This is the next stage in the process to adopt the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) that was published in the autumn.
The consultation process only runs until the 5th May and the stated intention is to implement this new regime from April 2022 and affect public companies that employ over 500 people and other registered companies that employ 500 people and in addition have an annual turnover of £500 million. This will apply to c1600 companies in the UK and comes on the back of the already announced move by the Financial Conduct Authority that required c500 premium listed companies to adopt TCFD related disclosure for the accounting period from 1st January 2021. The new requirement will first appear in Annual Reports for premium list companies published from Spring 2022.
The Companies Act 2006 already contains requirements for a Strategic Report of a company to include information relating to Governance, Strategy, Risk Management and Metrics and Targets. Thus, primary legislation is not required. The new requirements will introduce specific reporting obligations for reporting in these areas to consider the risks and opportunities posed by climate change. Although the specifics of the requirements could still be modified because of the consultation, it is unlikely that the fundamentals will alter much. The four key pillars of reporting that companies will need to address are:
1.Governance: A description of the governance arrangements in place to identify and manage risks and opportunities arising from climate change. This will need to include identifying who has operational responsibility for climate change, including the experience of that executive or committee; and if the company has an audit committee, whether climate change is a matter considered by them.
2. Strategy: A brief description of the company’s business model and strategy plus an explanation of how this may change in response to effects relating to climate change, and the trends and factors that affect this change.
3. Risk Management: There will also need to be a description of the principal risks and opportunities, relating to transition risk i.e. the impact of changes in public policy and regulatory pressure, potential reputational damage or shifts in market preferences. There will also need to be an assessment of physical risk arising from climate change which may affect the business and a description of how the company manages those factors including:
4. Metrics & Targets: As in most contexts, the new regulations tacitly acknowledge that “what gets measured gets managed” by requiring a description of the key performance indicators (KPIs) relevant to the entity’s exposure to climate change and the targets set, so that the impact of the company’s activity, can be measured effectively. This could be a major battleground amongst competing organisations and the ability to impact these numbers on an annual basis could provide the opportunity for major commercial and investor advantage.
In addition to the mandatory requirements, scenario analysis will also be encouraged. However, the proposals recognise that this is one of the most challenging areas of the TCFD recommendations and while some companies are quickly developing capabilities in this area, there remains a significant skill and expertise gap for many. Where companies are already able to produce quantitative scenario analysis, they will be encouraged to continue to disclose their outputs to support the disclosures. However, given the continuing ratcheting up in recent years of the reporting requirements, it may well be that this also becomes a mandatory requirement further down the line.
In a further move, the Government is proposing to remove some of the exemptions that have to date only required corporate groups to report for those subsidiaries which would qualify for SECR reporting as a separate entity. In addition, the requirement for quoted companies to make SECR disclosures based on their global energy use and emissions would be extended to large unquoted companies and LLPs, who at present only have to report for their UK activities.
Perhaps one of the most significant proposals is somewhat buried away in the detail, with the Government also seeking views on whether reporting of Scope 3 emissions under SECR should continue to be voluntary given the increased interest of stakeholders in indirect emissions, including supply chains. This would seem to tie in with the proposal in the Industrial Decarbonisation Strategy released in March that raised the possibility of introducing a scheme that would identify the carbon footprint of each unit of production.
With the new more detailed disclosures and reporting being published as soon as next spring for many companies; this reinforces the need to have strategies and plans in place that will enable organisations to best demonstrate their journey to greater environmental sustainability and carbon net zero.