The UK Government’s consultation on mandatory climate-related disclosures
As the old saying goes – ‘knowledge is power’, and businesses caught in the net of proposed mandatory climate-related disclosures will need to empower themselves quickly in order to get up to speed by the proposed April 2022 rollout.
The Department for Business, Energy and Industrial Strategy (BEIS) announced in October, on the eve of the UK hosting COP26, new climate-related disclosure requirements for publicly-listed companies, large corporates and limited liability partnerships (LLPs).
The aim is to ensure that companies with a material economic or environmental impact or exposure assess, disclose and ultimately take action on those climate-related risks and opportunities.
BEIS believes, broadly, that there is a poor understanding of climate-related risks and opportunities among companies and financial institutions, and as a result, climate-related risks cannot be managed which, in turn, leads to an inefficient allocation of capital.
The BEIS consultation on climate-related disclosure forms part of the UK Government’s wider Net Zero Strategy to reach net zero emissions by 2050 and support the transition to a “green and sustainable future”.
The regulations introducing the mandatory climate-related financial disclosures for companies were laid before Parliament at the end of October (the Draft Regulations) and are generally in line with recommendations from the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures.
A copy of the regulations for companies can be found here, with the regulations applying to LLPs to follow.
When would the requirements come into play?
If adopted, the disclosure requirements would apply in respect of financial years ending after 6 April 2022 and would capture:
- UK companies already required to produce non-financial information statements;
- UK companies with securities admitted to the Alternative Investment Market and more than 500 employees; and
- UK-registered companies and LLPs with more than 500 employee and a turnover of more than £500 million.
What are the additional disclosure requirements?
The disclosure requirements set out in the Draft Regulations can be split into four main categories:
CategoryRequirement
Governance
- A description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities.
Strategy
- A description of:
- the principal climate-related risks and opportunities arising in connection with the company’s operations; and
- the time periods by reference to which those risks and opportunities are assessed.
- A description of the actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy.
- An analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios.
Risk management
- A description of how the company identifies, assesses, and manages climate-related risks and opportunities.
- A description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process.
Metrics and targets
- A description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets.
- A description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those key performance indicators are based.
Are directors granted any discretion?
The Draft Regulations provide that where the directors of a company reasonably believe that, having regard to the nature of the company’s business, and the manner in which it is carried on, the whole or a part of certain climate-related financial disclosure are not necessary for an understanding of the company’s business, they may omit the whole or (as the case requires) the relevant part of that climate-related financial disclosure. It is clear that careful monitoring of, and guidance on, the application of this discretion will be essential if the aim of the regulations is to be achieved.
Climate-focused investment decisions
If the regulations are adopted, the UK will become the first G20 country to impose such mandatory disclosures. The regulations would force climate change reporting onto the agenda and, we suspect, would be broadly welcomed by the investor community. Indeed, the consultation responses were overwhelmingly supportive.
It is hoped that the new disclosure requirements would arm the investment market with the necessary knowledge to allow them to wield their investment power to develop, and shape, a climate resilient economy here in the UK.
For more information, please contact John Morrison, Partner in our corporate finance team, or a member of our ESG Advisory Group.