climate change – Sustainability, Resiliency and Risk Mitigation

April 25, 2022April 25, 2022 by Drew D. Salvest

New Climate-related Financial Disclosure Regulations for UK Companies

On 19 January 2022 the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (the “Regulations”) were published in the UK. As of 6 April 2022, these Regulations are now in force. Companies that are subject to the Regulations will need to comply with the new reporting requirements for accounting periods ending on or after 6 April 2022.

What do the Regulations do?

The Regulations amend the Companies Act 2006 and expand the type of companies that are required to provide information in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”) as part of their strategic reports. The Regulations require mandatory disclosure of material information in the four TCFD categories: Governance, Strategy, Risk Management, and Metrics / Targets.

It is mandatory for companies that are subject to the Regulations to disclose climate and sustainability-related information outlined in the Regulations in the non-financial information section of their strategic reports. The information required to be provided depends on the type of company, for example, AIM companies are subject to less extensive requirements. These reports will be publicly available, accessible free of charge and filed at Companies House.

Similar requirements will also apply to certain limited liability partnerships (LLPs) in the UK. The LLP Regulations amend The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008 and require certain LLPs to incorporate TCFD-aligned climate disclosures in their annual reports.

In-scope companies should familiarise themselves with the new reporting requirements and be aware of the potential for overlap with other reporting requirements. The BEIS Guidance offers additional detail on the expected disclosures. In general, companies and LLPs will be required to disclose the following information:

a description of the governance arrangements of the company or LLP in relation to the assessment and management of climate-related risks and opportunities;
an explanation of how the company or LLP identifies, assesses and manages climate-related risks and opportunities;
details of the processes the company or LLP uses to identify, assess and manage climate-related risks and how these processes are integrated into the overall risk management process of the company or LLP;
identification of the principal climate-related risks and opportunities arising in connection with the operations of the company or LLP;
a description of the actual and potential impacts of the principal climate-related risks and opportunities on the business model and strategy of the company or LLP;
an analysis of the resilience of the business model and strategy of the company or LLP, taking into consideration different climate-related scenarios;
a description of the targets used by the company or LLP to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
the key performance indicators used to assess progress against targets and a description of the calculations on which those key performance indicators are based.

Which companies do the Regulations apply to?

The Regulations apply to UK companies that are:

AIM / traded companies;
Banking companies;
Authorised insurance companies;
Companies with a high-turnover;

Provided that each such company has more than 500 employees (or together with its subsidiaries has more than 500 employees).

Are there any exemptions to the Regulations?

A company will not be subject to the Regulations if it is a subsidiary and annual climate-related disclosure is included in its parent company’s strategic report for the group. To be exempt, the parent must be a UK company (or LLP) and the strategic report must be prepared for a financial year that ends on or before the subsidiary’s financial year. The report must also include non-financial and sustainability information in respect of the subsidiary.

UK subsidiaries of a non-UK parent:

However, where a U.K. subsidiary has a non-UK parent that reports on a consolidated basis, the exemption does not apply. This means a non-UK parent may be exempt but their UK subsidiaries may be subject to the Regulations.

Non-UK companies with UK subsidiaries should be aware that their UK subsidiaries may fall within the scope of the Regulations and consider whether their strategic reports should be on an individual or consolidated basis with respect to their UK subsidiaries.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. For more information, please contact Brad A. Molotsky, David Amerikaner, Nanette Heide, Darrick Mix, Vijay Bange, Steve Nichol, or the attorney in the firm with whom you are regularly in contact.

February 18, 2022February 28, 2022 by Seth v.d.H. Cooley

Don’t Say Climate Change

As Florida’s “Don’t say gay” bill (SB 1834) occupies the front pages of many media outlets today, one is reminded of an earlier (2012) state legislative exercise in prohibiting engagement with reality: North Carolina’s “Don’t say climate change” bill (H819).Unhappy with the perceived prospect of dampened economic development resulting from the state’s Coastal Resources Commission estimating that the sea level would rise by 39 inches in the next century, the state legislature chose to bury the state’s head in the sand. It passed a bill prohibiting the state’s coastal management and environmental agencies from defining the rate of sea level rise for regulatory purposes for the next four years. (“The Coastal Resources Commission and the Division of Coastal Management of the Department of Environment and Natural Resources shall not define rates of sea-level change for regulatory purposes prior to July 1, 2016.”)

