Regulatory requirements placed on corporates in the UK have steadily been increasing. Following on from obligations imposed upon corporates by various statutes including the Bribery Act 2010, Modern Slavery Act 2015, Senior Managers & Certification Regime, and Money Laundering and Terrorist Financing Regulations 2020, next in the wave of regulations are climate change reporting obligations. It is likely that companies will need to re-assess their current reporting measures to meet the tightening of reporting requirements.
The Sustainability Disclosure Requirements (SDR) were released in a report from the Chancellor entitled ‘Greening Finance: A Roadmap to Sustainable Investing’. This came ahead of the 2021 United Nations Climate Change Conference (COP26) taking place in Glasgow between 31 October and 12 November 2021.
Environmental Disclosure Requirements
Companies
The Companies Act 2006 (the Companies Act) creates obligations for UK incorporated companies. Under sections 414A and 414C, companies must disclose in their strategic report, a description of the principal risks and uncertainties faced by the company. Further, section 414C(7) creates an additional requirement for quoted companies, that is, companies with equity shares listed in the FCA’s Official List and traded on a UK regulated market, in the EEA, or admitted to dealing on the New York Stock Exchange or NASDAQ. Quoted companies must include in their strategic report the impact of the company’s business on the environment.
The Companies Act creates two obligations related to climate change that UK directors must have regard to when conducting their duty. Under section 172, directors hold a fiduciary duty to promote the success of the company for the benefit of its members. As such, directors must ‘have regard’ to certain factors when acting in good faith, including the impact of the company’s operations on the environment and the likely consequences of any decision in the long term. A stand-alone section 172 statement must be contained in the strategic report, to inform shareholders of how the directors have fulfilled their requirements under this section. Under section 174 of the Companies Act, directors must ‘exercise reasonable care, skill and diligence’. Consequently, directors should consider climate risks when fulfilling their duties under the Companies Act.
Listed companies
The UK Corporate Governance Code 2018 (the Code) also applies to premium listed companies and recommends that companies report on how they have considered and addressed opportunities and risks relevant to the future success of their business. In their annual report, directors must include a statement about the long-term viability of the company. Under Listing Rule 9, companies must give a fair and balanced assessment of long term and principal risks, how emerging risks are identified and how risks are managed. In line with the Task Force on Climate-Related Disclosures (TCFD), listed firms should include all material climate-related financial disclosures in audited financial statements and/or regulatory reporting by 2022.
Issuers admitted to trading on a regulated market must state information relating to principal risks and key performance indicators, which include information relating to environmental matters under DTR 4 as these may impact a company’s prospectus.
In 2015, the TCFD was created by the Financial Stability Board (FSB). The TCFD aims to increase and improve reporting of climate-related financial information by companies, banks, and investors by requiring them to provide such information to stakeholders. In 2017, the TCFD made recommendations for disclosure covering four pillars:
- Governance;
- Strategy;
- Risk management; and
- Metrics and targets.
The TCFD currently applies to premium listed issuers but will apply to wider companies, banks, insurers, pension funds and asset managers by 2025. UK premium listed companies must state whether they comply with the disclosures required under the TCFD and if not, explain the reasons for non-compliance. This statement must be included in the companies’ annual financial report. The rule is applicable to premium listed issuers with an accounting period beginning on or after 1 January 2021.
In July 2020, the Bank of England Prudential Regulation Authority (PRA) wrote a ‘Dear CEO’ letter which stated, “Firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021”. This expects companies to take a proportionate approach that reflects their climate-related risks and exposure.
Pension scheme trustees
From 1 October 2021, there were new duties for to assess, manage and report on climate change risk. These apply to trustees of occupational pension schemes (with more than £5 billion in assets) and master trusts.
Under the new laws, trustees must identify climate-related risks and opportunities relevant to their scheme and assess the impact of these risks and opportunities on the scheme’s investment and/or funding strategy. To ensure trustees meet their climate change governance requirements, trustees should have sufficient knowledge and understanding of the rules applicable to them. A TCFD report, publicly available and accessible free of charge, must also be published within seven months of the scheme year end date. From 1 October 2022, other schemes with more than £1 billion in assets will also fall within the scope of these rules.
Sustainability Disclosure Requirements
The Treasury is due to bring in new laws under the Sustainability Disclosure Requirements (SDR) which will streamline existing climate reporting standards such as the TCFD and go further. The SDR mean large UK businesses, investment products and pension schemes will have to disclose their environmental impact. It also requires a company’s sustainability claims to be justified “clearly” and its net zero transition plans set out properly. Chancellor Rishi Sunak said, “We want sustainability to be a key component of investment decisions, and our plans will arm investors with the right information to make more environmentally-led decisions“. Details of the specific reporting requirements will be developed after a public consultation.
