When it comes to ESG factors, the common reporting theme is that companies with the greatest public interest are required to disclose the most. Reporting requirements for financial services firms come from a wide range of sources and cover several reporting channels. The obligation on the reporter varies from voluntary to mandatory, at times using the principle of ‘comply or explain’ to allow a degree of flexibility. The scoping of requirements is complex and varies depending on factors such as company turnover, the number of employees, the nature of the company’s operations and whether the company is quoted.

Mandatory requirements

The sources of mandatory disclosures are most commonly legislative or regulatory requirements. The UK and EU have been the leading jurisdictions to start introducing climate risk and ESG reporting requirements. In the UK, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) are implementing requirements for financial services firms.

Task Force on Climate-related Financial Disclosures (TCFD) – UK Requirements

The TCFD is a private sector led group convened by the Financial Stability Board (FSB) in 2015 to develop voluntary, consistent climate-related financial disclosures that is useful to investors, lenders and insurance underwriters in understanding material risks.

The UK has introduced mandatory requirements relating to TCFD aligned disclosures. The roadmap published by the government introduces a phased approach depending on the scale and complexity of the firms. As at September 2021, the requirement applies to large occupational pension schemes (>£5bn), banks, building societies and insurance companies, and premium listed companies. The scope will be expanded to other organisations over the period until 2025.

Implementation to date

Prudential Regulation Authority: In 2019, the PRA published a supervisory statement related to enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. The supervisory statement is relevant to all UK insurance and reinsurance firms and groups, and non-Solvency II firms, banks, building societies, and PRA designated investment firms. It sets out detailed expectations for governance, processes, risk management and disclosures in relation to climate risk. As per the PRA’s Dear CEO letter, firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021.

Financial Conduct Authority: In 2020, The FCA has introduced a new listing rule (LR 9.8.6(8)) for commercial companies with a UK premium listing, promoting better disclosures about how they are managing climate-related risks and opportunities. Under the FCA’s rule in-scope issuers are required to state in their annual financial report whether they have made disclosures consistent with the recommendations of the Taskforce on Climate related Financial Disclosure or explain if they have not done so.

TPR: The Occupational Pension Schemes (Investment) Regulations 2005 (the Investment Regulations) have long required trustees to include in their Statement of Investment Principles (SIP) their policy in relation to “the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments”. From this year, trustees will have to make changes. These include publishing an implementation statement describing whether certain policies in the scheme’s SIP have been followed, and the trustees’ voting behaviour. Trustees are required to include an implementation statement when they publish their first annual accounts after 1 October 2020.

Corporate Governance Code

The UK Corporate Governance Code 2018 (“the Code”) places emphasis on relationships between companies, shareholders and stakeholders. It also promotes the importance of establishing a corporate culture that is aligned with the company purpose, business strategy, promotes integrity and values diversity. The Code sets out the Principles the board of directors should apply in order to promote the purpose, values and future success of the company. You can find more detail here.

Company Law

Company law in the UK is mainly set out in the Companies Act 2006, supplemented by regulations (statutory instruments). The Act sets out requirements for the preparation of accounts and reports which include a range of ESG related information, including (but not limited to):

• Since 2013 quoted companies have included mandatory information on direct and indirect Greenhouse Gas (GHG) emissions. In 2019, the introduction of the Streamlined Energy & Carbon Reporting regulations (SECR) extended the scope beyond quoted companies, to all large companies and further broadened the disclosure requirements to include details on energy consumption and efficiency, as well as emissions.
• All companies qualifying as large under the Companies Act 2006 are required to disclose in their strategic report a “section 172(1) statement” describing how directors have had regard to the matters set out in sections 172(1)(a)-(f) of the Companies Act 2006 when performing their duty under the section. These matters focus on engaging with all stakeholders, as well as the impact of the company’s operations on the environment.
• All UK registered companies with more than 250 employees will have to include a statement summarising how their directors have engaged with employees, how they have had regard to employee interests, and the effect of that regard, including on the principal decisions taken by the company during the financial year.
• The EU Non-Financial Reporting Directive (NFRD) has been implemented in the UK through company law. It applies to large public-interest entities with more than 500 employees. Companies in scope are required to disclose information in their annual reports on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.

EU Requirements

Since leaving the EU, the UK does not directly apply EU regulations. However, EU requirements will have an impact on UK companies given that the EU provisions apply to all products manufactured and distributed in the EU. The disclosure requirements are mandatory for certain products and the comply-or-explain principle applies to the rest.