Well, the climate didn’t care. Based on a 5-year report newly released by NOAA (full NOAA report), the estimate generated by NC’s Coastal Resources Commission has proven to be very much on target. The NOAA report is enlightening, if one wishes to get into the seaweed and look at empirical data and methods for projecting forward. But an easier read can be found in the NC section of the website published by SeaLevelRise.org (here). Among the information presented is a simple graph showing the actual (not projected) increases and decreases in sea level, by year, in Wilmington, NC, measured using tidal gauges. Between 2012, when the NC legislature put the kibosh on defining the rate of sea level rise, and 2016, when doing so was again permitted, the sea level in Wilmington rose by about 4.5 inches (from 6.83 to 11.27 inches higher than the 1950 baseline measurement). The simplest of math tells us that this rate of increase exceeded one inch per year.

A 30 year mortgage loan on a Wilmington, NC or Long Beach Island, NJ shore property purchased today will not be paid off until after 2050, when NOAA is projecting that the East Coast sea level will be 10 to 14 inches higher than it is today. Legislators in many states may not yet be listening, but mortgage lenders surely must be. Maybe even erstwhile buyers, however much they may have been dreaming about a house at the beach.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discuss your proposed project with you. For more information, or if you have any questions about this post, please contact Brad A. Molotsky, Nanette Heide, Seth Cooley, David Amerikaner, Jolie-Anne Ansley, Hari Kumar or the attorney in the firm with whom you are regularly in contact.

November 16, 2021November 16, 2021 by Duane Morris

Decarbonization of the UK Construction Sector?

It’s probably too early to deliberate whether COP 26 was a success, and if progress has been made since Paris. Glasgow will be remembered for the passionate speech from the Maldives representative, which reminded us (if ever we needed reminding) of the Armageddon-esque effects of climate change to the planet as a whole, and to small island nations in particular. The target remains to aim for net-zero carbon emissions by 2050, and to keep global warming close to 1.5 degrees.

To read the full text of this post by Duane Morris partner Vijay Bange, please visit the Duane Morris London Blog.

November 15, 2021 by Drew D. Salvest

The HM Treasury’s Roadmap to Sustainable Investing: Overview and Key Considerations for Businesses

On 18 October 2021, the HM Treasury published a policy paper titled “Greening Finance: A Roadmap to Sustainable Investing” (the Roadmap) that sets out the government’s long-term strategy to green the financial sector.

The Roadmap outlines a three-phase strategy to achieve this goal. The first phase is “informing” where sellers of investment products, financial services firms and corporates will be required to report information on sustainability. The second phase is “action” where this information is mainstreamed into business and financial decisions. The third is the “shift” phase; ensuring financial flows across the economy shift to align with the UK’s net zero commitment.

The Roadmap sets out the government’s strategy to achieve phase 1 through economy-wide Sustainability Disclosure Requirements (SDR), the UK Green Taxonomy and Investor Stewardship. Each of these are outlined below.

1. SDR: what will businesses have to report on?

The SDR’s aim is to combine existing and new sustainability disclosure requirements in one framework for corporates, asset managers / owners and creators of investment products. The framework will be implemented through legislation, with sector-specific requirements being determined by government departments and regulators. The Roadmap emphasises that these new requirements will go further than existing disclosure requirements (such as those required by the Task Force on Climate-Related Financial Disclosures) by requiring reporting on environmental impact. SDR will also go beyond the FCA’s existing ESG framework by requiring asset managers / owners and creators of investment products to substantiate ESG claims in a way that is both comparable and accessible. SDR will also require disclosure with reference to the UK’s Green Taxonomy. Certain firms will have to publish transition plans, detailing how they intend to align with the government’s net zero goal by 2050.

