How Legal and Company Secretarial functions must rise to the environmental challenge
In recent months, PwC Legal has run a series of interactive livestream events on environmental, social and governance (ESG) issues. The series was attended by over 1,000 legal and governance professionals, who interacted with our panelists via a number of live polls to gain perspective and opinions on the issues being discussed. This article picks out some of the highlights from the first round of those livestreams
Environmental issues pose many of the most pressing regulatory and legal imperatives on the broader ESG agenda. Indeed, time is already running out for general counsels (GCs) and company secretaries (Co Secs) to get to grips with their organisations’ increasing responsibilities under the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).
For more than 1,300 large businesses, TCFD has brought mandatory disclosures of climate-related financial information into effect. The new regime began on 6 April; and over time, more and more organisations will fall in-scope of the reporting and disclosure rules.
What is TCFD?
Think of the TCFD disclosures as setting out the business’ climate change risks and opportunities. Reporting will have to cover the cost of meeting its environmental targets, as well as the potential cost of climate change impacts on the business, but will also consider potential upsides.
In practice, the new rules will require companies to make 11 separate disclosures under four pillars:
- Governance
- Strategy
- Risk management
- Metrics and targets
Governance
The governance that is in place around your business’ climate-related risks and opportunities
Strategy
The actual and potential impacts of climate-related risks and opportunities on your business’ strategy and financial planning.
Risk management
The processes used by your business to identify, assess, and manage climate-related risks.
Metrics and targets
The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
GCs and Co Secs can expect all information disclosed to be closely scrutinised by groups ranging from investors to regulators – and the consequences for businesses that make errors or omissions, or simply disclose poor performance, are potentially significant.
Bear in mind too that large pension schemes – those with more than £5bn of assets – must also make TCFD disclosures. That gives rise to reputational risk if the scheme’s trustees’ disclosures do not agree with those made by the employer sponsoring the scheme.
How do businesses prepare for TCFD?
Naturally, some organisations are better prepared for the challenges of TCFD than others – depending, in part, on their size, industry sector and the complexity of their value chains. In polling conducted during this livestream, while 11% of respondents described their organisations as very well-prepared, the majority said they were just getting started, or still in the relatively early stages of preparations.
Playing catch-up will be at least a three-stage process. First, many organisations are now investing in climate change and TCFD training for their main boards or audit committees, increasing the knowledge of key directors. Second, strategic work on scenario planning is becoming more sophisticated, with companies modelling the potential impact of different climate change outturns on their businesses. And third, more detailed work is under way to measure businesses’ carbon footprints – both their own emissions, known as Scope One disclosures, and Scope Two and Three disclosures, which cover the entire value chain from suppliers to customers. In each of these areas of work, GCs and Co Secs will play a crucial role, from ensuring boards understand their legal responsibilities, to evaluating the implications of potential scenarios, and ensuring that all disclosures bear scrutiny.
In this sense, GCs in particular can be conductors for their companies, bringing together every part of the organisation to orchestrate accurate environmental reporting and compliance. There will be specific legal issues, such as the need to renegotiate contracts with suppliers with environmental targets in mind, but also the broader responsibilities to protect the business and to engage with stakeholders. GCs are also ideally positioned to consider the group position, with many businesses facing similar legislation in other jurisdictions, including the European Union.
Is the legal function ready to step up? In a second poll, 31% of respondents said the primary responsibility for environmental reporting in their organisation sat with the corporate sustainability team; only 12.5% and 11% respectively picked out Co Sec and Legal.
Action points for GCs and Co Secs
It will be interesting to see how those polling numbers change as the legal framework of TCFD and other regulation replaces the less formal disclosure regimes that companies have previously worked with. But how should GCs and Co Secs take on more responsibility for reporting and the broader environmental agenda? The following ideas might help:
Have you understood what your regulatory responsibilities are across different jurisdictions? Where does your business sit in relation to the thresholds for TCFG – and for EU regulation such as the Corporate Reporting Sustainability Directive? Even it is not currently in-scope, it may wish to make voluntary disclosures in order to prepare for mandatory reporting in future.
Do you have access to good quality data from across your organisation’s entire value chain? Without that data, accurate reporting – and mitigation of risk – will prove elusive.
Have you understood the scenarios your organisation is modelling? For example, are you basing your modelling on an assumption that the world is successful at keeping temperature rises within 1.5C, or are you planning for more pessimistic outcomes?
Have you done practice runs on reporting? GCs and Co Secs can then provide robust challenges to the process and its outcomes, in order to drive higher-quality disclosures later on.
Have you resolved legal roadblocks to good reporting and emissions reduction? For example, if suppliers account for, say, 50% of your Scope 3 emissions, a contractual requirement for them to report their emissions to you may be essential. Future contracts may even set targets for emissions reductions at suppliers.
Finally, is your organisation alive to the dangers of greenwashing? There is substantial risk – both legal and reputational – for businesses that make claims about their environmental performance if these claims turn out to be a triumph of style over substance. GCs and Co Secs must be ready to head off greenwashing at the pass.
You can register for our next event in our ESG Series. If you missed any of the previous events, you can catch up on demand.
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