Mandatory climate-related financial disclosures

In light of the UK Government’s recent proposals to make disclosure of climate-related financial information mandatory for certain businesses, employers will want to consider how they can best embed a climate conscious culture.

Between 24 March and 5 May 2021, the UK Government consulted on its proposals for mandatory  disclosure of climate-related financial information by listed companies and large private companies and LLPs (i.e. those with more than 500 employees and more than £500m turnover).

The consultation envisages draft regulations to be published later this year, introducing reporting obligations in stages from 6 April 2022, with all relevant organisations required to report by 2025. This expands upon the Financial Conduct Authority’s (“FCA”) new Listing Rule introduced earlier this year that 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 Listing Rule applied for 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 four pillars:

1. Governance – governance around climate-related risks and opportunities
2. Strategy – actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning
3. Risk Management – the process used to identify, assess and manage climate-related risks
4. Metrics and Targets – 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 UK Government is seeking to increase the quality and quantity of disclosure by making these disclosures 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:
   • To the extent the organisation is not required to report on its business model and strategy, a brief description of this information
   • A description 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 companies and specifically 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”.

Even before this consultation was proposed, the Clyde & Co employment team designed an HR “Eco” Audit to assist employers drive forward climate change initiatives through greater collaboration with their employees. This audit aims to help businesses to embed a climate conscious culture, by reviewing, and where appropriate, reconfiguring, each and every aspect of the employment relationship to maximise sustainability. It now appears that this approach mirrors that which the Government consultation is proposing.