Climate-related disclosure – are you ready?

On 6 April this year, the Government will introduce new climate-related disclosure requirements for larger companies. These new requirements are part of the Government’s Industrial Decarbonisation strategy, Greening Finance strategy and the Government’s Roadmap towards mandatory climate-related disclosures.

The requirements also align with suggestions from the Task Force on Climate-Related Financial Disclosures established by the Financial Stability Board, making the UK the first G20 country to adopt them.

Targeting larger UK companies indicates a Government view that these companies have the greatest environmental impact and therefore the most urgent responsibility to disclose. The push for greater transparency is also undoubtedly a reaction to accusations of ‘green washing’ - where sustainability claims made by companies do not necessarily always bear scrutiny.

Which companies are affected?

The disclosure requirements will apply to the following companies:

• All UK companies:
  • with securities admitted to AIM with more than 500 employees.
  • which are currently required to produce a Non-Financial Information Statement, including UK companies that have more than 500 employees and are either traded companies, banking companies or insurance companies.
  • that are not included in the above categories, but have more than 500 employees and a turnover of more than £500m.

LLPs that have more than 500 employees and a turnover of more than £500m.

Where relevant, the disclosures will be required at a group level so that the reporting requirements and scope thresholds will apply on a consolidated basis.

Whilst the disclosure requirements  will currently only affect the above companies, the plan is for this to be a mandatory requirement for all companies by 2025.

What information do companies have to provide?

Companies caught by the new reporting requirements will have to provide the following:

• The company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities.
• How the company identifies, assesses, and manages climate-related risks and opportunities.
• How processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process.
• 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.

The Government hopes that disclosure will allow investors and businesses to better understand the financial impact of their exposure to climate change which in turn, will allow businesses to better manage climate risk.

How do the Regulations tie in with other disclosure regimes?

IFRS Sustainability Disclosure Standards

The Government has shown support for the IFRS Sustainability Disclosure Standards and indicated aligning with those standards. The IFRS have established a new International Sustainability Standards Board (ISSB) to help meet the demand from investors calling for high quality, transparent and reliable company reporting on environmental matters.

The ISSB is set to release its first draft of standards early in 2022.. The Government intends to create a mechanism for companies to meet these standards but, as we await the first draft, this mechanism is not yet clear.

Further, in December 2021, the FCA published its policy on financial related disclosures for standard issuers. The FCA is extending the application of their existing climate-related disclosure requirements to issuers of standard listed shares and standard listed issuers of Global Depositary Receipts.

This extension will align the disclosure rules for standard listed issuers with premium listed issuers. The FCA commented that they intend to help the Government in aligning the UK’s disclosure process with the ISSB’s reporting standards.

The Sustainability Disclosure Requirements

In an effort to tackle greenwashing, the Government set out proposals within their Green Finance Strategy report for new standards for environmental reporting. The sustainability disclosure requirements – or SDR, will bring together existing sustainability-related disclosure requirements into one integrated framework. The ISSB’s work will form a core component of the SDR framework and will be the backbone of its corporate reporting element.

The SDR will also introduce disclosure requirements and a sustainable investment labelling system for asset managers, listed issuers, pension schemes, certain FCA regulated asset owners and the investment products they offer. The FCA mention that only certain investment products will be required to have such a label. Further information will be issued for consultation in the second quarter of 2022.

What happens next?

We expect to see a lot of movement in the financial industry in the first half of 2022 from a regulatory standpoint. The demand from investors for companies to report their environmental impact has been acknowledged by the Government and the FCA. Clearly the implementation of the climate-related disclosure requirements is the first step in the Government’s commitment to making the UK financial system the greenest in the world.

Please contact Brian Farrell, Partner and Head of Ashfords LLP’s Energy & Resource Management team, for further details on the article above.

Further reading

The Government’s Greening Finance: A Roadmap to Sustainable Investing report can be found here.

The FCA’s report titled ‘Enhancing climate-related disclosures by standard listed companies’ can be found here.

The FCA’s report on the SDR can be found here.