Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021

Lord Vaux of Harrowden Excerpts

Tuesday 30th November 2021 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, I understand and welcome the principle of the regulations—to ensure that large companies state what they are doing about climate risks and opportunities—but I have one concern. Companies’ financial statements are becoming ever fuller of environmental, social and governance information. There is a danger that, in doing this, we render the accounts more difficult to follow. It becomes hard to see the wood from the trees.

We have only to look at US listed company financial statements to see how that can go. You have to wade through hundreds of pages of risk and other ESG analysis. Most of it consists of standard-form, boilerplate statements that do not change year to year and, in reality, add little or nothing to the understanding of the reader. Indeed, it can make the accounts almost unreadable and very hard to make an informed decision about the position of the company.

I fear there is a danger that we may be starting to follow that trend, so I am very pleased that Part 3 of the regulations requires a review to be carried out, but that is not until 6 April 2027. I suspect that it will become clear much more quickly than that whether they are having the desired effect or are just adding more meaningless boilerplate to the accounts. I urge the Minister to keep that under constant review, rather than waiting until 2027, and to take action much more quickly if it becomes clear that the regulations are really not doing what is intended.

[Lord Lennie (Lab)]

We shall see, my Lords. We debate these regulations on the back of the most important summit the UK has ever held—a summit which future generations will look back on as when we either met the moment or missed the opportunity. It is increasingly clear that progress at COP 26 was modest and, too often, action will come too late. The Climate Action Tracker has stated that Glasgow commitments mean that, rather than limiting warming to the target 1.5 degrees, we are on track for a devastating 2.4-degree rise.

This is the backdrop to which we debate these regulations, which I hope have not come too late, as they will play an essential part in reaching net zero by 2050, as well as ensuring businesses both mitigate the risks of climate change and seize opportunities.

Today’s instrument introduces new reporting obligations for certain UK registered companies, as the Minister explained, including certain listed companies and companies with more than 500 employees and a turnover of more than £500 million, which require them to report climate-related financial information as part of their strategic report. This is in line with the recommendations of the task force on climate-related financial disclosures—a framework which includes 11 recommendations forming, as we have heard, four pillars: governance, strategy, risk management, and metrics and targets.

Support has been coalescing around these recommendations. The TCFD’s latest annual status report states that the number of organisations endorsing the task force’s recommendations has increased to more than 2,600—an annual increase of 70%.

We should remember that, regardless of the serious impact on migration, security and hunger, climate chaos is also costly. The Intergovernmental Panel on Climate Change estimates $69 trillion in global financial losses by 2100 from a 2-degree warming scenario.

Getting to this point has taken a while, and climate delay has been a repeated issue with this Government. The task force on climate-related financial disclosures published its recommendations back in 2017. Then the UK Government’s green finance strategy set out an expectation that all listed companies and large asset owners should disclose in line with the TCFD’s recommendations back in 2019, but did not hold a consultation on the proposals until earlier this year. As we have heard, these new requirements are to come into force next April, 2022—five years after the task force on climate-related financial disclosures published its recommendations.

According to BEIS, regulatory action is necessary because the current voluntary approach

“is unlikely to be effective … current levels of disclosure across the economy are low and reporting quality varies significantly.”

If we look in detail at the impact assessment, this is clear. Looking at the central scenario for additional groups having to comply with reporting requirements, it reveals that only 34% of the 1,350 companies in scope have already aligned with governance, 24% with risk management and only 14% with scenario analysis. The impact assessment estimates that 1,350 companies are in scope of the regulations. Can the Minister tell us what percentage of the UK economy this covers?

The impact assessment states that

“When a UK group is in scope, all the subsidiaries (UK and overseas) belonging to the same UK group, would be expected to hold some degree of reporting burden.”


What does “some degree” mean? These regulations also focus on companies producing mandatory qualitative scenario analysis. The impact assessment states that the Government

“understand that while some companies might decide to go beyond these requirements … there will be some companies that lack the expertise, resources and capabilities to undertake quantitative scenario analysis by the time these regulations come into force.”

How many companies are predicted to produce quantitative analysis as well? What will be done to encourage both qualitative and quantitative analysis to be produced? When does the Minister expect quantification to be phased in?

It is regrettable that, first, we are unable to study the non-binding guidance alongside these regulations and, secondly, that the LLPs regulations have not been laid at the same time as this SI, due to their interlinking nature. The Secondary Legislation Scrutiny Committee flagged this SI as an instrument of interest:

“We note that the Department will produce guidance on the new reporting requirements which, according to the Impact Assessment, will be around 125 pages long. This suggests a considerable degree of complexity. In the absence of the actual guidance, it is difficult to form a view of the nature and extent of the new reporting requirements, and how robust the Department’s assessment of the impact on businesses is.”


Does the Minister agree that there will be a “considerable degree of complexity”? Why is the guidance not ready for today’s debate? In the consultation stage impact assessment, the Government had assumed that guidance would be about 75 pages long. Why has this increased by 50 pages according to the Secondary Legislation Scrutiny Committee’s report?

The Government state that the combined impact on business of these regulations and those which apply to LLPs is £145.3 million. The impact assessment states that costs result from companies needing

“to get familiar with BEIS Guidance, TCFD Guidance and other companies’ disclosures before producing their own report”,

as well as ongoing costs which include collecting and processing information, strategy and risk management. How are the Government communicating to and supporting businesses with this additional cost?

I would like some clarification from the Minister on enforcement. The impact assessment states that:

“We also expect there to be an additional ongoing cost of monitoring, supervision and enforcement to the Financial Reporting Council (FRC) as the appropriate regulating body for disclosures”,


but is the FRC properly resourced to take on this additional burden? Can the Minister explain how the Government will work closely with the Financial Conduct Authority and the Financial Reporting Council to ensure monitoring and enforcement frameworks operate in a coherent and complementary way? What happens if these companies fail to follow these obligations or publish substandard information? Will there be fines? The impact assessment states that “reporting quality varies significantly”, as the Minister said, so can these regulations ensure that this does not continue to be the case? A review before 6 April 2027 is welcome, but the impact assessment states that there will be “a light touch review” in 2023. What will this consist of?

I end by speaking about small and medium-sized enterprises. As the impact assessment states,

“Climate change poses significant risks to businesses,”

and we have to include SMEs within that statement. The cost implication of these risks means that SMEs can be even more exposed to the risks and to being squeezed out of the opportunities of climate change. Does the Minister see these obligations being extended to SMEs soon? The impact assessment states,

“disclosure can have cascade effects through the supply chain”.

Can the Minister confirm they are not just relying on trickle-down climate economics to see a change in reporting behaviour for SMEs? The cost implications for SMEs make it essential that the Government have a strategy to support them.

To conclude, these regulations are welcome, but they represent only a small part of the picture of how the Government need to help businesses respond to the risks and opportunities of climate change.