The world has changed. Extreme weather events, climate strikes, and rapidly changing regulations and markets – it is clear there can be no more business as usual.   

The good news; building your climate resilience is building business resilience. New challenges pave the way for new opportunities and innovations. The market response has already been fast paced, according to the Investment Association Annual Survey, the percentage of UK assets integrating Environmental, Social, Governance in their investment processes has increased to almost 50% in 2020 from below 40% the previous year.  

Current regulations 

The headline emissions reduction targets in the UK are well known; to reach net-zero greenhouse gas emissions by 2050. In Scotland, a more ambitious net-zero by 2045 target has been set, with specific annual reporting requirements mandated from all public bodies. 

This briefing seeks to explore the current landscape for the private sector - both current and upcoming regulatory drivers for UK businesses.  

To date, climate regulations have largely focussed only on large businesses, or what can be defined as “large undertakings”, while requirements on smaller companies have remained largely voluntary. Some examples include: 

• Energy Savings and Opportunities Scheme ESOS – since 2014, ESOS, which operates in four year cycles, has required large undertakings (250+ employees or turnover over £44m) to report on their energy consumption and identify opportunities to make energy savings. 
• Streamlined Energy Carbon Reporting SECR – introduced in 20191, the Streamlined Energy Carbon Reporting mandated large companies to report annually on their energy usage as well as greenhouse gas emissions. This applies to all UK listed companies, large companies (as defined in the Companies Act 2006) and large Limited Liability Partnerships.  
• Adaptation plans have been requested from certain individual organisations of national strategic importance, such as infrastructure networks and utility companies.

Upcoming regulations 

As the global economy moves toward decarbonisation, there is a need for organisations to identify and respond to new risks to build their own resilience, as well as provide accurate information to stakeholders.  

Whilst previous UK Government requirements on the private sector largely focussed on energy and emissions data (with some exceptions), new regulations will go much further and challenge businesses to think bigger picture – not just considering the climate impact of a company's emissions, but also the climate change impact on the company – such as exposure to new risks and opportunities.  These risks can be divided into two broad categories; 

• Physical risks: such as the impact of extreme weather on business continuity, supply chains and infrastructure.
• Transition risks: as the market moves toward net-zero, businesses will need to evaluate their model of operation, and how compatible their products and services are with a net-zero future. 

Risks Disclosure 

In 2017 the Financial Stability Board (FSB) Taskforce on Climate related Financial Disclosures (TCFD) released a set of recommendations for consistent disclosures across four key themes:  

• Governance: Disclose the organisation’s governance around climate-related risks and opportunities. 
• Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material. 
• Risk Management: Disclose how the organisation identifies, assesses, and manages climate-related risks. 
• Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. 

Already, TCFD recommendations have been adopted on both mandatory and voluntary basis’ around the world, with New Zealand being the first country to do so. Building on the TCFD, a new International Sustainability Standards Board (ISSB) is currently developing global baseline reporting standards for sustainability. It is anticipated that any future UK regulation will align with emerging ISSB recommendations.  

From April 2022, the UK will mandate some companies to disclose TCFD aligned information, as part of a package of measures included in new Sustainability Disclosure Requirements (SDR). SDR is an integrated framework which focuses on “decision-useful disclosures” – with an aim to better integrate environmental information within capital financial decisions. SDR will apply initially to the following sectors, although its impacts are economy wide. 

• Corporate, including UK-registered companies, financial services firms (e.g. banks and insurance companies), and UK-listed companies (a company that is included on a stock exchange) 

• Asset managers – such as life insurers and pension schemes. 
• Investment products – this includes consumer investment portfolios 

Green Taxonomy  

Taxonomy based approaches are another tool available to strengthen sustainability informed decision-making in financial decisions. Green taxonomies help establish a common understanding of what exactly can be defined as ‘green’, by setting a list of specific economic activities and the minimum criteria these must operate.  

The EU Green Taxonomy was published in June 2020 and mandatory disclosures are in place for large companies. A similar UK Green Taxonomy will be finalised as part of SDR rollout, expected to be published as part of an updated Green Finance Strategy later this year. 

Companies within the scope of these regulations will be required to identify and disclose the proportion of their activities which can be considered “Taxonomy-aligned”. Similar rules will apply to investment fund providers in relation to the assets contained within a portfolio. Importantly, taxonomy-alignment is based on reported data, not future projections – so gives a good metric of an organisation’s current environmental impact.  

Cascading impacts across the economy 

While initially, we can expect that the UK SDR requirements will only apply to large companies, 99% of UK businesses are categorised as SMEs, consisting of less than 250 employees. Achieving a Net Zero and climate resilient future must be a whole economy project, with no business left behind.  

The rollout of SDR will have knock-on implications for Small and Medium Sized Enterprises (SMEs) who will increasingly be required to disclose climate related financial risks to financers and major business to business customers. However, if the transition is not managed properly, there is a risk that investors could withdraw from markets quickly, resulting in a shockwave to many small businesses. 

To ensure a ‘Just Transition’, it is therefore critical that SMEs are enabled to start reducing their emissions and to identify and address physical and transition climate risks.   

Whether or not regulation comes into effect for SMEs in the near-term is unclear, however many private sector businesses are already moving faster than their regulatory drivers. Ellen McArthur, a leading thinker in economic transformation, has stressed that “there is a massive economic opportunity out there to be taken without waiting for government legislation.” 

For an introduction to business climate risks and actions to increase resilience visit the Adaptation Scotland Climate Ready Business web pages: https://www.adaptationscotland.org.uk/how-adapt/your-sector/businesses