This issue covers the six months since our last briefing when the UK Government released its ‘Powering up Britain' strategy, outlining plans for the UK to seize opportunities associated with the net zero transition and improve energy security. Since our last briefing there have been significant developments in the climate policy landscape, most notably the Climate Change Committee’s 2023 Progress Report to Parliament and the recent government U-turn on a number of key net zero targets. Although this has generated much discussion among the business community, particularly around contributing to investment uncertainty, other key initiatives such as those on corporate disclosure and transition planning, continue at pace.
Key takeaways for non-executive directors (NEDs)
- Recent UK policy announcements, and the reaction to them, have focused on a roll-back of green measures as the Conservative party in government seeks to find clear lines of differentiation before next year’s general election. For companies, this could have important implications for planning and investment. According to the Cambridge Institute for Sustainability Leadership (CISL), in their analysis of the situation, “if the UK wants to attract investment for new green industries, maintain public buy-in and support for changes, keep costs down and minimise disruption it needs to have a clear, transparent and steady approach.”
- Although overshadowed by the recent announcements, other initiatives of direct relevance to NEDs, such as those around corporate disclosure and transition planning, have continued at pace. On October 9, the Transition Planning Taskforce (TPT) released its Transition Planning Disclosure Framework – and the UK Government intends to consult on making the disclosure of transition plans mandatory for all large companies in the final quarter of 2023. The Financial Conduct Authority (FCA) has set its intention to consult in the first half of 2024 on implementing changes to disclosure rules for listed companies with the aim to align with the Government’s endorsement process.
- In tandem, under the umbrella of its Sustainability Disclosure Standards (SDS), the UK continues to move towards aligning corporate disclosure with the IFRS’s Sustainability Disclosure Standards under the International Sustainability Standards Board (ISSB). NEDs should consider how to build on existing practices in a way that is consistent with the TPT recommendations and ISSB Standards. This includes establishing processes for disclosing information that is not required by the Taskforce on Climate-Related Financial Disclosures (TCFD) (which will be dismantled next year as the ISSB supersedes it). It will also mean considering interdependencies with other sustainability-related issues, such as nature, where these are material.
- The October 2023 release of the Competition and Markets Authority’s (CMA) Green Agreements Guidance marks a positive development for climate collaboration between UK businesses, in that it provides greater clarity on the types of environmental sustainability agreements organisations can pursue without risking enforcement action from the competition authority. The guidance reaffirms that businesses can collaborate to create effective environmental sustainability initiatives while avoiding regulatory risks.
Key developments in the UK policy landscape that NEDs need to know about
- As has been well publicised, the UK Government recently announced changes to its net zero policies, including rolling back both a ban on the sale of petrol and diesel vehicles from 2030 to 2035 and the phase out of gas boilers from 2026 until 2035, and delaying stricter energy efficiency standards for residential landlords.
- Responses from business have highlighted the negative impact on investment and consumer confidence, particularly those in impacted sectors. For example, Ford’s UK Chairman said: “Our business needs three things from the UK Government: ambition, commitment and consistency. A relaxation of 2030 would undermine all three.” The Society of Motor Manufacturers and Traders (SMMT) chief executive commented: “Consumers must want to make the switch [to EVs], which requires from Government a clear, consistent message, attractive incentives and charging infrastructure that gives confidence rather than anxiety. Confusion and uncertainty will only hold them back.”
- The changes have important implications for NEDs across sectors who are responsible for steering their companies in the face of climate- and policy-related risk. The departure from a political consensus on climate change and the drawing of political lines in the lead-up to next year’s election will require careful navigation.
- Directors will need to ensure processes are in place to track policy positions from both the right and left side of the political spectrum, in order to remain focused on, and ensure alignment with, the UK’s 2050 net zero legal target. Specifically, board-level investment decisions will need to take into account the lack of a consistent short-to-medium-term policy landscape, but also keep in mind the UK’s longer-term 2050 net zero commitment. Nissan, for example, has decided to press ahead with the switch to all-electric by 2030, despite the recent announcements. NEDs will also want to be aware that organisations such as ClientEarth and Good Law Project are taking the UK Government to court over its current climate plan.
- On October 12, the Climate Change Committee (CCC) published its response to the announcements, stating: “We remain concerned about the likelihood of achieving the UK’s future targets, especially the substantial policy gap to the UK’s 2030 goal. Around a fifth of the required emissions reductions to 2030 are covered by plans that we assess as insufficient. Recent policy announcements were not accompanied by estimates of their effect on future emissions, nor evidence to back the Government’s assurance that the UK’s targets will still be met. We urge the Government to adopt greater transparency in updating its analysis at the time of major announcements.”
