Existing scope of companies falling under new requirements too narrow and TCFD alignment not close enough, says ClientEarth.
The UK Department for Business, Energy and Industrial Strategy’s (BEIS) finalised legislation for mandatory climate-related reporting for companies “could have been far more ambitious”, according to Dan Eziefula, Climate Finance Lawyer at ClientEarth.
Following a consultation period earlier this year, the finalised legislation aims to ensure increased alignment between the UK’s reporting requirements and the Task Force on Climate-related Financial Disclosure’s (TCFD) voluntary framework. Subject to Parliamentary approval, qualifying companies will be obligated to report in line with these requirements from 6 April, 2022.
However, Eziefula said that the proposed scope of companies subject to the legislation is too narrow and not fully aligned with all 11 recommendations of TCFD. Further, guidance on Scope 3 emissions disclosures and qualitative scenario analysis is limited.
“We welcome that new legislation is being introduced to explicitly address climate-related disclosures for large companies and limited liability partnerships (LLPs). But this to a large degree formalises what companies should already be doing under existing legislation – including disclosing material climate-related risks,” Eziefula told ESG Investor.
The finalised legislation is based on feedback from the spring consultation, which included feedback from 137 stakeholders, including financial institutions, civil body societies and academics.
Of those who responded to BEIS’ call for input, 58% said that the proposed scope is wide enough. However, a large number of companies called for a wider scope of companies to report in line with the legislation.
This means that all UK-listed companies with more than 500 employees and/or a turnover of more than £500 million will be required to produce mandatory climate-related disclosures from next year.
The decision is “seriously disappointing and casts doubt on the UK’s climate finance leadership”, Eziefula said.
In Europe, the scope of companies providing climate-related disclosures is going to be much wider under the Corporate Sustainability Reporting Directive (CSRD), including all large companies and all companies listed on regulated markets.
“In the UK, we believe reporting requirements should apply to all companies within scope of Streamlined Energy and Carbon Reporting (SECR) requirements, which would closely reflect the scope of the upcoming EU requirements,” Eziefula added.
Respondents to the BEIS consultation called for increased alignment between SECR and TCFD requirements, BEIS noted, adding that the department will now “consider how best to achieve that”.
“Any changes to the SECR regime to facilitate that alignment will require a separate consultation process, and that process will run in due course,” BEIS said.
Current UK reporting on carbon emissions and energy consumption in SECR reports recently came under fire, with the Financial Reporting Council (FRC) noting “a number of entity-specific disclosure errors or omissions”, according to recent research.
The consultation asked respondents to indicate whether the UK’s reporting mandate should be based on all 11 of the TCFD’s recommendations or whether it should take a broader based approach across the four pillars: governance; strategy; risk management; and metrics and targets.
Of 117 respondents, 66 said BEIS should pursue a four-pillar approach, compared to 44 noting that an 11-recommendation approach would be more appropriate. Due to the close split, BEIS has compromised, with its requirements covering nine of the 11 recommendations.
“The BEIS requirements should have fully reflected all 11 TCFD recommendations. Instead, it misses emissions disclosures, particularly Scope 3 emissions. And it misses the express requirement to disclose long-term risks, which is of key importance to meaningful net zero plans that will actually hold up in the future,” said Eziefula. London-based ClientEarth has previously called for BEIS to include all 11 recommendations.
The remaining two TCFD recommendations, scenario analysis and the emissions metric, were addressed separately.
“Our final regulations will include a requirement for in scope companies and LLPs to include an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios. In associated guidance, we will be clear that a qualitative assessment of resilience against different scenarios will be sufficient to meet the obligation,” BEIS noted.
“It is very positive to see a scenario analysis requirement now included in the final regulations for companies, which the UK Sustainable Investment and Finance Association (UKSIF) and others have called for,” said James Alexander, UKSIF CEO. “This is necessary to ensure companies can provide to investors and savers a clearer and more meaningful picture of climate risks and the opportunities to support the transition in their annual report and accounts.”
However, BEIS has failed to provide sufficient detail on how companies should conduct this qualitative scenario analysis or what the different scenarios should be, Eziefula pointed out.
Following respondent demands for more clarity around Scope 3 disclosure requirements, BEIS has said officials will consider this issue “in due course”.
“Investors have made clear that they need companies’ transition plans to assess their resilience, and they need the full emissions picture – including Scope 3 – for them to make responsible investing choices,” Eziefula noted.
This follows the publication of the UK government’s sustainable investing roadmap last week, which outlined how the government plans to green the UK financial system, including the development of a UK Green Taxonomy, which will define environmental and social activities for investment products.
The government was keen to point out that progress in the sector was being made. Greg Hands, UK Minister of Energy and Climate Change, said the UK was the first G20 country to mandate climate-related reporting by companies.
“If the UK is to meet our net-zero commitments by 2050, we need our financial system, including our largest businesses and investors, to put climate change at the heart of their decision-making,” Hands said.