Tom Proverbs-Garbett, an expert in corporate governance at Pinsent Masons, said: “Whilst companies need to make sure their governance structures, strategic and financial planning and reporting processes are fit for purpose to enable a thorough understanding of climate issues throughout their organisation, it is important they remember this is just one step in what will be a long line of climate-related legal requirements that they will need to understand and engage with. The decisions companies make now are vital in giving investors, lenders and other stakeholders the confidence that their response to climate-related risks and opportunities is appropriate, and the approach will now have to be disclosed.”
“However, the guidance is perhaps a missed opportunity to open a dialogue with businesses about what ‘good’ looks like. If the UK is to make a meaningful impact on its net zero ambitions, it needs to be encouraging businesses to go above and beyond the minimum requirements in tackling their carbon emissions,” he said.
In its guidance, the Department for Business, Energy and Industrial Strategy (BEIS) listed the information that companies and LLPs have to disclose under the new regulations, and elaborated on each point to clarify what the relevant disclosures should refer to.
Governance information to be disclosed includes a description of how the organisation identifies, assesses and manages climate-related risks and opportunities, the overarching governance arrangements that apply in that regard, and how climate-related risks are integrated into the organisation’s overall risk management process.
Proverbs-Garbett said: “In line with recent publications from the Financial Reporting Council and other regulators which emphasise the importance of TCFD-aligned reporting in permitting an understanding the maturity of a company’s response to climate change, the guidance focuses on specifics.”
“A particular person or committee should be identified who has the responsibility for identifying and considering climate-related risks and opportunities. If no-one has been given such responsibility and/or if no directors have oversight of climate-related risks and opportunities, this should be stated. Such a statement would send a message to investors and other stakeholders about the importance of climate change initiatives to the organisation; companies will want to be clear, as soon as possible, who is leading their climate-related efforts,” he said.
Further details of the principal climate-related risks and opportunities arising in connection with the operations of the company or LLP must also be disclosed, along with relevant time periods that those risks are assessed against, together with a description of the actual and potential impacts on the business model and strategy of the company or LLP. There should also be disclosure of an analysis of the resilience of the business model and strategy of the company or LLP with reference to different climate-related scenarios.
Scenario modelling will be new to many companies. In addition to choosing, modelling and describing the scenarios and the resulting impact on business resilience, the underlying assumptions and estimates will need to be established and justified. Proverbs-Garbett said: “This is no easy task, requiring different skillsets across a business and no-doubt the input of external advisers. The guidance acknowledges familiarity with such a process will take time and that, to begin with, there may be significant divergence even within industries, coalescing as experience develops.”
Companies and LLPs must also disclose the targets they use to manage climate-related risks and to realise climate-related opportunities and of performance against those targets, the key performance indicators used to assess progress against those targets, and a description of the calculations on which those key performance indicators are based.
In elaborating on the duty to describe the actual and potential impacts of the principal climate-related risks and opportunities, BEIS confirmed that it expects companies and LLPs to consider “physical” climate-related risks and opportunities, such as their exposure to changing weather patterns or extreme weather events, as well as “a range of transition risks and opportunities most relevant to their products and markets”.
BEIS provided illustrative examples of the transition risks and opportunities that could be relevant to some companies and LLPs. It said, for instance, that the emergence of a rival lower-carbon technology at a time when “emissions-reductions solutions are sought” is a technology-related risk that might need to be disclosed. It said changes in policy and regulation could also present themselves as risks or opportunities and need to be disclosed and further highlighted how reduced consumer demand for higher-carbon products could also be a disclosable risk or opportunity depending on the nature of the products companies or LLPs sell.
According to BEIS, companies and LLPs might also need to be aware of how incidents affecting an industry competitor could affect how their environmental impacts are scrutinised.
The guidance confirms that companies should report at the group level if applicable – subsidiaries do not have to report separately if included within consolidated group reporting – and that the top UK parent should report in respect of the global operations of the UK group. However, there is also an expectation that reporting should identify whether risks and opportunities are identified at subsidiary level and communicated up through the group. Proverbs-Garbett said “Governance structures must be effective to capture that group-wide assessment, either to properly escalate information from subsidiaries or to ensure a group-level assessment can robustly assess the threats and opportunities on a group-wide basis.”
A useful second section sets out interaction with other frameworks, such as the Financial Conduct Authority’s Listing Rule on TCFD disclosures and anticipated national and international measures, including the forthcoming UK Green Taxonomy, which will add to the regulatory burden for companies. Proverbs-Garbett said: “Legal and secretarial teams, along with General Counsel, Sustainability Officers and, indeed, all C-suite executives will want to assure themselves arrangements are in place that allow the new legal requirements to be met and which suitably future-proof against additional requirements coming down the line.”
“As future developments are intended to be based around the TCFD requirements, developing a deep understanding of those requirements now is likely to be of significant advantage,” he said.
BEIS said its guidance is “non-binding”, stating that it is “intended as a factual explanation of the secondary legislation” and not “exhaustive” in outlining everything companies and LLPs will need to consider to comply with the new regulations.