- This assessment builds on the CCC’s progress report to parliament from June this year, when even before the latest government announcements, it stated that its confidence in the UK meeting its goals from 2030 onwards is now markedly less than it was a year ago.
- NEDs will want to be aware that the CCC is pushing for stronger demand-side and land-use policies, as well as radical planning reform, to support Net Zero.
- Its recommendations also include producing stricter guidance for business on what appropriate ‘offsetting’ looks like and when it should be used to contribute to a net zero target.
| Also from the Climate Change Committee The Power of Partnership – unlocking business action on Net Zero. The Climate Change Committee has published a report from its expert advisory group looking at how business can accelerate progress towards net zero, highlighting what is called the five I’s - impact of integrity, investment, implementation, innovation and influence. |
UK Sustainability Disclosure Standards (SDS)
- In August, the Government issued an update to the UK Sustainability Disclosure Standards (UK SDS), the corporate arm of UK sustainability disclosure.
- It states that the UK Secretary of State for Business and Trade will consider the adoption of the ISSB Sustainability Disclosure Standards, to create UK SDS by July 2024.
- By using the ISSB Sustainability Disclosure Standards as a baseline, the aim is for the information companies disclose under UK SDS to be globally comparable and decision-useful for investors. (Also of note, the Financial Reporting Council ran a consultation, which closed Oct 11, collecting views on whether the application of the IFRS S1 on sustainability disclosure and IFRS S2 on climate disclosure from the ISSB to a UK context will meet this objective).
Transition Planning
- On October 9, the Transition Planning Taskforce (TPT) published its Disclosure Framework.
- Based on TCFD Guidance, the FCA already requires listed and FCA-regulated companies to disclose transition plans on a ‘disclose or explain’ basis starting in 2022. Now the TPT framework has been released the UK Government, following its announcement at COP26 in 2021, is planning to make disclosure of transition plans mandatory for the largest companies, including private companies, with an FCA consultation on this process planned for early 2024.
- Directors should be aware that the TPT requires additional information to that covered in the TCFD (for example, on whether and how remuneration and incentive structures are aligned to the objectives of the transition plan), so boards need to make sure appropriate processes are in place. It also expects companies to take a strategic and rounded approach, including explaining their contribution to the economy-wide climate transition.
- Chapter Zero released a Transition Planning Toolkit for non-executive directors on 1 November. The Toolkit, drawing from the Transition Plan Taskforce Disclosure Framework, is designed to support non-executive directors and boards in overseeing the development and implementation of credible net zero transition plans to accelerate climate action in the boardroom. Please send any feedback on the Toolkit to climate@chapterzero.org.uk.
- In May, the FRC launched a consultation on its proposed updates to the UK Corporate Governance Code, which closed in September. The proposed updates emphasise long-term value creation and suggest requirements to account for the sustainability of a company’s business model, both in terms of environmental and social matters, in the delivery of its corporate strategy—with recommendations across company reporting, audit and assurance policies, remuneration practices, and transition planning.
- The main proposed changes, “concern those parts of the Code which deal with the need for a more robust framework of prudent and effective risk management and internal controls. They are aimed at providing a stronger basis for reporting on, and evidencing the effectiveness of, the framework during the reporting period.” They require the risk framework and controls to extend from “financial” to “reported” information.
- Responses will help enhance the Code's effectiveness in promoting good corporate governance in the UK.
- In responding to the consultation, the Institute of Directors (IoD) stressed that the FRC could better emphasise the inherent flexibility in the code, and that the code must avoid being too prescriptive. For example, the FRC is recommending that the audit committee should take responsibility for ESG disclosures, controls, processes, and assurance. However, an individual board might reasonably determine that a sustainability committee, an ESG committee or the board as a whole is the more appropriate mechanism through which to oversee these areas – especially if the audit committee is already overburdened.
- Watch this space for the outcome of the consultation.
- In October 2023, the Competition and Markets Authority (CMA) launched its Green Agreements Guidance, providing welcome clarity on the application of the Chapter I provision of the Competition Act 1998 to environmental sustainability agreements between businesses.