Certain UK-registered companies and listed issuers, including financial services firms, will need to disclose information about how they identify, assess and manage sustainability factors arising from their global operations in their Annual Reports. Financial services firms that manage or administer money for investors will need to disclose the sustainability-related information that clients and end-consumers need to make informed decisions about their investments. Investment product firms will need to disclose, at product level, the sustainability-related information that consumers need to make informed decisions about their investments.

2. UK Green Taxonomy

The lack of commonly accepted definitions makes it difficult for companies and investors to clearly understand the environmental impact of their decisions and can lead to issues such as greenwashing. To address this, the government is implementing the UK Green Taxonomy (the Taxonomy) that outlines criteria that specific economic activities must meet to be considered environmentally sustainable and “Taxonomy-aligned”.

Reporting against the Taxonomy will form part of SDR. Certain companies will be required to disclose the proportion of their activities that are Taxonomy-aligned. Providers of investment funds and creators of investment products will have to do the same for the assets that they invest in and products they create.

The Taxonomy has six objectives: Climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection and restoration of biodiversity and ecosystems. Each of the environmental objectives will be underpinned by a set of standards known as Technical Screening Criteria (TSC). To be considered Taxonomy-aligned, an activity must meet three tests. It must make a substantial contribution to one of the six environmental objectives, do no significant harm to the other objectives (this aims to ensure that activities which support one objective do not have a significant adverse impact on another) and meet a set of minimum safeguards: these are minimum standards for doing business, constituting alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

Although Taxonomy-alignment will be determined by reported data rather than projections, the Taxonomy also recognises companies that are working to meet environmental objectives in the future. For example, due to technological constraints, some economic activities cannot currently be conducted in a way which is aligned with net zero-ambitions. For a number of these activities, the TSCs will set the threshold for Taxonomy alignment at the “best-in-sector” emissions level. These are known as “transitional activities”. Secondly, some companies will report on the proportion of their capital expenditure that is Taxonomy-aligned. This will enable these companies to demonstrate their investment in producing green activities in the future.

3. Investor Stewardship in Green Finance

The Roadmap outlines the government’s expectation that the pensions and investment sectors should seek to integrate ESG considerations into investment decision-making, monitoring and engagement strategies, escalation and collaboration (with other investors) and voting practices. For example, when exercising their shareholder rights, being ready to vote against directors, corporate actions or other resolutions.

Next Steps

The key dates and developments to look out for are:

November 2021 – discussion papers on SDR disclosures, consumer-facing product-level SDR disclosures and the sustainable investment labelling regime
Q1 2022 – consultation on two of the environmental objectives under the Taxonomy (climate change mitigation and climate change adaptation)
2022 – consultations on SDR disclosures, consumer-facing product-level SDR disclosures and the sustainable investment labelling regime
End of 2022 – legislation on draft TSCs for climate change mitigation and climate change adaptation
End of 2022 – government expects pensions and investment sector organisations to have published a high-quality net zero transition plan
Q1 2023 – government to consult on expansion of TSCs and standards for remaining four environmental objectives under the Taxonomy
End of 2023 – government to assess progress on its expectations for stewardship within the UK pensions and investment sectors

Key Considerations for Businesses

Although companies will have adequate notice before becoming subject to disclosure requirements, in order to be prepared companies are advised to review existing disclosure practices and determine the additional information required to be disclosed and the processes in place for gathering that additional information. Companies are also advised to keep up-to-date with the key consultation and implementation dates outlined above.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. For more information, please contact Brad A. Molotsky, David Amerikaner, Nanette Heide, Darrick Mix, Vijay Bange, Steve Nichol, or the attorney in the firm with whom you are regularly in contact.

