Greener charities

Greener charities

COP26 brought a flurry of announcements, papers and guides, as organisations scramble to meet the Paris climate goals and set net‑zero targets. For charities, it is important to keep a close eye on new rules emerging from the UK government, Her Majesty’s Treasury (the Treasury) and the regulatory bodies responsible for the financial sector.

The UK has already made good progress and charities will have grown used to absorbing new direction from governments and regulators. In 2019, the UK government published its Green Finance Strategy and became the first major economy to commit in law to net‑zero greenhouse gas emissions by 2050. In 2020, the UK government announced that it would make climate risk‑aligned disclosures fully mandatory across the economy by 2025 (with most requirements in place by 2023).

Activity stepped up in 2021, however, with the government setting in law the target to curb emissions by 78 per cent (compared with 1990) by 2035, while the Treasury issued the paper Greening Finance: A roadmap to sustainable investing. The Financial Conduct Authority issued a discussion paper on the sustainability disclosure requirements (SDR) regime and investment labels. At the same time, the new International Sustainability Standards Board was established to develop global baseline reporting standards on sustainability. Ultimately, the plan is to incorporate these into the UK accounting standards.

Detailed plans

These initiatives have been designed to make comparisons globally against the same criteria. The Treasury’s roadmap has three phases: information, action and shifting financial flows. Phase one has three key elements: the new SDR, a UK ‘green taxonomy’ and a renewed focus on stewardship (voting and engagement).

The SDR cover disclosures for corporates/LLPs, asset managers/owners and investment products. They are based on the four pillars of the Task Force on Climate‑related Financial Disclosures (TCFD) reporting framework: governance, strategy, risk management, and metrics and targets, which in turn are supported by 11 principles. The principles start with securing the buy‑in of the board and the senior leadership team and putting in place appropriate governance structures, flow‑through to risk registers and climate scenarios before moving onto information reporting and assurance of data.

The UK green taxonomy draws on the EU approach, setting a framework for ‘green’ labelling. There are six environmental objectives relating to climate change mitigation, climate change adaption, sustainable water, the circular economy, prevention of pollution and protection of biodiversity. Each objective will be underpinned by a set of detailed technical screening criteria. To be considered ‘taxonomy aligned’, an activity must meet a series of tests.

The government plans for net‑zero targets to become the norm for companies. Organisations cannot simply ‘hit and hope’; any announcements need to be supported by detailed transition plans including concrete actions, targets and dates. There are a number of organisations providing advice on transaction plans including the TCFD. As common standards for transition plans emerge, these will be incorporated into regulation too.

Consultation

The UK government has promised consultation periods followed by adequate time for implementation. Changes will be made through statutory instruments to ensure parliamentary scrutiny and the government has agreed to provide presentation tools to make compliance easier. Implementation will apply to large corporates, then to the financial sector once the data from corporates becomes available and so on through the economy.

Many larger businesses will be grappling with these changes from the start of 2022, though the timeline for smaller companies and other organisations is less clear. Apart from the direct impact on corporates, the financial services industry, pensions and investment products and services, there will be knock‑on effects in most business segments as they begin to transition to net zero.

The TCFD reporting framework is perfectly suited to social issues too. The EU issued its draft social taxonomy earlier in 2021, so the UK is likely to follow its lead on social issue reporting. Government‑related work increasingly requires alignment with the Paris Agreement[1] and net‑zero commitments, but it is not just government driven. Increasingly, clients are awarding business to firms that can demonstrate alignment with their values.

This is true as much for charities as for any other business. Demonstrating a positive impact from charitable activities requires detailed planning, setting realistic metrics and reporting against targets. There is a steep learning curve, but there is free practical systematic advice that is relatively easy to find. It is best to start as soon as possible.


[1] The Paris Agreement is a legally binding international treaty on climate change.