Climate reporting - COP26 developments
There is a raft of changes being developed by governments and regulatory bodies within the UK, and around the world, to significantly expand the requirements for businesses to report on climate-related matters. These developments in corporate reporting have been accelerated this year, particularly from the UK government, the IFRS Foundation and the European Commission, and as was seen at COP26 in early November 2021, they are a vital part of the world’s response to dealing with climate change.
Keeping up-to-date with the developments is not a simple task, however it is likely that climate change be high-up (or perhaps at the top) of your agenda going forward. Here we set out an overview of each key area of development for reporting purposes, with links for further information, to help you understand the position going into the 2021 reporting season.
1) Task Force on Climate-Related Disclosures (TCFD)
What: Reporting under the TCFD framework requires companies to disclose climate-related financial disclosures in line with the Recommendations of the Task Force on Climate-Related Financial Disclosures. The recommendations are designed to provide information for investors, insurers and lenders to allow them to understand climate-related financial risks better. They contain four broad headings of disclosures: 1. Governance; 2. Strategy; 3. Risk Management; and 4. Metrics and Targets. UK companies are required to report on a comply or explain basis (like the UK Corporate Governance Code) and include a statement in their annual reports as to whether they have made disclosures consistent with the TCFD recommendations, or if they have not made all the required disclosures, which they have omitted and why.
When: The legislation is applicable for accounting periods beginning on or after 1 January 2021 for UK premium listed commercial companies.
In June 2021, the FCA announced a consultation that set out proposals to extend the application of the climate-related disclosure requirements to issuers of standard listed equity shares and also a consultation that sets out proposals to expand the requirements for asset managers, life insurers, and FCA-regulated pension providers. The proposals would come into effect for standard listed companies from 1 January 2022. For asset managers the proposals would be effective from 1 January 2022 for the largest asset managers and asset owners, and from 1 January 2023 for other asset managers and asset owners over a £5 billion threshold.
Further information: For further details about the requirements, please refer to our website article: Task Force on Climate-Related Disclosures (TCFD).
2) The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021
What: This is new mandatory legislation applicable to the UK’s largest listed (including AIM) companies, banks, insurers and private companies to require them to report on climate-related disclosures aligned with TCFD. It is based on the UK Government’s consultation that ran from March to May 2021.
When: The legislation is applicable for accounting periods beginning on or after 6 April 2022.
Further information: For further details about the requirements, please refer to our blog article: Climate reporting – New mandatory legislation from April 2022.
3) International Sustainability Standards
What: These are new standards to be developed by the new International Sustainability Standards Board (ISSB) under the responsibility of the IFRS Foundation.
The ISSB: The formation of the new ISSB was announced on 3 November 2021 at the Climate Change Conference (COP 26). The aim of the ISSB is to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. The new board will be drawn from leading investor-focused sustainability disclosure organisations, the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF). The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) merged in June 2021 to form the VRF.
The Disclosure Standards: The ISSB will develop the IFRS Sustainability Disclosure Standards aiming to address companies’ impacts on sustainability matters relevant to assessing enterprise value and making investment decisions. The standards will enable companies to provide consistent sustainability information for the global financial markets, with the goal of providing compatibility and a base for emerging local requirements (for example, the EU’s planned Corporate Sustainability Reporting Directive (CSRD) as well as initiatives in the Americas and Asia-Oceania).
Disclosure prototypes: Two prototypes have been published, and which were developed by the Technical Readiness Working Group (TRWG), a group formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB. These prototypes are:
These prototypes are built on joint work by representatives of the Climate Disclosure Standards Board (CDSB), the International Accounting Standards Board (IASB), the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), the Value Reporting Foundation (VRF) and the World Economic Forum (Forum), supported by the International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators. The prototype standards bring together and coordinate existing experience and knowledge focusing particularly on alignment with TCFD.
When: The next step is for the ISSB to begin due process (i.e. public consultations) on the proposals for finalisation as standards by the end of April 2022.
Applicable to: The intention is for the international sustainability standards to be able to be applied to organisations on a global basis. For UK companies, the government has announced in its Green Finance policy document that it will create a mechanism to adopt and endorse the international sustainability standards for use in the UK and that there will be consistency with both existing and forthcoming disclosure requirements so that companies are not required to report the same information twice.
Further information: For further information, please refer to the IFRS website.
4) Sustainability Disclosure Requirements (SDR) and the UK Green Taxonomy
What: The new economy-wide Sustainability Disclosure Requirements (SDR) form a significant part of the UK government’s long-term aim to green the financial system and achieve its net-zero commitment. The government has published a policy document: Green Finance: A Roadmap to Sustainable Investing, which focuses on delivering the first phase of the overall plan to “ensure that decision-useful information on sustainability is available to financial market decision-makers”. The aim of the new Sustainability Disclosure Requirements is to bring together new and existing sustainability reporting requirements for business, the financial sector and investment products, thereby allowing investors and consumers to make sustainability-linked financial decisions.
