Draft Companies
(Strategic Report) (Climate-related Financial Disclosure)
Regulations 2021
The Minister for Energy, Clean Growth and Climate Change ()
I beg to move,
That the Committee has considered the draft Companies (Strategic
Report) (Climate-related Financial Disclosure) Regulations
2021.
The regulations were laid before the House on 28 October 2021.
They will amend the Companies Act 2006 to require certain
publicly quoted and large private companies to include in their
annual reports disclosures in line with the international
framework for climate reporting developed by the Taskforce on
Climate-related Financial Disclosures.
Climate change is the biggest challenge of our time, both to
society and to the economy. Internationally the Government are
taking a leading role to promote action through our presidency of
the United Nations COP26, and domestically we are working to
deliver the UK’s world-leading target of net zero greenhouse gas
emissions by 2050. The Government have published our net zero
strategy, which sets out the measures to transition to a green
and sustainable future. To support the transition to net zero, it
is important that economically significant companies assess,
disclose and act to manage climate-related risks and
opportunities. Without an accurate assessment of climate risks by
companies, it will be impossible to assess what action is needed
to address them. Information from those assessments should be
taken into account in the business model and strategy of every
company to create more climate-resilient businesses. It should
also form a key part of all investment decisions.
Some large UK companies are already reporting on climate risks,
but to date those disclosures have been variable in both quality
and quantity. The inconsistency makes it very difficult for
investors to compare opportunities and risks across companies,
let alone across markets. Many organisations are also not making
the fuller disclosures that are needed to inform business risk
and investment decisions.
(Scarborough and Whitby)
(Con)
From listening to the Minister, I understand that we are talking
about general statements about risks and opportunities, not about
accounting for the carbon dioxide or other greenhouse gases
produced in the same way as businesses produce business accounts
for currency.
This is a qualitative assessment done by the 1,300 largest
companies in this country—those with more than 500 employees—of
how they see the risks and opportunities of climate change, to
help their own company planning and also help investors looking
at particular companies and across sectors. At this stage, the
idea is to have a qualitative assessment from each company in its
annual report. Producing annual reports is part of an established
process.
Mr Goodwill
Does the Minister think that in due course we might see a carbon
balance sheet where companies have detailed information, so we
would be able to tell exactly where they were in terms of their
own net zero targets?
We already have a separate reporting regime in place for
that—streamlined energy and carbon reporting. I think my right
hon. Friend is a member of the Environmental Audit Committee,
which takes a keen interest in these matters. I refer him to that
separate reporting stream, which might satisfy some of his
rightful craving for more information.
The Chair
And perhaps we can return to the topic under discussion this
morning.
Yes, of course, Mr Gray. The regulations will now require the
UK’s largest companies to assess and disclose actions to manage
climate-related risks and opportunities. In November 2021, the
Government published “A Roadmap towards mandatory climate-related
disclosures”, which set out how the UK would become the first G20
country to mandate TCFD-aligned climate-related financial
disclosures across major parts of its economy. At the meeting of
G7 Finance Ministers in June, the Chancellor of the Exchequer won
agreement from his counterparts to include mandatory
climate-related financial disclosures in their countries. Major
economies are set to introduce similar measures to ours,
following our lead.
The Government have already introduced regulations to require
climate disclosures, for example from occupational pension
schemes. The Occupational Pension Schemes (Climate Change
Governance and Reporting) Regulations 2021 were approved by both
Houses and came into force on 1 October 2021. In addition, the
Financial Conduct Authority has introduced TCFD-aligned
disclosure in the UK listing rules for premium listed companies.
It has also conducted a consultation on extending this to
standard listed companies. The Government have now laid these
draft regulations to integrate TCFD-aligned climate-related
disclosures in UK corporate reporting.
