Philip Richards, ESG and Net Zero Lead at BiU explains the new and upcoming reporting obligations for UK firms.
In October 2021, the UK government published its Greening Finance Roadmap, which sets out new standards for reporting environmental and climate-related matters for UK financial institutes, asset managers and large businesses.
Many businesses will now be familiar with the Taskforce for Climate-related Financial Disclosures (TCFD), but there is also a new acronym on the horizon: SDR, short for Sustainability Disclosure Requirements. SDR looks to build on TCFD, and its remit is an ambitious one: to remove greenwashing and green up the UK financial system.
Here’s what businesses need to be preparing for now, and in the near future.
TCFD-aligned reporting: what’s happening now
As of 6th April 2022, large UK registered companies, asset managers and financial institutes are required by law to report on climate-related risks and opportunities in line with recommendations by the Taskforce for Climate-related Financial Disclosures.
The information required falls into four categories:
Governance: is the climate one of the considerations in how the business is being run?
Strategy: do the long-term plans of the business take climate into account, and are the company’s decision-makers aware of how a changing climate could affect operations?
Risk management: is the company taking climate risk as seriously as any other business risk?
Metrics and targets: what is the hard data underlying the climate-related decisions of the company?
Although there is not a commonly agreed format for businesses to use, the climate-related reporting of any of the above metrics must be clear and concise for the reviewer so they can easily understand the risk and mitigation.
Who has to comply with TCFD reporting?
Currently, the new TCFD reporting rules apply to UK companies in the following categories:
- Businesses that are already required to produce a non-financial information statement. That is, banks and insurance companies, plus listed companies with over 500 employees.
- UK companies listed on the AIM (formerly the Alternative Investment Market) with over 500 employees.
- Other UK companies which both employ over 500 people and have a turnover of above £500m.
- Limited Liability Partnerships (LLPs) with over 500 employees and a turnover of above £500m.
This only covers roughly 1,300 businesses and financial institutions, but they are among the largest in the UK. The government believes that applying the scheme to some of the country’s “most environmentally and economically significant companies” will have a significant effect on the UK’s business community.
SDRs: a more ambitious approach
TCFD reporting is just the start. The government is developing new Sustainability Disclosure Requirements (SDR) over the next few years, which will go further than TCFD.
Whereas TCFD currently focuses almost exclusively on climate-related risks, SDR will have a broader sustainability (or ESG) remit. It will also go further with a “double materiality” focus: in simple terms, that means it will look at both the impact of climate on a business, and the impact of a business on the climate. Companies will need to account for net zero transition plans and align with a new UK Green Taxonomy.
The government is set to consult on a new SDR framework this year, and the new rules could be in place within the next couple of years.
Time to act
Giving investors the tools to choose companies with a robust climate strategy will send powerful market signals, but the process of sustainability reporting is in itself an important motivator. When businesses are forced to think about the climate-related consequences of their decisions, they are more likely to take action both on reducing their exposure to climate risk and reducing their own emissions.
The current TCFD guidelines require you to explore what would happen to your business and its value chain in various warming scenarios: 1.5°C, 2°C and so on. For many businesses, this might be the first time they have seriously considered the risks (and possible opportunities) of these changes. Mandatory TFCD reporting is changing the way that businesses develop their strategy.
Doing this kind of long-term thinking is likely to help businesses avoid, or at least plan for, the risks that could threaten operations. Businesses may also see benefits in the shorter term, as changes such as improving energy efficiency will bring about rapid operational savings.
For this reason, it is crucial that businesses in scope of mandatory TFCD reporting don’t waste the opportunity by treating it as a box-ticking exercise and prepare for broader requirements coming under SDR.
For expert advice on how your business can make the most of mandatory climate reporting, email us on email@example.com or call 01253 789 816.