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Mandatory climate disclosures 'risk unnecessary complexity'

The UK government is consulting on plans to require all publicly quoted and large private companies as well as large limited liability partnerships (LLPs) to make climate-related financial disclosures.

The Department for Business, Energy and Industrial Strategy (BEIS) is proposing mandatory disclosures in line with the four overarching pillars of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) – governance, strategy, risk management, metrics and targets.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said the proposal represented a significant step forward in environmental, social and governance (ESG) behaviour transparency.

“However, this is a rapidly evolving area, with many moving parts and it is at risk of becoming overly complex – the opposite of what the government intends,” Proverbs-Garbett said.

According to the BEIS consultation document (34 page / 796KB PDF), premium listed companies will continue to be required to make disclosures against the TCFD pillars as well as the task force’s 11 detailed recommendations, on a comply or explain basis. This follows amendments to the Financial Conduct Authority’s Listing Rules last year.

Other listed or large companies as well as large LLPs will be required to disclose in line with the four TCFD pillars only, a more general and flexible approach.

It is proposed the requirements will apply to listed UK companies and public interest entities that have more than 500 employees, and large unquoted companies or LLPs with over 500 employees and turnover in excess of £500 million.

Enforcement powers would be unchanged, falling under existing provisions allowing the government or the Financial Reporting Council to order revisions to accounts and annual reports and BEIS said it did not propose to introduce new monitoring powers. Equally, the government does not intend to alter the role of auditors in relation to climate-related financial disclosures, although it is acknowledged in the consultation that as the proposals would require climate-related financial disclosures to be situated in the annual report, auditors will be required to obtain an understanding of the legal and regulatory requirements applicable on an entity by entity basis.

The government said the proposals for mandatory reporting should be consistent with the reforms proposed in its recent earlier consultation focused on restoring trust in audit and corporate governance, which suggests a mandatory resilience statement “could be used as a vehicle for climate-related financial disclosures in the future”.

The new consultation also asks whether large companies should be obliged to report in line with the streamlined energy and carbon reporting requirements where not currently required, given the likely overlap in data used.

The government said it would seek to align its proposals with any future international standards in this area. The International Financial Reporting Standards (IFRS) Foundation has proposed a new, global Sustainability Standards Board, with the aim of a definitive proposal by September 2021 ahead of the United Nations Climate Change Conference in November, but currently no global standards on climate-related reporting exist.

“Government and investors will need to be very clear, in quick order, about expectations in order to allow companies to report effectively against such an extensive background of regulatory change,” Proverbs-Garbett said.

“The government's position is that, while it has been supportive of the voluntary TCFD framework, levels of disclosure are perceived to be low and often manifest in sustainability reports rather than in financial filings or annual reports. Only, so the argument goes, if reporting is regular, consistent and links directly to strategic positions and business models, will it provide value to investors and other market stakeholders, making the market – and the flow of green capital – work better,” Proverbs-Garbett said.

“Without international agreement on standards so that comparable information is disclosed to and between markets, mandatory reporting might be argued to be of limited use. However, that misses the point. This is an incremental process. Companies beginning to respond to and adopting the practices of environmental reporting will be a good thing as they continue to develop the techniques and approaches required to provide rigorous and user-friendly reporting to investors,” Proverbs-Garbett said.

The BEIS consultation closes on 5 May 2021, and the government said new regulations would come into force on 6 April 2022, applying to financial periods starting on or after that date.

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