02 Feb Disclosing climate related risks
In June 2018 we reported on a proposal by the Environmental Audit Committee to require large companies and pension funds to report their risk exposure to climate change. One of the driving forces behind these proposals was a concern that unless organisations take full account of the effect of climate change on their operations they may promote short term practices at the expense of long term stability.
Three years on and the proposals have become more concrete with a draft statutory instrument having been put before Parliament. Due to come into force on 6th April 2022, ‘The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021’ will apply to any financial year which starts on or after the in-force date.
The Regulations will apply to three types of entity:
- Companies which fall under section 414CA(1) of the Companies Act. These are trading companies, banks, and insurance companies with more than 500 employees and which are currently required to provide a non-financial information statement.
- AIM listed companies with more than 500 employees.
- Other companies and LLPs which do not fall under the above two categories but which have more than 500 employees and turnover in excess of £500 million.
It is envisaged that some 1,300 entities will be affected by the Regulation. Disclosures required under the Regulation start with a requirement to describe the governance arrangements in relation to assessing and managing climate-related risks and opportunities and how the entity identifies, assesses and manages climate-related risks and opportunities including relevant processes. Further drill-down information such as principal climate-related risks, time periods, actual and potential impacts and resilience analysis is also required.
Following the comply or explain pathway, directors have the option to omit either the whole or part of a climate-related financial disclosure. However they can only do so where they believe that providing climate-related information is not necessary for an understanding of the company’s business and they have to provide a clear and reasonable explanation of their decision.
These new climate change disclosure requirements have been widely welcomed across industry and by investors. Commenting on the new regulation Flora Hamilton, Director, Financial Services, Confederation of British Industry (CBI) said: “The government’s proposed framework for mandatory climate disclosures will help companies and investors better manage risks and opportunities resulting from climate change.” Meanwhile Chris Cummings, Chief Executive of the Investment Association, said: “These regulations are an important step to taking an economy wide approach to addressing climate change and reaching net zero carbon emissions.”