Sustainability reporting – are you and your business prepared?

Sustainability reporting is now a priority for businesses, investors and customers. Since April 2022, the UK's largest companies and LLPs must disclose climate-related risks and opportunities in line with the TCFD’s (Task Force on Climate-related Financial Disclosures) recommendations.

Companies need to prepare for these new mandatory sustainability reporting standards, not just from an ethical and environmental standpoint, but also due to the major implications they have on people, processes, technology and data.

So what are the requirements of sustainability reporting, and how does a company prepare?

On 6 April 2022, the UK Department for Business, Energy and Industrial Strategy (BEIS) introduced mandatory climate-related financial disclosure regulations for certain companies and LLPs. The government set out its non-binding guidance to help everyone affected by the rules understand sustainability reporting standards and sustainable business practices.

These regulations are part of a coordinated effort by government and several regulatory bodies to mandate climate-related financial disclosure aligned to the TCFD. Disclosure of important climate-related financial data can support investment decisions in the transition to a low carbon economy.

The TCFD regulations apply to:

• All UK companies currently required to produce a Non-Financial Information Statement. This includes traded, banking and insurance companies with more than 500 employees
• UK-registered companies with securities admitted to the alternative investment market (AIM) and more than 500 employees
• UK-registered companies not included in the above categories with more than 500 employees and a turnover that exceeds £500 million
• LLPs with more than 500 employees and a turnover of more than £500 million.

The regulations require in-scope companies and LLPs to provide a description of disclosures on climate change-related risks and opportunities, where these are material. The disclosures should cover how climate change is addressed in corporate governance, impacts on strategy, how climate-related risks and opportunities are managed, and performance measures, KPIs and targets applied in managing these issues.

Companies should include these disclosures in the Non-Financial and Sustainability Information Statement (previously known as the Non-Financial Information Statement) in the Strategic Report. For LLPs, disclosures are included in either the Energy and Carbon Report of their Directors’ Report or in the Strategic Report.

Investors are increasing looking at companies’ exposure to climate-based risks and copportunities as information becomes more accessible.

In October 2021, the UK government introduced its Greening Finance: A Roadmap to Sustainable, detailing its long-term ambition to evolve the financial system into a greener model aligned with the UK’s commitment to net zero. It explains how sustainability reporting standards are part of the wider strategy to provide investors with the information they need to include climate change and sustainability when making financial decisions.

The TCFD state that the regulations around investing need standardisation. There’s a risk that without the right information investors incorrectly price or value assets leading to a misallocated capital. The importance of integrating ESG and sustainability reporting standards into an investment portfolio can be addressed by four key points:

Risk assessment and performance

Depending on risk objectives, sustainability reports can inform various stages of the investment process, including asset allocation, security selection, portfolio construction, risk management as well as material risks and opportunities which might be otherwise overlooked.

This helps identify investment, which may lead to enhanced risk, adjusted returns and reduce downside risk. We explain in more detail the key steps to enhance governance of your risk landscape in the next article in our series.

Stakeholder engagement

Sustainability reports promote transparency and accountability by encouraging companies to disclose their environmental and social impacts. This helps to build trust, benefitting a company’s value and reputation.

Regulatory requirements

The Corporate sustainability reporting directive now have a responsibility and a duty to disclose sustainability report information to a certain standard, which could evolve over time. It’s crucial for stakeholders to keep on top of any updates as this will affect sustainability reporting resources and efforts across organisations.

• Analyse climate-related data your company already reports to identify where gaps exist in comparison to TCFD guidelines or existing climate reporting requirements
• Look at how your teams (Finance, Risk, Sustainability and Strategy) collaborate to see if sustainability and climate information can be allocated the time and resources required to meet future needs
• Form an internal working group or taskforce to initiate an all-company effort for climate reporting. This contributes significantly to a positive ESG culture within organisations
• Communicate directly with the company's investors by listening to what they want and what their core ESG priorities are. This will help shape expectations and future planning in the race to net zero
• It’s important to remember that climate reporting is an ongoing process. It’s necessary to remain open and transparent about where the company stands.