3 minute read • published in partnership with Irwin Mitchell
Insight: Getting ready for the new Climate Related Financial Regulations
On 6 April 2022, the Companies Act will be amended by statutory instrument to include new sections incorporating the Companies (Strategic Report) (Climate Related Financial Disclosure) Regulations. Jill Crawford, a specialist environmental lawyer at Irwin Mitchell explains what manufacturers need to be aware of.
The Climate Related Financial Disclosure (CRF) Regulations will have the effect of making it compulsory for the UK’s largest companies, including manufacturing businesses with over 500 employees and £500m turnover, to disclose climate-related financial information in relation to climate risks as well as climate opportunities.
The CRF Regulations will broadly follow the recommendations from the Task Force on Climate Related Financial Disclosure (TCFD).
Established in 2015, the TCFD aims to create consistent information for climate related risks and opportunities for investors and developed a reporting framework based on a set of consistent disclosure recommendations for use by companies as a means of providing transparency on its climate related risk exposure to investors lenders and insurance underwriters.
The UK will become one of the first G20 countries to make compliance with the TCFD mandatory.
The government is hoping that the CRF Regulations and says it will “increase the quality and quantity of climate related reporting across the UK business community and will ensure businesses consider the risks and opportunities the face as a result of climate change and encourage them to set emission reduction plans and sustainability credentials”.
The CRF Regulations are also part of the government’s efforts to make climate related financial disclosure mandatory across the economy by 2025.
The obligations on manufacturing businesses are extensive and include providing a description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities.
It will also be necessary for the business to describe how it identifies, assesses, and manages climate-related risks and opportunities.
Other requirements include an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios.
A description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets is also required.
Manufacturers must also describe the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those key performance indicators are based.
Failure to comply with the CRF regulations will be a criminal offence with the penalty being an unlimited fine. This also applies to every person who was a director of the company immediately before the end of the period for filing accounts and reports for the financial year in question AND who failed to take all reasonable steps for securing compliance with the requirements therefore putting directors at risk of prosecution as well as the company.
Whilst the CRF regulations clearly give rise to legal risks for manufacturers, if the regulations are implemented properly by businesses then it could be argued that the regulations have the effect of significantly reducing the risk by providing protection from climate litigation risk.
The inclusion in the Regulations to allow a business not to disclose climate related information as referenced above will need to be monitored to ensure that it does not have the effect of undermining the purpose of the regulations. The first monitoring of the Regulations is to be undertaken in 2027.
There is also the risk that there will be ‘greenwashing’ by some business but the government has said in response to criticism of the potential for greenwashing is that a science based ‘gold standard’ for transitions plans will be drawn up by a new Transition Plan Taskforce which will be composed of industry and academic leaders, regulators as well as civil society groups.
Evidence suggests that large number of manufacturing companies are aware of the impending CRF Regulations and if not yet fully prepared for the implementation of the Regulations, are working towards it.