The regulations we consider today will amend the Companies Act
2006 to place obligations on certain publicly quoted
companies—banks, insurers and large private companies—to
incorporate TCFD-aligned climate disclosures into their annual
reports. These requirements will apply for an accounting period
starting on or after 6 April 2022. Companies in scope will be
required to make specific climate change-related disclosures in
their annual strategic report in respect of governance, strategy,
risk management, metrics and targets. These headings reflect the
four thematic pillars of the TCFD framework.
The regulations have been drafted to ensure they fit effectively
into the existing corporate reporting framework and,
specifically, company reporting on risk in the strategic report
where these new climate disclosures will be located. The
disclosure requirements will apply to all public interest
entities and companies traded on AIM—the alternative investment
market of the London Stock Exchange —where those companies have
more than 500 employees. They will also apply to private
companies with over 500 employees and over £500 million in
turnover. This will bring over 1,300 of the most economically
significant companies in the UK economy into the scope of the
disclosure requirements.
Large private companies are also included in the scope of the
draft regulations. Increasing disclosures of climate risks and
opportunities to inform decision making is just as relevant for
private companies, which are an important part of value chains
across our economy, as for listed companies. The Government will
introduce separate regulations to apply the same climate
disclosure requirements to large limited liability partnerships
according to equivalent size thresholds. This separate statutory
instrument will be laid before Parliament at a later date and
will be subject to the negative resolution procedure.
The Department is preparing to publish non-binding guidance to
help companies in the scope of these regulations. The guidance
will provide additional information to help companies to
understand the requirements and to improve disclosures. The
guidance will signpost to sources of further information for
companies, including to the online resource of the TCFD The Department
consulted on the policy design for these regulations between
March and May 2021;we received 137 responses from a range of
companies and LLPs—financial institutions, civil society
organisations, trade associations and accountancy firms.
Officials also took part in three online events to engage with
wider audiences. Overall, the Department’s proposals received
wide support. Many respondents were pleased to see Government
taking action in this space, and they welcomed the clear timeline
for businesses to prepare for the disclosure requirements.
The Department made two main policy changes in response to the
consultation. First, it simplified reporting for companies that
are also subject to the Financial Conduct Authority rules. We
have amended the wording of the regulations to make it more
closely aligned to the wording in the TCFD’s framework. Secondly,
respondents to the consultation called for companies to be
required to analyse their risks against specific climate
scenarios. As such, these regulations include the requirement for
companies to assess their climate risks against different
scenarios and to report on this on a qualitative basis. Scenario
analysis is a powerful tool to help companies in their assessment
of climate-related risks and opportunities. It supports better
resilience against climate risks.
The Government consider that the draft regulations are in the
UK’s long-term interest to help to future-proof our economy
against climate change. The Government want to ensure that
companies and investors can make the most of the opportunities
created as we transition the economy to net zero and
sustainability, so we need companies to understand the risks and
opportunities and report on them transparently. I commend the
draft regulations to the Committee.
09:35:00
(Southampton, Test)
(Lab)
It is a pleasure to serve under your chairmanship, Mr Gray. I am
afraid that this morning we cannot beat the record for the
briefest Committee sitting, but I hope we will get reasonably
close, because the Opposition not only have no wish to divide the
Committee, but positively welcome the changes proposed.
The draft regulations are particularly welcome because of the
importance of what the climate change imperatives facing large
companies in the UK mean for the assumptions and practices—for
example about the long-term duration of assets in the ground, or
fossil fuels—that were previously widespread in the industry. The
required disclosures will ensure that companies are clear about
the risks in their operating portfolio, particularly the risks of
stranded assets. Across the world, as the impact assessment
suggests,
“a third of oil reserves, half of gas reserves and 80% of coal
reserves should remain unused in order to meet the target of 2
degrees rise above the average global temperature of
preindustrial times.”
A number of larger companies have such assets, so it is
absolutely right that the risks related to continuation should be
set out in their company accounts.
