The UK has just introduced some of the toughest non-financial requirements in the world for companies to disclose their climate exposure. The regulations require certain UK listed companies and large private companies to show how they manage climate-related risks in their operations.
Natalie Stewart is a senior partner in the London office of US law firm Duane Morris and an expert in this area.
STEWARD: This new requirement covers various climate-related financial disclosures, including governance arrangements related to a company’s assessment and management of climate-related risks and opportunities and how climate-related risks and opportunities are identified, assessed and managed by a company.
It also covers the integration of the assessment of these risks into the company’s overall risk management process, the actual and potential impacts of the main climate-related risks on the company’s business model and strategy, the resilience of the business model, the objectives chosen to manage climate-related risks and the key performance indicators used to assess progress.
There is no specific format or structure as to how disclosure must be made under the regulations. It primarily requires a company to consider climate-related risks in relation to its specific business model and industry and gives companies the freedom to determine their particular disclosure format. It will be interesting to see how the market evolves on this and whether a standard form of disclosure and risk assessment will develop over time.
UK leads the way on climate disclosure
EDGE: Is this a big change, or were a lot of these big companies already doing this sort of thing voluntarily?
STEWARD: We see more disclosure in general. Under the UK Companies Act 2006 there were already disclosure requirements on environmental issues, social issues, respect for human rights and similar matters. So that adds climate-related risks, but it’s likely that many of these companies were already considering those risks. This is something that we have already seen large companies do on a voluntary basis.
Part of the goal appears to be to get companies to think about how their business will be affected by climate-related risks and opportunities in the future, as well as their resilience.
One interesting thing about the regulations is the impact it will have on small businesses that are not required to make this disclosure under the legislation, but may want to do so on a voluntary basis, as the market is changing and stakeholders are asking for more disclosure on this type of subject.
EDGE: This is an assessment of a company’s ability to be climate resilient, not of its efforts to reduce its carbon footprint?
STEWARD: Looking at the regulatory context, part of the goal seems to be to get companies thinking about how their business will be affected by climate-related risks and opportunities in the future, as well as to their resilience. .
However, it will also be necessary to disclose a company’s progress towards its climate-related risk management goals and deliver on climate-related opportunities and associated key performance indicators, but it’s not just focused on that. Rather, it is to help companies assess risks and opportunities.
EDGE: What is the status of non-UK companies that may have some sort of subsidiary or business interest in Britain?
STEWARD: A company will not be subject to the regulations if it is a subsidiary and the annual climate-related communication is included in its parent company’s strategic report for the group. To be exempt, the parent company must be a UK company and the strategic report must be prepared for a financial year ending no later than the financial year of the subsidiary (the report must also include non-financial and sustainable development concerning the subsidiary) .
However, where a UK subsidiary has a non-UK parent which reports on a consolidated basis, the exemption does not apply. This means that a non-UK parent company may be exempt, but its UK subsidiaries may be subject to regulation.
Non-UK companies with UK subsidiaries should be aware that their UK subsidiaries may fall within the scope of the regulations and determine whether their strategic relationships should be on an individual or consolidated basis with respect to their subsidiaries in the United Kingdom.
A possible change of direction?
EDGE: What happens if the companies to which the regulation applies do not comply?
STEWARD: The Financial Reporting Council will monitor the reports in the future, and if it finds that a company should have disclosed the information required by the regulations and did not disclose it in its report, it can apply to the court for the report not to be not compliant with regulations.
The court may then order the preparation of a revised report and any other matter it deems appropriate. Based on current practice, we would expect the Financial Reporting Council to engage with companies before going to court, as a first step in encouraging compliance. It will be interesting to see how the Financial Reporting Council’s approach to reviewing climate-related financial disclosure develops.
What we will check is whether similar legislation will be introduced for small businesses and what exactly will need to be disclosed. It will be interesting to see if this is going to be a sea change in business disclosure in general, and also if small businesses decide to do disclosure on a voluntary basis, if this will translate into small business legislation at all levels. It will be interesting to see how this develops further.