What does this mean?
The standard of care for directors of companies now includes consideration of climate-related risks or policy changes. Like all regulation, these have the potential to impact on the value of companies’ assets and future profits and should be disclosed accordingly.
Under the rules applicable to them, companies are meeting their minimum legal reporting requirements, but disclosures are often of a low quality and of a general nature. Disclosures on the risks and opportunities facing companies are often boilerplate and do not provide meaningful climate-change information, making it difficult to assess their financial implications. This creates a risk of ‘greenwashing’ where stakeholders are misled through material omissions.
For example, companies set targets to reach specific goals such as ‘net-zero’ or ‘Paris-aligned’ but lack the granular detail on how that is to be reached. For greenhouse gas emission disclosures, these often lack the scope of what emissions are included within the disclosure and the basis on which the emissions have been calculated.
There is often a mismatch between financial statements and annual reports. While companies often reference climate change in annual reports, not all make such reference in financial statements, creating a lag or inconsistencies between the two.
Consequences
Directors owe the above fiduciary duties to their company with the company, or in certain cases its members via a derivative claim, able to enforce these duties. The consequences of a loss to the company, due to a breach of the duty to promote the success of the company, can include the setting aside of transactions, an interim injunction, damages or compensation for financial losses incurred, and criminal fines. For a breach of the duty of care, skill, and diligence, stakeholders may seek damages.
In certain circumstances, breach of duty may result in the termination of the director’s service contract or lead to disqualification under section 6 of the Company Directors Disqualification Act 1986.
For UK pension schemes, wholesale non-compliance with regulations will result in trustees facing a mandatory penalty of at least £2,500. The Pensions Regulator (TPR) has discretion to award penalties for other breaches with the maximum fine of £5,000 for an individual trustee, or £50,000 for a corporate trustee. Further, failure in relation to TPR’s notification requirements could also create liability of £5,000 and £50,000 for individual and corporate trustees respectively.
Listed companies may be reported to the FCA for failing to disclose climate change risks to investors. ClientEarth recently reported Just Eat Takeaway.com NV and Carnival PLC to the FCA for failing to include climate change risks in their 2020 annual reports and asked the FCA to refer both for investigation. For a breach in the listing rules, the FCA has the power to impose a financial penalty or to issue a public censure.
Companies may be legally obliged to align their policies with climate regulation. In 2021, a court in the Netherlands ruled that oil company Shell must reduce its emissions by 45% by 2030. This was a case brought by the Friends of the Earth, other bodies, and more than 17,000 Dutch citizens. The ruling is likely to have a significant impact on Shell’s corporate strategy and growth. Although the decision is only applicable in the Netherlands, it could have wider effects across the globe.
Next steps
Companies will be re-assessing their current reporting measures to meet the tightening of reporting requirements. To demonstrate greater understanding and knowledge of climate change, corporate strategic responses will need to improve in their development of climate change as a factor linked to financial risk.
These new requirements have the potential to impact companies’ financial performance and prospects. As climate change regulations are applied, the regulatory obligations on corporates have increased from a trickle to a tidal wave. Obtaining clarity on climate risk governance and reporting requirements is of utmost importance.
Rosenblatt can help
Rosenblatt has a wealth of experience in financial crime and is uniquely placed to support clients that are the subject of an investigation and prosecution, having defended one of the largest prosecutions brought by the Financial Conduct Authority.
https://www.rosenblatt-law.co.uk/services/financial-crime/#financial-crime
Contact us
Should you wish to discuss the services we offer further, please contact the Financial Crime team on the details provided below.
Authors
Anil Rajani, Partner (anil.rajani@rosenblatt-law.co.uk)
Tracy Tsao, Trainee Solicitor (tracy.tsao@rosenblatt-law.co.uk)
Sources
- Climate change and sustainable finance | FCA
- UK firms will have to disclose climate impact – BBC News
- FRC Climate Thematic
- Bank of England Prudential Regulation Authority “Dear CEO” letter
- Climate-related reporting requirements | FCA
- Task Force on Climate-related Financial Disclosures Report
- Climate Financial Risk Forum Guide 2020 – Disclosures chapter (fca.org.uk)
- ClientEarth Accountability Emergency
- UK firms will have to disclose climate impact – BBC News
- Governance and reporting of climate change risk: guidance for trustees of occupational schemes (publishing.service.gov.uk)
We at RBG Holdings/Rosenblatt support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors of articles published on our website/s do not necessarily reflect the opinions, views, practices, and policies of RBG Holdings/Rosenblatt.