- Following its environmental sustainability advice provided to the UK Government in March 2022, the CMA’s guidance sets out types of environmental sustainability agreements that are unlikely to infringe competition law and a corresponding commitment to not take enforcement action against agreements that meet certain public interest tests. This delineation of exemption boundaries may help lessen anxiety around the threat of antitrust action, which has been perceived as a barrier to some businesses pursuing collective climate action.
- The guidance, and its confirmation of CMA’s open-door policy for supporting businesses in pursuing environmental sustainability agreements, is a step in the right direction for determining how the benefits of sustainability agreements in the UK are properly assessed and quantified. Although the risk of private litigation in relation to environmental sustainability agreements is still present, organisations can feel assured in the CMA’s clear definition and support of collaboration in achieving sustainability objectives.
- September saw Amendment 191 to the Levelling up and Regeneration Bill passed by the House of Lords. The amendment would have given new duties to the Secretary of State to give special regard to climate change including environmental and climate targets in planning decisions. The House of Commons subsequently rejected the Lords amendments and proposed a different amendment in lieu, introducing a duty on the Secretary of State to have regard to climate change mitigation and adaptation when preparing the new national development management policies. The Bill was given royal assent on 26 October 2023.
- Although the final amendment is weaker, the progress of this Bill is representative of a growing momentum towards addressing net zero through changes to the planning system, if not through legislation, then through court decisions, and forward-thinking NEDs will want to anticipate what the impacts could be for their companies.
- Parliament also recently released a report on the role of local government in delivering net zero which can be found here.
- A UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS on 1 January 2021. The government has now published guidance on who the UK ETS applies to and what is required of the businesses that are covered.
Open consultations
Scope 3 emissions reporting
- As promised in the UK Government’s 2023 Green Finance Strategy, a call for evidence on Scope 3 emissions reporting is now live, with a deadline of 14 December.
- Views are being sought on:
- The costs, benefits and practicalities of Scope 3 greenhouse gas emissions reporting to help inform the government’s decision on whether to endorse the ISSB standards in the UK
- The current ‘Streamlined Energy and Carbon Reporting’ (SECR) framework in the UK, to inform a Post-Implementation Review of the policy.
Key external developments
EU Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD)
- Implemented in 2021 as part of the European Commission’s legislative framework for sustainable finance, the EU Sustainable Finance Disclosure Regulation (SFDR) sets out transparency rules and disclosure regulations for financial market participants (FMPs). Under the EU SFDR, UK-based FMPs offering products or services to the EU are subject to compliance and investor disclosure obligations, as are EU entities marketing services and products to the UK.
- The EU SFDR is interrelated with the anti-greenwashing requirements under the European Commission’s Taxonomy Regulation and requires sustainability information to be accessible via company websites, in pre-contractual product documents, and in annual reporting.
- There are currently two open consultations on the implementation of the SFDR which close on December 15.
- As of January 2023, UK companies with a presence in the EU, including through subsidiaries, must also consider the EU Corporate Sustainability Reporting Directive (CSRD), which will come into force between 2024 and 2028. Building on the preceding Non-Financial Reporting Directive (NFRD) principles, the CSRD requires all reporting companies to provide double materiality analysis - reporting both on how the business is impacted by sustainability issues (“outside-in”) and how the business’s activities impact society and the environment (“inside-out”). The CSRD will also require all sustainability data to be submitted in a standardised digital format subject to “limited third-party assurance.” If a company was already obligated to report under the NFRD, it is required to report under the CSRD.
- For UK businesses not currently subject to SFDR and/or CSRD, it is important to recognise the likelihood of these regulations expanding and introducing more localised directives, and the inevitable impact across organisational value chains. Companies that do not meet disclosure requirements, or that have poor ESG performance, may face increasing challenges in accessing finance in European markets, as investment decisions become more selective based on the sustainability disclosure information.
Looking ahead
As the UK ramps up for a general election in 2024, the policy positions of the main parties in relation to climate change continue to be fleshed out. Our next issue will summarise what we know so far, and how the picture may develop. We will also reflect on the outcomes of the upcoming UN Climate Conference, COP 28, and what it could mean for UK Policy.
In the meantime, NEDs should look out for the UK government consultation on the mandatory disclosure of transition plans, expected by the end of this year, and a review by the Department for Work and Pensions concerning the extent to which their Stewardship Guidance is being followed, which will see engagement with interested stakeholders on how to clarify fiduciary duty through a series of roundtables and a working group of the Financial Markets and Law Committee.
