Big business prepares for new climate laws

The UK will be the first country in the world to legally enshrine previously voluntary regulations created by the international Task Force on Climate-Related Financial Disclosures (TCFD). The change comes into force on 6 April 2022 and affects many of the UK’s largest traded companies, banks and insurers, as well as private companies with more than 500 employees and £500 million in turnover. 

The TCFD was created in 2015 by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, to provide a framework for large companies to disclose climate-related financial information. 

In order to comply with TCFD, businesses must report on the climate risks and opportunities that are material to their operations and describe how they are managing those risks and opportunities, in their annual reports.

This will make sustainability and reporting on climate risks into key boardroom topics, if they are not already. There are huge reputational and market risks if a company fails to disclose or discloses improperly, with the potential for litigation.

To comply with the legislation, companies will need to disclose information on four key areas: governance, strategy, risk management, and metrics and targets:

Governance
Companies will need to explain the role of their boards in connection with climate risk. They must also explain how their management teams will assess and manage future risks and opportunities.

Plans and strategies
Companies must develop a strategic plan of action for how they plan to tackle climate risk and provide a timetable for doing so. They must also outline how the business is likely to be affected under a number of different scenarios.

Risk management
Companies need to show markets they have “end-to-end risk management processes” in place that demonstrate that they know how to respond to climate change-related events and scenarios.

Metrics and targets
Complying with TCFD requires companies to supply a lot of climate-related data, including some environmental, social, and governance (ESG) data, and indicate how these are related to their performance.

This is a substantial change as it enshrines into law what has been voluntary up until this point. It is likely to be one of many new laws and regulations coming through this decade as governments put pressure on businesses to do more to tackle climate change and risk. 

We believe there will be knock-on effects further down the supply chain. We have clients expressing concern about disclosure, even though they are not captured by the mandate. Indeed, there is a strong possibility that, as large companies clean up their acts, there will be pressure down the supply chain to do the same. 

Chris Bennett is co-founder and managing director of sustainability services company Evora Global.