June 16, 2021 by Drew D. Salvest

Bank of England explores impact of climate change on the UK banking sector

With climate change an increasing political and policy concern, the Bank of England (BoE) is making moves to ensure UK banks and insurers measure and understand their exposure to the risks from climate change and adjust their business models and strategies in response. On 8 June 2021, the BoE published “Climate Biennial Exploratory Scenario: Financial risks from Climate Change” (CBES), identifying climate change as a financial risk with a view to exploring its impact on the banking and insurance sectors. It is the first time an exploratory climate-related stress test of UK banks and insurers has been undertaken.

The Regulatory Agenda

In 2021, banks face a number of regulatory and supervisory deadlines. The UK Prudential Regulatory Authority has set a 2021 deadline for UK banks (and insurers) to have strategies and business models to manage climate risks. The European Central Bank will require banks at the Banking Union to undertake a self-assessment of their compliance with its guidance on climate risks in 2021 before conducting a review in 2022. In the US, the New York State Department of Financial Services has set out climate-related standards for banks under its supervision. Rating agencies are also factoring in climate change to their assessments.

In this post we will provide an overview of the CBES and its implications for banks and borrowers.

CBES

The CBES participants are made up of the largest UK banking groups, building societies and insurers. Participants have until October 2021 to make initial submissions, with the results expected to be published in May 2022. The results will be published on a combined basis to reflect systemic risk.

The CBES is intended to be a learning exercise for both the BoE and participants in measuring climate risks based on different policy pathways that could be taken by the government to achieve its aim of net zero greenhouse gas emissions by 2050. The CBES states the exercise will not be used to set capital requirements, however it may inform future policy.

The three stated aims of the CBES are:

measure the financial exposures of participants to climate-related risks;
understand the challenges to participants’ business models from climate-related risks and the implications; and
assist participants in improving management of climate-related risks.

The CBES asks participants to look at three climate scenarios – early policy action (with transition beginning in 2021), late policy action (where transition begins in 2031) and no additional policy action. Each scenario has different outcomes in terms of global temperatures and the economy over the period 2021-2050, a significantly longer time period than the traditional planning period for financial institutions. Participants will measure the impact of the three different scenarios on their year-end 2020 balance sheets.

Within each scenario, two key risks from climate change are identified. “Transition risks” are risks that arise as the economy moves to net zero emissions, such as carbon taxes and changes in technology, regulation and policy that could create credit exposures for banks and other lenders. UK financial institutions are exposed to a wide range of sectors worldwide, many of which will be affected by climate change and the transition to net zero. In addition, reputational risk could arise from shifting attitudes of customers and other stakeholders towards the UK banks response to climate change.

“Physical risks” are the risks that are likely to occur as a result of climate change if no further policy action is taken by the government, such as extreme weather events and rising sea levels. Physical risks could result in large financial losses, reducing asset values and the value of investments held by banks. Extreme weather events are likely to impact businesses, affecting their ability to repay loans and damaging the value of assets.

Opportunities

There are a range of opportunities that banks, borrowers and other lenders are considering, particularly in the green finance space that we have previously covered in posts here and here. It is likely that banks and borrowers will take advantage of the opportunities which arise in the transition to a greener and more sustainable economy, as illustrated by the inflows to green investment products and the growth in the green and sustainability-linked bond and loan markets. With banks looking at how their business models will be impacted by various climate change policies, borrowers will also need to consider how their business practices may need to change in light of the changes to the financing options that might be available.

December 28, 2020February 3, 2021 by Duane Morris

Potential for Bipartisan Climate Change Action in 2021 with the Biden Administration

As we almost turn the page from 2020 to 2021, many have cause for optimism with regard to the incoming Biden Administration and the potential for bipartisan climate change engagement and action. A hint of cautious optimism is, indeed, in the air.

President elect Biden campaigned on an ambitious climate action agenda and both R’s and D’s seem ready to address climate change and risk as part of a renewed focus on the environment.

To read the full text of this post by Duane Morris partner Brad Molotsky, please visit the Duane Morris Opportunity Zones – Insight from the Land of OZ Blog.