Sustainability Disclosure Requirements cover three types of disclosures, and builds upon the UK’s TCFD implementation:
Key aspects of the UK’s SDR framework
There are three key aspects to the SDR framework to ensure alignment throughout the UK and the world, and consistency across all companies:
The UK Green Taxonomy
As part of the government’s overall plans, it is implementing the UK Green Taxonomy (Taxonomy). This will clearly set out the criteria that specific economic activities must meet to be considered environmentally sustainable i.e. 'Taxonomy-aligned'. It will help companies and investors to highlight their sustainable business practices by reporting on an accepted definition of what counts as ‘environmental sustainability’. Reporting against the Taxonomy will form part of SDR.
The aim of the Taxonomy is to require certain companies to disclose what proportion of their activities are ‘Taxonomy-aligned’ i.e. meet the criteria to be environmentally sustainable activities. Providers of investment funds and products will have to do the same for the assets that they invest in.
The approach of the UK’s Taxonomy draws on the EU approach, which the UK helped design as a former EU Member State (see below for further details). The taxonomy has six environmental objectives: i) climate change mitigation; ii) climate change adaption; iii) sustainable use and protection of water and marine resources; iv) transition to a circular economy; v) pollution prevention and control; and vi) protection and restoration of biodiversity and ecosystems. Each of the environmental objectives will be supported by detailed standards, known as Technical Screening Criteria (TSC). There will be an individual TSC for each economic activity included in the Taxonomy, which identifies how that activity can make a substantial contribution to the environmental objective. To be considered ‘Taxonomy-aligned’, an activity must meet three criteria:
When: The timing of the SDR, and the reporting detail, will be determined following a consultation in due course. In relation to the UK Green Taxonomy, the government is currently reviewing the Technical Screening Criteria for climate change mitigation and climate change objectives (which are based on the EU Green Taxonomy), and it is expected to consult on the UK draft TSCs in Q1 2022, with legislation expected by the end of 2022. These TSCs will focus on economic activities which can make the most significant contributions to tackling climate change. The expectation is that the TSCs for the remaining four environmental objectives will be consulted upon during Q1 2023.
5) The EU Green Taxonomy for sustainable activities
What: This is a European requirement driven by Article 8 of the EU Regulation 2020/852 and looks at establishing a framework to facilitate sustainable investment by requiring companies to report on their ‘sustainable’ or ‘green’ activities.
When: The legislation becomes effective on a phased basis. From 1 January 2022*, Phase 1 requires the disclosure applicability for: i) climate change mitigation; and ii) climate change adaptation objectives. From 1 January 2023, Phase 2 requires disclosure applicability for the remaining four environmental objectives: iii) sustainable use and protection of water and marine resources; iv) transition to a circular economy; v) pollution prevention and control, and vi) protection and restoration of biodiversity and ecosystems.
*For asset managers subject to the EU Sustainable Finance Disclosure Regulation (SFDR), implementation of the requirements will be delayed until 1 July 2022.
Applicable to: The legislation is currently applicable to EU organisations that fall within the scope of the Non-Financial Reporting Directive (NFRD) – this being public-interest companies with more than 500 employees. Public interest companies include listed companies, banks and insurance companies. The scope will be extended from 2023 to include companies defined as ‘large’, so as to align with the Corporate Sustainability Reporting Directive (CSRD). This will therefore capture a much wider group of companies. Large being defined as those meeting at least 2 of the 3 criteria: Turnover of more than €40M; Total assets of more than €20M; or Employees of more than 250
Further information: For further information, please refer to our blog: The EU ‘Green’ Taxonomy for sustainable activities and the European Commission’s website.
6) Corporate Sustainability Reporting Directive (CSRD)
What: The European Commission has accelerated its need to produce its own sustainability standards for use by organisation within European countries. It has announced that it will cooperate with the new International Sustainability Standards Board so that there is a coordinated approach.
Climate standard prototype: In September 2021, the EFRAG Project Task Force on European Sustainability Reporting Standards (PTF-ESRS) released its first climate standard prototype. This prototype will not be subject to public consultation at this stage, but it is being made publicly available for transparency purposes and provides a good indication of the progress made to date.
When: The EC has announced they will be making these new standards effective for 2023. Public consultation on the standards is expected to start in early 2022 with proposed standards delivered to the EU Commission by mid-2022 and the commission approving these in October 2022.
Applicable to: The legislation is applicable to all EU listed companies and EU companies defined as ‘large’. Large being defined as those meeting at least 2 of the 3 criteria: Turnover of more than €40M; Total assets of more than €20M; or Employees of more than 250.
Further information: For further information, please refer to the EFRAG’s website.
If you require any further information or support about climate reporting, please do not hesitate to get in touch by clicking the button below.
Tell your story effectively and transparently to all your stakeholders. Good reporting offers a window into the culture of the organisation. Recent years have seen a stronger emphasis placed on reporting quality, with tighter regulation and rising demands from stakeholders. Companies must work harder than ever to tell their story. From fast-growing start-ups to established multinationals, we work...
This website uses cookies.
Some of these cookies are necessary, while others help us analyse our traffic, serve advertising and deliver customised experiences for you.
For more information on the cookies we use, please refer to our Privacy Policy.
This website cannot function properly without these cookies.
Analytical cookies help us enhance our website by collecting information on its usage.
We use marketing cookies to increase the relevancy of our advertising campaigns.