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Climate-Related Impact Disclosures on Net Zero: What do climate regulations mean for SMEs?

Stuart Brown | 13 December 2021

Chancellor Rishi Sunak recently announced that the UK government plans to “rewire” the economy to hit climate goals.

On 6 April 2022, over 1,300 of the UK’s largest businesses and banks will legally have to disclose their climate-related costs - and set out clear targets for cutting them to keep both the environmental and economic climate manageable.

One of the key drivers for this is to help reduce ‘greenwashing’ by ensuring that companies are transparent about their climate impacts and the costs involved. However, it is not solely about spending - it will also help to make businesses more aware of the impact the changing climate is likely to have on them. This will allow them to make better-informed choices and more effectively weigh up risks against opportunities.

Climate disclosures affect large and small businesses

When the change is enshrined in law, reporting carbon emissions and their associated costs will be mandatory. It will need to comply with the framework set out by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and its 11 overarching recommendations.

At present, companies committed to doing this include some of the nation’s “most economically and environmentally significant companies”, such as the biggest businesses, private companies, banks and insurers. It’s primarily those with over 500 employees and an annual turnover of £500 million or more.

While this may only seem relevant for larger enterprises, this couldn’t be further from the truth. With figures from The Carbon Trust clarifying that almost 20% of the country’s emissions currently come from companies with 250 or fewer employees, the pressure will soon be on small and growing businesses to adapt - and evidence of how they plan to do this.

From April, bigger businesses and financial institutions may be charged with leading the country’s change to a net zero powerhouse by 2050, but the action of SMEs will almost certainly underpin the nation’s efforts to create a cleaner, less turbulent climate. Whilst there are currently no mandatory deadlines for compliance by smaller and growing companies, the Chancellor has stated that he wishes the UK to become the first country in the world to make such disclosures compulsory across the economy by 2025. This means that very soon the ‘comply or explain’ approach will be painfully outdated - making now the time to plan ahead.

What do climate disclosures mean for me?

“Companies that fail to adapt to climate change will go bankrupt.” - Mark Carney, former governor of the Bank of England.

Stark words from Mr Carney - but an excellent reminder that economic imperatives and climate health are inextricably linked as we look to forge a sustainable future.

Understandably, this will have many business owners now wondering “what does this mean for me?”.

In short, it means that all publicly traded companies and financial institutions will have to publish their plans on exactly how they intend to make their businesses more sustainable.

For many, this may seem like a daunting task on an ever-expanding ‘to-do’ list, but it should be seen as an opportunity to ultimately cut costs by driving change. Decarbonising could increase revenues in the long-term and act to optimise capital structure, particularly for those businesses involved in sectors that rely heavily on transport or the supply of goods.

So, what exactly do you need to know about the impending changes?

The regulations for larger companies are in-depth but are explored fully in the TCFD’s ‘final report’, Recommendations of the Task Force on Climate-related Financial Disclosures. It is a lot to digest, there’s no escaping that - but it is worth familiarising yourself with the recommended disclosures on page 22, which clearly outline how companies should comply with the regulations in terms of four key categories: governance, strategy, risk management, and metrics and targets.

For small and growing businesses, the journey to net zero can be broken down into three core steps, outlined by the government’s SME Climate Hub:

  1. To halve their greenhouse gas emissions by 2030
  2. Achieve net zero by 2050
  3. Provide yearly updates on progress

Committing to change

The first and most pressing thing you should consider doing is to make the initial commitment to cut your business emissions in half by 2030. To do this, you’ll have to enrol with the government’s SME Climate Hub. To make this all-important first step, you’ll need to visit their portal and sign the pledge.

Once signed up, you’ll have access to a selection of tools and resources to help set targets, measure emissions and reduce them. This should act to underpin your organisation-wide strategy to halve emissions over the next nine years, with a view to being completely carbon neutral by 2050.

Whatever the size of your company, if you run an owner-managed business, minimising the negative environmental impact and accounting for any related costs will soon be an essential part of your strategy - and should be ingrained in your company values and budgets sooner rather than later.

At Duncan & Toplis, we’re always on hand to offer practical business advice to keep you ahead of the curve, abreast of the competition, and ensure that you’re optimally positioned to fulfil relevant legislative and regulatory updates.

If you would like guidance, support or advice in helping to prepare your business for this new reporting model, please get in touch.

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