The UK Sets the Scene for Mandatory ESG Laws in the Western World
As we in the U.S. await action by the federal government on mandatory ESG laws, the United Kingdom has become the first European Union country to enact mandatory ESG disclosure laws.
These new reporting requirements are of import beyond the shores of Great Britain in that they portend what government mandates are to come across the EU and in the U.S. And maybe of greatest import, these new laws provide a map and compass for businesses believing that profit should come not from creating the world’s problems, but from solving them.
Two separate regulations were “laid before Parliament by Command of Her Majesty and approved by a resolution of each House of Parliament” .. “made on January 17, 2022 coming into force on April 6, 2022” in order to support the UK’s transition toward net zero.
On their face the two new statutory instruments apply to all UK registered companies and LLPs with over 500 employees with an annual turnover of more than £500 million; and also all UK Public Interest Entities, being companies currently required to produce a non-financial information statement under existing reporting laws. However, the impact will not only be on the UK’s 1,300 largest companies and financial institutions, but also thousands of businesses in their supply chains.
These new laws are the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022.
The new regulations now require certain companies to provide a “sustainability” information statement on climate-related disclosures in their annual strategic report.
The regulations require certain LLPs to provide a similar sustainability information statement on climate-related disclosures in their annual strategic report or their energy and carbon report.
Under these new requirements the sustainability information statement means a description of:
- the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
- how the company identifies, assesses, and manages climate-related risks and opportunities; and
- how processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process;
As well as a description of
- the principal climate-related risks and opportunities arising in connection with the company’s operations, and
- the time periods by reference to which those risks and opportunities are assessed;
- a description of the actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy;
- 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; and
- a description of 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.
So, the new statutory instruments set out how companies across sectors and geographic areas, in order to support the UK’s transition toward net zero, can assess and disclose their governance, strategy, risk management and metrics and targets related to sustainability including climate change. The aim of the statutory instruments is to require these disclosures to promote the management of climate-related financial risk and opportunities across the British economy.
The UK has done much more than merely be the first EU country to enact mandatory ESG disclosure laws; it has set the scene for mandatory ESG regulation in the Western world whilst driving a London double decker bus toward repairing the world.
And significantly, beyond the prescriptive mandate, these new laws provide a road map for businesses believing that profit should come not from creating the world’s problems, but from solving them.