BEIS Independent Review of Net Zero Targets – what this means for companies
On 13 January 2023, the Department for Business, Energy and Industrial strategy (BEIS) published the final report by the Rt Hon Chris Skidmore, Mission Zero: Independent Review of Net Zero (the review). This reviewed the UK Government’s approach to delivering its net zero target thus far and was tasked with recommending how the UK could deliver and implement a plan for future energy transition.
The review suggests that “net zero is the economic opportunity of the 21st century” and should be pursued enthusiastically to increase the prosperity of the UK. It is clear that there are opportunities both within the UK (via the creation of ‘green jobs’ and a wider ‘green economy’) and outside the UK, as we support other countries in achieving their own net zero aims.
The publication stated “with more than 90% of global GDP covered by a net zero target there is now huge global momentum to reach net zero and capture the economic opportunities. This is driven by businesses of all sizes who have recognised that net zero can help them grow". The review is split into two parts:
- Part 1 discusses the opportunities and benefits to individuals and the economy, with the underlying message being that the UK needs to go much further to realise the economic benefits of net zero.
- Part 2 makes recommendations relevant to individual sectors of the economy, as well as local authorities, communities and individuals, in the pursuit to deliver net zero.
Some of the key aspects from the review in relation to corporate reporting and corporate governance are discussed below.
International Sustainability Standards Board (ISSB)
In 2020, the Financial Conduct Authority (FCA) published a policy statement on its proposals to enhance climate-related disclosures by listed issuers and clarified existing ESG disclosure obligations. The FCA required all commercial companies with a premium listing to either make climate related disclosures consistent with the approach set out by the Taskforce on Climate-related Financial Disclosures (TCFD) or explain why not.
A key recommendation of the review is that the UK Government should endorse the ISSB standards as soon as these are published. The ISSB is an independent, private sector body, engaging with jurisdictions globally, that is working towards a framework aligning on key climate disclosures.
The review details that the UK ought to lead by example and launch a formal adoption mechanism, as well as moving swiftly to assess and endorse the standards for use in the UK. The aim is that the UK should aim for 2024/5 as the first sustainability reporting cycle for companies in scope, with companies being encouraged to apply these standards voluntarily in 2023/24. A company will be in scope if it is a relevant public entity (a UK company having more than 500 employees with either transferable securities admitted to trading on a UK regulated market or are banking companies or insurance companies); a UK registered company with securities admitted to AIM with more than 500 employees; and UK registered companies not included the aforementioned categories, but which have more than 500 employees and a turnover of more than £500m.
The Association for Financial Markets in Europe has noted that the adoption of the ISSB standards would provide investors and capital markets with sustainability data, which would in turn enable the growth of investment and financing of sustainable investments. This is expected to be one of many of the recommendations adopted, with the UK Government set to consult in due course on a mechanism for adopting the ISSB’s standards in the UK.
Transition plans
The review also recommends making the UK Transition Plan Taskforce (TPT) standards mandatory for both listed and private firms (once more developed) to ensure comparable disclosure standards across the economy.
At present, whilst the FCA has mandated asset managers/owners and listed companies to include comply or explain requirements to publish transition plans since 1 January 2022 (as discussed in the ISSB section above), there is currently no policy in place which mandates disclosure of transition plans for private companies regulated under the Companies Act. It is envisaged by the review that, in order for transition plans to have their intended effect of providing information for investment purposes, they need to become a mandatory requirement for all firms, including private companies.
The UK Government has made previous commitments in this area, and so we can also expect this recommendation to be implemented.
Stewardship
The review recognised that investors can shape the transition not only by where they invest, but how they engage with the firms they invest in (or consider investing in). Another recommendation by the review is that the UK Stewardship Code should be updated by the end of 2023 to explicitly reflect the need to take sustainability and transition into account.
The Stewardship Code sets stewardship standards for those investing money on behalf of UK savers and pensioners, with the aim being responsible allocation and oversight of capital to create long-term value for clients and beneficiaries. If this recommendation is adopted by the UK Government, we can expect to see a renewed emphasis on encouraging investors to make sure their money supports activities seeking to reduce the carbon footprint of firms and their supply chains.
What does this mean for companies?
It is likely that the UK Government will seek to implement the key corporate recommendations noted above (with some being progressed already). As a result, private and listed companies will likely encounter an increasing amount of ESG regulation, particularly as focus on climate change policy heightens in the years ahead. However, with McKinsey estimating that this sector could be worth up to £1 trillion for British businesses by 2030, it seems clear that the UK should capitalise on the opportunities presented by this growing area of the economy, and not just the regulation that will inevitably ensue.
How can we help?
Morton Fraser MacRoberts’ Corporate team advises businesses of all sizes on all aspects of corporate law. If you have any queries about what the review means for your business, please get in touch with a member of our team.