EU Commission

• As of 10 March 2021, the EU has implemented a new European Sustainable Finance Disclosure Regulation (SFDR). This obliges investors and asset managers to disclose how they integrate ESG factors into their risk processes. Investors in ESG funds must be provided with significant additional information both prior to investing in the fund and during the life of the investment through periodic reports and information made available on the website of the management company.
• The EU Taxonomy came into force on 12 July 2020, imposing disclosure requirements for companies and financial markets participants with regards to the environmental aspect of ESG. The taxonomy aims to unify the standards that would qualify activities as “environmentally sustainable”, trying to combat “greenwashing”. Companies will be required to report on climate change mitigation and adaptation as of January 2022 and on all six environmental objectives in reporting periods after 1 January 2023.
• The UK is planning to adopt a Green Taxonomy, which is expected to incorporate principles similar to the EU Taxonomy.
• The EU has proposed a new Corporate Sustainability Reporting Directive (CSRD), which is to replace the current NFRD. The new CSRD extends the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises), requires the audit (assurance) of reported information, introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards, and requires companies to digitally ‘tag’ the reported information, so it is machine readable. The new CSRD envisages the adoption of EU sustainability reporting standards, the first of which is expected to be adopted by October 2022.
• UK companies that are dual listed or have their parent companies in the EU will be subject to the new CSRD and will have to comply with the new disclosure requirements.

EBA

The European Banking Authority (EBA) is establishing regulatory and supervisory standards for ESG risks and has published a multiyear sustainable-finance action plan. On 1 March 2021 it released its consultation regarding draft technical standards for Pillar 3 disclosures of ESG risks, including reporting templates and instructions. The European Union’s Capital Requirements Regulation (EU) No. 575/2013 (CRR) includes under Article 449a the requirement to disclose prudential information on ESG risks, including transition and physical risk—a requirement addressed to large institutions with securities traded on a regulated market of any member state. These disclosure requirements are applicable from June 2022 on an annual basis during the first year, and biannually thereafter. 

Voluntary frameworks 

Alongside the mandatory ESG requirements, an increased number of organisations are opting to align themselves to recognised codes, ESG frameworks and reporting standards. Some of the sources used for voluntary disclosures include:

Codes of best practice

• The UK Stewardship Code 2020 requires signatory companies to disclose material issues, including in relation to environmental matters, which covers climate change. The revised code is now targeted at asset owners, such as pension funds and insurance companies, and service providers, as well as asset managers, and covers a wider range of corporate assets. A new principle, principle 7, states that signatories are expected to consider material ESG issues, including climate change, as part of their investment, monitoring, engagement and voting activities. The code is voluntary and sets an aspirational standard beyond minimum regulatory requirements in the UK. An organisation applying to become a signatory to the code will need to provide a Stewardship Report that sets out how they have applied the code Principles in the preceding 12 months, with the requirement to report annually thereafter on stewardship activity and its outcomes.
• The UK Money Markets Code sets out best practice in the unsecured, repo and securities lending markets in the UK. In April 2021, significant changes in a number of areas of the code were published, including ESG criteria. Where UK Market Participants choose to establish ESG policies, it may be helpful to consider basing any policy in line with existing credible ESG frameworks.

Reporting is expected to encapsulate the recommendations of TCFD.

TCFD Disclosures

Whilst mandatory for some companies as discussed earlier in this paper, other companies can and do voluntarily report against the TCFD recommendations in their annual or sustainability reports.

Over 150 companies in the UK have chosen to report against TCFD in their annual reporting in 2021. 

Principles and standards

Firms can also opt to align their disclosures to other recognised ESG frameworks and reporting standards, such as:

• UNEP FI’s Principles for Responsible Banking (PRB) – provide the framework for a sustainable banking system and help the industry to demonstrate how it makes a positive contribution to society.
• UNPRI Principles for Responsible Investing (PRI) – voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.
• UNEP FI Principles for Sustainable Insurance Initiative (PSI) – aimed to better understand, prevent and reduce environmental, social and governance risks, and better manage opportunities to provide quality and reliable risk protection.
• The Partnership for Carbon Accounting Financials (PCAF) – global partnership of financial institutions that work together to develop and implement a harmonized approach to assess and disclose the greenhouse gas (GHG) emissions associated with their loans and investments. It has developed an open-source global GHG accounting standard for financial institutions, the Global GHG Accounting and Reporting Standard for the Financial Industry against which organisations can report.
• The Partnership for Biodiversity Accounting Financials (PBAF) – a partnership of financial institutions that work together to explore the opportunities and challenges surrounding the assessment and disclosure of the impact on biodiversity associated with their loans and investments.
• Global Reporting Initiative (GRI) – global standard setter for impact reporting.
• Sustainability Accounting Standards Board (SASB) – set to develop a common language about the financial impacts of sustainability.
• Climate Disclosure Standards Board (CDSB) – an international consortium of business and environmental NGOs committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. CDSB offers entities a framework for reporting environmental information with the same rigour as financial information. In turn this helps them to provide investors with decision-useful environmental information via the mainstream corporate report, enhancing the efficient allocation of capital.

Where to find reporting

Much of the resultant reporting is publicly available, including via:

• Companies House: where statutory information is available from for all UK companies
• Company websites: in addition to annual reports, larger companies may issue a sustainability and stewardship reports containing a wealth of ESG information. Company websites may also include further details on governance, including policies implemented (e.g., responsible investment policies)
• Initiative websites: companies often report information as part of being signatory to an initiative. The website for the initiative may maintain a database of submissions which can be viewed via the initiative’s website.