I could give a number of other examples, but for the sake of time
I will not go into them. I think we agree that this measure to
secure transparency is important for future investors’
consideration of companies. Disclosures in company accounts will
be important, as will the level playing field for everybody
concerned as a result of the mandatory nature of the changes
made. The impact assessment mentions the alternative scenario of
voluntary disclosure, but considers that the regime should be
mandatory for reasons of a level playing field and because
companies might otherwise consider that they would get a first
mover disadvantage by disclosing when others do not.
What is not immediately apparent in the draft regulations is what
sanction will be in place for companies that do not comply.
Because the draft regulations are effectively folded into the
Companies Act 2006, I assume that there is some form of sanction
under that Act to distinguish the requirement as mandatory. I am
sure the Minister agrees that if there were no definitely
attached sanction, an arrangement stated to be mandatory would be
no different from a voluntary arrangement. I hope that the
Minister can assure me that a sanction is attached to these
arrangements. It would be very helpful to the Committee if he
outlined what that sanction is and how it might be applied.
09:40:00
Ms Anum Qaisar (Airdrie and Shotts) (SNP)
It is a pleasure to serve under your chairmanship, Mr Gray. I
will keep my contribution relatively short; I wish simply to make
a few points for the record.
It is vital that tackling climate change is at the top of
everyone’s agenda, as it is in Scotland, from our greener
national policies in the Scottish Parliament to the fantastic
work done by local community groups, charities and citizens.
Since my election in May, I have been so impressed by my Airdrie
and Shotts constituents’ work to tackle climate change. Of
course, Scotland hosted COP26, and I am sure that we were all
inspired by the work done by people from across the globe.
COP26 in Glasgow reinforced the idea that tackling climate change
is a global issue and that everyone— every single person on this
planet—can make a positive change. That leads me to an important
point: at the heart of tackling climate change is the need for a
rapid transformation across all sectors of our economy and of
society. Large corporations must be transparent about their
contributions to that transformation. The more that companies are
required to publish climate-related financial disclosures, the
more they will be encouraged to focus on becoming greener. That
is a positive thing.
09:41:00
I thank the hon. Members speaking for the official Opposition and
the Scottish National party for their contributions. Many of the
points they made vindicate the approach that the Government have
taken.
The hon. Member for Southampton, Test asked what the penalties
for non-compliance will be. It is worth pointing out that we are
amending the procedures in the Companies Act 2006, which, through
the Financial Reporting Council procedures, are a well
established means for companies to publish their annual reports.
The regulations amend those procedures so that the existing
regime remains in place. Company directors have duties under the
2006 Act to prepare a strategic report and to comply with the
Act’s requirements. When they knowingly approve non-compliant
accounts or fail to take reasonable steps to ensure compliance,
enforcement action may be taken and they may be liable to fines
if convicted. I think that very unlikely for the sort of
companies that we are talking about—the 1,300 largest companies
in the UK—but that sanction does exist in the 2006 Act.
The Financial Reporting Council monitors the contents of
strategic reports, and has the powers to make an application to
the court for a declaration that the reports do not comply with
the 2006 Act. The court may then order the preparation of revised
accounts, including the revision of the strategic report. As I
say, we are not envisaging that the sanction will be needed. I
remind the Committee that the majority of businesses that
responded to the consultation were in favour of taking action in
this place.
The hon. Member for Airdrie and Shotts raised the importance of
COP26 in Glasgow, which vindicates the UK Government’s decision
to host that conference. We are delighted with the success of
COP26, particularly in areas such as financial disclosure, which
builds on a lot of the activities that the Chancellor of the
Exchequer and the whole of Government have been leading this
year, including through the G7. COP26 tied all that in very well,
which vindicated our decision to host it.
The regulations for TCFD-aligned climate disclosures are designed
to enable our businesses and the UK economy to embrace
transparency about climate risks and opportunities as part of a
greener and sustainable future. I thank hon. Members for their
valuable contributions to the debate. I hope that the Committee
will approve the statutory instrument.
Question put and agreed to.
