likely come into force in 2022.
- banks, building societies and insurance companies: The PRA will review the quality of firms' 2021 disclosures on climate change risks and then consult on any additional rules needed.
- UK-authorised asset managers, life insurers and FCA-regulated pension schemes: The FCA will be consulting on proposed rules in the first half of 2021, with a view to final rules coming into force in 2022 on a phased basis.
- occupational pension schemes: The DWP has proposed an amendment to the Pensions Bill to implement the TCFD recommendations into law on a phased basis, commencing in October 2021.
Separately, the Bank of England has announced a June 2021 launch date for its climate stress test exercise, which had previously been delayed due to the COVID-19 crisis. The exercise will be made up of three different climate scenarios, and will analyse different combinations of physical and transition risks over a 30-year duration, with the aim of understanding how participating banks and firms might respond. It is hoped that risk management processes will be improved as a result. For more information, please see our alert on the Bank of England's announcement on climate stress testing.
It is also worth noting that UK Government and UK financial regulators have issued a statement supporting the proposals set out in the International Financial Reporting Standards (IFRS) Foundation Trustees’ consultation on a global approach to sustainability reporting, published on 30 September 2020. Notably, the consultation includes a proposal to establish a new sustainability standards board.
UK Green Taxonomy
Mr Sunak also ended uncertainty surrounding the UK’s post-Brexit approach towards the EU Taxonomy Regulation, by confirming that the UK will establish its own green taxonomy for determining whether an activity is environmentally sustainable. The Government announced that the scientific metrics developed for the EU sustainable finance taxonomy will be adjusted to ensure they are suitable for the UK market and confirmed that a UK Green Technical Advisory Group will be set up to carry out such assessments. The Government has also announced its intention to join the International Platform on Sustainable Finance in order to collaborate with other countries on work surrounding sustainable taxonomies.
The latest announcements by the UK Government and regulators are an important development in the UK's approach to tackling climate change. They serve as an important reminder of the key role that financial services have and will continue to play in meeting the UK's environmental commitments and indeed, given the UK’s position in global finance, in the world’s response to climate change. The UK Government's announcement of mandatory climate-related financial disclosures across a wide range of financial institutions and corporates and of the proposed development of its own sustainable finance taxonomy will set the stage for the UK's position in the global green finance space for the coming years and maybe decades. Further detail on the proposals announced this week will follow in the next few months (including the publication of the UK's Joint Government-Regulator TCFD Taskforce's final report on climate-related financial disclosures and the related consultation papers) and will provide additional clarity on the UK Government's invigorated approach to climate-related disclosures, and the UK's position as a leading market for green finance and investment more generally following the end of the Brexit transition period.
Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.
Authored by Andrew Carey, Rachel Pleming and Patrick Evans