In 2022, the UK government passed legislation to make climate-related disclosures a mandatory part of the financial reporting regime for large businesses.
The rules put analysis of corporate impact on climate change and sustainability on a formal regulatory footing, as well as creating new governance responsibilities. The policy objectives were to create greater transparency and accountability around corporate behaviour in relation to climate change, achieve greater clarity about the commercial and economic risks climate change poses, and ultimately help leverage corporate power in the transition to a low-carbon economy.
How do the disclosures work?
Large corporations are required to submit annual reports as part of the financial oversight and governance regime. These reports are published publicly to allow stakeholders such as existing and would-be shareholders and investors to view information relevant to their interests, and to ensure directors and senior management are accountable for financial performance.
Climate-related financial disclosures now form part of this reporting process. They apply to all organisations required to submit an annual report, namely:
- Publicly traded companies
- Financial services companies.
- Private limited companies with more than 500 employees and/or a turnover of more than £500m.
- LLPs with more than 500 employees and/or a turnover of more than £500m.
As of 2024, the disclosure recommendations put forward by the interim Task Force on Climate-Related Financial Disclosures (TFCD) were formally adopted by the new International Sustainability Standards Board (ISSB) standards, creating a single, globally recognised standard for sustainability reporting. Organisations can now use the IFRS S2 Climate-related Disclosures standard as guidance and remain fully compliant with UK regulatory requirements.
What must be disclosed?
Both the now-disbanded TFCD’s recommendations and the IRFS S2 Climate-related Disclosures standard require disclosures to be made in four areas:
- Governance: Organisations must describe management’s role in assessing and handling climate-related risks and opportunities, and also explain how oversight is maintained at board level, including details of individual responsibilities, terms of reference, mandates, role descriptions and any other applicable policies.
- Strategy: Disclosures must detail actual climate-related risks that have been identified in relation to the organisation’s operations in the short, medium and long term, explain the potential impact on performance, strategy and planning, and provide details of the organisation’s resilience in the face of applicable climate-related scenarios. This all includes consideration of both current and future risks, evaluation of strengths and vulnerabilities at different points in the organisation’s value chain, and assessment of resiliency and ability to adapt to changing circumstances.
- Risk Management: Organisations must detail how they identify, assess and manage climate-related risks, including how these processes are incorporated into broader risk management policies.
- Metrics and Targets: Organisations are required to detail how they measure performance in relation to their climate impact and associated risks, including disclosing the metrics and targets they use. The regulations specify that disclosures must cover data in relation to an organisation’s Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions.
The introduction of mandatory climate-related financial disclosures underlines the increasingly prominent role sustainability is taking in the corporate regulatory regime, and also how it is being tied directly to financial interests. Other examples include the growing use of taxation as a lever to implement environmental policies.
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