Legal

Should businesses report climate-related financial information?

17 Jun 2021 By Charles Urquhart and Annette Legat

With draft regulations expected later this year, Charles Urquhart and Annette Legat outline how firms can prepare for disclosing finances on environmental activities

On 24 March 2021, the UK government issued its consultation on mandating the disclosure of climate-related financial information by listed companies and large private companies and LLPs (that’s companies with more than 500 employees and more than £500m turnover). 

The draft regulations are expected later this year with reporting obligations being introduced in stages from 6 April 2022, with all relevant organisations required to report by 2025. 

This expands upon the FCA’s new listing rule introduced earlier this year, which requires companies with a premium listing to state whether their disclosures are consistent with the recommendations of the Treasury-led task force on Climate-related Financial Disclosures (TCFD), or to explain why they have not provided such a statement. 

The new rule applies to accounting periods beginning on or after 1 January 2021. Further details can be found here.  

Notwithstanding the move towards mandatory reporting, a number of companies already choose to voluntarily report on climate-related financial disclosures under the framework for reporting set by the TCFD. The TCFD recommendations centre upon disclosure against the following four pillars:

  1. Governance around climate-related risks and opportunities. 
  2. Strategy on actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses and financial planning.
  3. Risk management processes used to identify, assess and manage climate-related risks.
  4. Metrics and targets used to assess and manage relevant climate-related risks and opportunities.

Voluntary disclosure levels are low. Companies often choose not to disclose against all four pillars, with strategy being the least reported pillar. 

In an effort to influence the behaviours of organisations and their stakeholders, and to have a material impact on the country’s efforts to reach net zero by 2050, the government is seeking to increase the quality and quantity of disclosure by making these mandatory.

What information will organisations be expected to disclose?

The expanded requirements will introduce specific reporting obligations to mandate disclosure against the four pillars identified above. Further details are expected but, in summary, the information would include: 

  1. Governance: A description of the organisation’s governance arrangements in place to identify and manage risks and opportunities arising from climate change.

  2. Strategy: A brief description of the business model and strategy and of how strategy may change in response to climate change, and the trends and factors that affect such change.

  3. Risk management: A description of the principal risks and opportunities arising from climate change and how the organisation manages those areas. A summary of the risk management policies adopted by the organisation, including the outcomes of those policies and any due diligence implemented in pursuance of those policies.

  4. Metrics and targets: The KPIs and related targets relevant to the organisation’s exposure to climate change risk and opportunity.

What can HR do to assist companies preparing for mandatory climate-related disclosures?

The government consultation states that it is ‘essential for appropriate behaviours to be embedded into organisational culture so that climate change is considered at all levels of an organisation’. 

Employers need to drive forward climate change initiatives through greater collaboration with their employees. HR professionals can play a significant part in this journey by helping businesses to embed a climate conscious culture, by reviewing, and where appropriate, reconfiguring, each and every aspect of the employment relationship to maximise sustainability.  

Charles Urquhart is a partner and Annette Legat an associate at Clyde & Co

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