While commitments to lowering UK carbon emissions have been in law for many years, November 2020 marked a tipping point in governmental regulations.
UK Chancellor Ricki Sunak, seeking to establish the UK at the forefront of green finance, announced that non-financial information disclosure – aligned with the Task Force on Climate-related FInancial Disclosures (TCFD) – would be made mandatory across the economy by 2025.
Then in the months following, the sixth Carbon Budget was announced. This set a new ambitious target in law: to cut UK emissions by 78% by 2035, including in aviation and shipping.
How do businesses need to respond to these new UK laws? Are these governmental moves indicative of further regulations to come? And how can companies prepare for the transition while protecting their bottom line?
Preparing for TCFD disclosure
The UK is the first G20 country to mandate climate disclosures by large companies and financial institutions across the economy. Significantly, this is not a ‘comply or explain’ situation either.
The roadmap laid out by HM Treasury explains the timeline. Depending on your business type, the deadline to disclose non-financial information aligned with TCFD criteria will fall after the following years:
- 2021: FCA premium listed companies, occupational pension schemes (>£5bn), banks, building societies and insurance companies.
- 2022: Wider scope of FCA listed companies, UK-registered large private companies, largest asset managers, life insurers and FCA-regulated pension providers, and occupational pensions schemes (>£1bn).
- 2023: Other UK authorised asset managers, life insurers and FCA-regulated pension providers.
- 2024-25: Other occupational pension schemes (subject to review) and further refinements to measures across all categories.
Following a government consultation earlier this year, it was decided that companies should have seven months from the end date of each year to publish their report.
Penalties may be issued to companies that fail to comply, so it is essential for businesses to begin preparing for their deadline if they do not already publish TCFD-aligned data. There are no plans to require this data from SMEs yet, though this may change at a later date.
Disclosing non-financial information is an increasingly common practice but not all sustainability reports are created equal. To tailor the report to your business and to stay competitive in your sector, you may want to consider input from an external specialist.
The sixth Carbon Budget
Beyond these regulations, the UK government is aligning not only with a net-zero carbon economy by 2050 but an earlier target of cutting emissions by 78% by 2035 (compared to 1990 levels).
The sixth Carbon Budget has set the carbon budget for 2033-2037 at 965 million tonnes of carbon emissions. Although on paper the legislation has “no impact on business, charities or voluntary bodies”, it clearly has implications.
The law is a governmental response to the recommendations of the independent Climate Change Committee (CCC) who speak to the role that businesses need to play. They recommend that businesses adopt the highest possible ambition and address all emissions. In particular they single out Scope 3 emissions as a priority issue.
Scope 3 emissions include all carbon emissions in a company’s value chain that do not fall under a company’s direct control. The CDP Global Supply Chain Report estimates that emissions from a company’s supply chain are 5.5 times higher than those related to a company’s direct operations. So to align with the UK government’s 2035 target, as the CCC identifies, it is crucial for businesses to address these emissions.
Unlocking sustainability in the supply chain is a challenging task but there can be significant benefits for your business both in protecting against risk and in preserving your bottom line.<link to blog 02 of series>
What it means for your sector
Besides disclosing Scope 3 emissions, the CCC details a number of other ways that businesses can respond to the sixth Carbon Budget. They suggest contributing through R&D investment in green technology, particularly for greenhouse gas removal, partnering with existing projects, and choosing shipping solutions with high fuel efficiency.
For businesses producing consumer goods, the CCC suggests improving the design of products to extend their lifespan. They also recommend enabling products to be repaired, remanufactured and re-used to minimise waste.
For the property sector, the Green Finance Institute published a report on stimulus actions. They identified that the decarbonisation of the UK building stock is unfeasible with the present supply chain – and scaling the retrofit supply chain could be a significant opportunity. Additionally, for lower hanging fruit, they recommended the retrocommissioning of void or commercial buildings to reduce energy consumption by up to 20%.
The laws and regulations to come
It’s worth noting that while the sixth Carbon Budget is – as of June 2021 – official law, few policies have yet been announced to enforce it. This did not go unnoticed in the CCC report on the UK government’s progress on reducing emissions.
Right now, as the report shows, the UK government’s policies for delivery only address 20% of the sixth Carbon Budget’s reduction target. This is not far from the situation that was formerly highlighted by the Institute for Government’s report, published a year after the UK adopted a net zero by 2050 target. Both call for a sector by sector plan setting out how emission reductions will be achieved, and when decisions will be made.
So while many businesses need to prepare for mandatory TCFD-aligned data disclosure, there may well be more policies to come. The sixth Carbon Budget might not yet be enforceable on a business by business basis but future regulations may be – and the earlier businesses can prepare for these, the smoother the transition will be.
Possible future regulations include the carbon labelling of intermediary industrial products. The UK Government’s Industrial Decarbonisation Strategy discusses how this could be implemented as soon as the mid-2020s.
This could fall in line with the recommended timeline given by the CCC. Their report on the UK government’s progress made it clear that in order to achieve their Net Zero Strategy, policies should be fully in place “by the end of the current Parliament at the latest (i.e. by 2024)”.
To avoid being caught off guard, it is advisable for businesses themselves to act sooner rather than later. Preparing now for the transition to a low-carbon economy will help protect against risk and stay competitive as new policies are introduced.
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