The U.K. has just introduced some of the world’s toughest non-financial requirements for companies to disclose their climate exposure. The regulations require certain U.K. publicly quoted companies and large private companies to show how they are managing climate-related risk in their operations.

Natalie Stewart is a senior associate in the London office of U.S. law firm Duane Morris and an expert in this field.

STEWART: This new requirement covers various climate-related financial disclosures, including governance arrangements in relation to the assessment and management of climate-related risks and opportunities by a company and how climate-related risks and opportunities are identified, assessed and managed by a company.

It also covers how the assessment of these risks is integrated with the company’s overall risk management process, the actual and potential impacts of the main climate-related risks on the company’s business model and strategy, the resilience of the business model, the targets used to manage climate-related risks and key performance indicators used to assess progress.

There’s no specific format or structure in terms of how the disclosure must be made pursuant to the regulations. It mainly requires a company to look at climate-related risks in relation to its specific business model and industry sector and gives companies the freedom to determine their particular disclosure format. It’ll be interesting to see how the market develops on this and whether a standard form of disclosure and the assessment of the risks will develop over time.

The UK Leads the Way on Climate Disclosure

BRINK: Is this a big change, or were a lot of these big companies already doing this sort of thing voluntarily?

STEWART: We’re seeing more disclosure generally. Under the U.K. Companies Act 2006, there were already disclosure requirements on environmental matters, social matters, respect for human rights and similar topics. So this adds in climate-related risks, but it’s likely that a lot of these companies were looking at such risks already. It’s something that we’ve seen large companies do already on a voluntary basis.

Part of the purpose of this would seem to be to get companies to think about how their businesses are going to be impacted by climate related risks and opportunities in the future, as well as how resilient they can be.

One interesting thing about the regulations is the impact that it will have on smaller companies who aren’t required to make this disclosure under the legislation, but who may want to do so on a voluntary basis, as the market moves and as stakeholders call for more disclosure on this type of topic.

BRINK: This is an assessment of a company’s ability to be resilient to climate, not its efforts to reduce its carbon footprint?

STEWART: Looking at the background to the regulations, part of the purpose of this would seem to be to get companies to think about how their businesses are going to be impacted by climate related risks and opportunities in the future, as well as how resilient they can be.

However, there will also be a need for disclosure about a company’s progress towards its targets for managing climate-related risks and realizing climate-related opportunities and the linked key performance indicators, but it’s not solely focused on that. It’s more about helping companies consider the assessment of the risks and opportunities.

BRINK: What’s the status of non-British companies that may have some kind of subsidiary or business interest in Britain?

STEWART: A company will not be subject to the regulations if it is a subsidiary and the annual-climate related disclosure is included in its parent company’s strategic report for the group. To be exempt, the parent must be a U.K. company, and the strategic report must be prepared for a financial year that ends on or before the subsidiary’s financial year (the report must also include non-financial and sustainability information in respect of the subsidiary).

However, where a U.K. subsidiary has a non-U.K. parent that reports on a consolidated basis, the exemption does not apply. This means that a non-U.K. parent may be exempt, but their U.K. subsidiaries may be subject to the regulations. 

Non-U.K. companies with U.K. subsidiaries should be aware that their U.K. subsidiaries may fall within the scope of the regulations and consider whether their strategic reports should be on an individual or consolidated basis with respect to their U.K. subsidiaries.

A Possible Sea Change?

BRINK: What happens if companies to whom the regulations apply don’t comply?

STEWART: The Financial Reporting Council will monitor reports going forward, and if they find that a company should have disclosed the information required by the regulations and hasn’t disclosed it in their report, they can make an application to the court that the report does not comply with the regulations. 

The court may then order a revised report to be prepared and any other such matters as it may think fit. Based on current practice, we would expect the Financial Reporting Council to engage with companies before going to court, as a first step to encourage compliance. It will be interesting to see how the Financial Reporting Council approach to reviews of climate-related financial disclosure develops.

The thing that we’ll be looking out for is whether similar legislation will be brought in for smaller companies and what exactly will be required to be disclosed. It’ll be interesting to see if this is going to be a sea change in company disclosure generally, and also if smaller companies do decide to make the disclosure on a voluntary basis, if that will result in legislation for smaller companies across the board. It will be interesting to see how it develops further.