According to the World Economic Forum, ’extreme weather’’ and ‘’climate action failure’ are among the top five short-term risks to the world, but the five most menacing long-term threats are all environmental. ’Climate action failure’, ’extreme weather’ and ’biodiversity loss’ also rank as the three most potentially severe risks for the next decade (World Exonomic Forum, The Global Risks Report 2022).
Climate change has multiple impacts on businesses, such as possible supply chain shortages, operational effects of extreme weather events or potential liability for emitting greenhouse gases. Many companies have been brought to the media's attention due to the damaging impact of their business activities. Still, we are also seeing a shift towards significant commitments achieving net-zero.
Towards the end of last year, the UK Government published a policy paper: Green Finance: A Roadmap to Sustainable Investing, which sets out the UK Government’s ambition towards net- zero commitment and more sustainability disclosure requirements. As part of the UK’s transition towards net-zero, increased disclosure on climate change and ESG reporting would level up the proportion of companies acting against climate risks. This means increased pressure for those who work in the governance and compliance team of those businesses who are required to comply.
These changes are not one-off regulatory changes but a gradual shift towards a broader group of stakeholders, looking into greater transparency, focusing on climate and related social issues embracing sustainability in the long term.
New TCFD (Task Force on Climate-Related Financial Disclosures) regulation comes into force on 6 April 2022. UK companies with (i) an annual turnover of greater than £500m (on a consolidated basis) and (ii) more than 500 employees will be subject to this new climate-related disclosure requirements.
The FCA (Financial Conduct Authority) highlighted the importance of TCFD related statements in the Primary Market Bulleting (PMB) 36. The statement must be included in an Annual Financial Report of a listed company. If they fail to disclose such information under the TCFD framework, any non-compliance will be taken seriously, which might lead to sanction if appropriate.
Ongoing implications for businesses: Climate Change Act 2008 (with 2050 Target Amendment)
The Act set out emission reduction targets that the UK must comply with legally. The Climate Change Act 2008 was amended on 12 June 2019, with the 2050 Target Amendment. It targets greenhouse gas reduction carbon reduction commitment and helps set out reporting requirements and guidance. In the long term, this policy will impact businesses and, therefore, the governance professionals too.
In addition to the new regulations, we must not forget the UK Corporate Governance Code (UK Corporate Governance Code, 2018):
Principle A of the UK Corporate Governance Code highlights the role of the Board is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
Principle O of the Code states that the Board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take to achieve its long-term strategic objectives.
And the Stewardship Code 2020
Principle 1 and 7 of The Stewardship Code for asset managers explains two key reporting expectations regarding important investment outcomes and ESG issues (FRC, UK Stewardship Code 2020):
Principle 1: Signatories’ purpose, investment beliefs, strategy and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.
Principle 7: Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfill their responsibilities.
The need to act is no longer a choice
Boards have to consider the consequences of their business decisions in the long term, and when implementing the business strategy, they should consider the business effects on the climate. As they sign off reports such as ESG report and Modern Slavery Statement, legal and reputational risks are associated with these acts.
Governance professionals are recommended to address climate and ESG related business issues to the board and remind them of their director’s duties, inform the potential impact of their decision on business strategy and governance. They are key in identifying the reporting obligations and ensuring businesses remain compliant. Therefore, governance professionals need to be continuously trained to face these challenges and be able to advise the Board accurately. These individuals are also key persons in implementing corporate governance changes, internal controls and supporting the management.
Auditors plan an important role in challenging businesses and improving the disclosure of climate-related issues.
Companies should also focus on ‘comply or explain’ where they face challenges and are unable to meet expectations. As investors begin to support companies with greater disclosure and forward-thinking strategy, they should try to focus on constantly improving their corporate reporting, and climate-related issues should be integrated into business decisions.
Boglarka is an Associate member of The Chartered Governance Institute of UK & Ireland and completed a master’s degree in Corporate Governance.