The UK government introduces mandatory climate change reporting rules

The UK government is introducing mandatory climate change reporting rules from April 2022. While these rules focus on large corporations, we believe that they may soon also apply to small and medium-sized businesses too (SMEs). 

All SMEs ought to be considering their environmental impact irrespective of the regulatory requirements that may be coming. Businesses must fulfill a wider duty to society – to do business sustainably and with regard to the environment.

In 2022, Limited Liability Partnerships (LLP’s) and large companies will have a new duty to disclose climate-related financial information. This data will be about climate-related risks and opportunities. It is a change that will force many businesses to evolve the way they are recording, handling, and reporting internal information.

As a result of this change, the UK will become the first G20 country to have mandatory climate change reporting rules for their large businesses. This change in policy is in line with recommendations from the Task Force on Climate-related Financial Disclosures (TFCD) and comes at a time when the discourse on environmental responsibility is ramping up around the world.

In line with this month’s COP26 summit, papers and online media platforms are awash with news about climate change promises and analyses of how different countries are approaching their sustainability initiatives. The introduction of mandatory climate change reporting rules for 2022 is an indication that most UK businesses will need to adjust in the future.

Over 1,300 of the largest UK-registered companies will have a mandatory responsibility to disclose climate-related financial information after the new rules are brought in on 6 April 2022. The new reporting rules will affect the UK’s largest traded companies, insurers,and banks, as well as private companies with over £500 million in turnover and 500 employees. Cost analysis suggests that the requirements will cost affected businesses £145.3 million per year.

The aim of the mandatory disclosures is to increase the quality and quantity of climate-related reporting among the largest UK businesses. Such ambitions from the government are also an indication that climate-related financial reporting may soon be on the way for SMEs too. For now, the focus is on the most environmentally and economically significant companies registered in the UK, and once the system is proven to be effective it may begin to be used in a wider context.

The new reporting rules should help businesses form a more sophisticated understanding of the financial impacts of their exposure to climate change, while also encouraging businesses to support the shift towards a greener economy.

The Financial Reporting Council will be responsible for compliance with the rules that will be aligned with the recommendations of TCFD. This will ensure that companies have a uniform way to analyse how climate change may impact their business strategies and that there is a verified level of accountability. The framework of the TCFD provides guidance on four key areas: Governance, Strategy, Risk Management,and Metrics.

As I noted in an article on why all businesses should embrace sustainability, back in 2020, “Sustainability is so much more than just a trend. The world is becoming increasingly socially conscious. Consumers are judging businesses on their corporate social responsibility and on whether their values and actions are aligned. It is not enough for businesses to simply say they stand for a cause, but they must have honourable intentions and a motivated agenda behind it too….brands must be able to meet the demands of today without compromising the needs of tomorrow”.

SMEs should get ahead of the regulatory curve and take a good look at the climate-related financial information today. Unfortunately, as a society,we are already playing catch-up when it comes to the environment. Therefore it is important that businesses of all sizes take their environmental responsibilities seriously now before they are forced to by governmental regulations.

On the topic of climate change reporting rules Richard Kleiner, Managing Partner at Gerald Edelman commented: “This change by the government is merely the beginning of a raft of changes that businesses and other organisations will have to adhere to over the coming months and years. At Gerald Edelman we intend to be ahead of the curve so that when the legislation arrives in all its forms that the transition will not be so great.”