May engagement update: A government consultation on carbon reporting.

Government regulation can have a significant impact, positive or negative, on companies and their operations. As such many investors, ourselves included, keep a watchful eye on the policy landscape. Whenever there’s an opportunity to give our views on proposed legislation that may impact the investments in our portfolios, we’ll make time to put together a thoughtful response.

So in early May the investment team responded to a public consultation on carbon reporting.[1] To be more precise, the government was consulting on whether to introduce requirements to make larger companies report on the climate risks they face. These risks can be split into two categories: physical and transition risks. Physical risks include the impact of changing weather patterns on companies, their operations and their supply chains. Transition risks relates to the steps that companies will need to take to ensure their business can operate successfully in a low carbon economy.[2]

As investors, we need to better understand the costs that are associated with both types of risks. As such, we’re supportive of the government’s proposed measures. We hope too that by forcing companies to analyse and report on carbon risks and costs, management teams will take swifter remedial action.

The government’s proposed reporting framework originated from a group called the Taskforce for Climate-related Financial Disclosure (TCFD). TCFD was a project instigated by the then Governor of the Bank of England, Mark Carney, in his capacity as chair of the Financial Stability Board in 2015.

The TCFD framework asks companies to report on their climate management in four areas: governance, strategy, risk management and metrics and targets.[3] TCFD is a comprehensive framework and prescribing a common approach to reporting means that in time investors will be able to better compare the companies and their approach to climate risk management. Again, we were happy to voice our support to the proposed introduction of the TCFD framework.  

Below is our full response to the consultation questions that we chose to answer (other questions related to privately held companies which we do not invest in).


QUESTION 1: Do you agree with our proposed scope for companies and LLPs?

As an investment house with a small and mid-cap bias to our investment universe, we feel there is a balance to be struck in terms of the regulatory net being cast widely enough to capture a large number of companies but without unduly burdening smaller companies. At Castlefield, we have discussed whether we think the measure of 500 employees as the key determinant of size is appropriate, as opposed to revenue or profit. We concluded that the 500 employee threshold is consistent with other requirements already in place in respect of principal risks and opportunities for Public Interest Entities (PIEs). We are particularly pleased that companies on AIM are being captured alongside those on the Main Market given there are some large and well-established companies listed on AIM which should be treated equally. We see the present scope as an opportunity for larger listed businesses (such as the FTSE 100) to be leading best practice in this area and therefore the 500 employee threshold seems a reasonable place to build from.


QUESTION 3: Do you agree with the proposal to require climate related financial disclosures for companies and LLPs at the group level?

Yes. A key aim of the proposed legislation is to encourage investors to use climate related financial disclosures in their investment decision-making. To do this, investors need to understand the carbon impact and climate resilience of a prospective investment in its entirety, i.e. at the Group level. In addition, we are hopeful that Group-level reporting will encourage multinational companies to take further action on climate change across their global operations, even in countries where climate legislation lags behind peers.


QUESTION 4: Do you agree that the Strategic Report is the best place for the disclosure of climate-related financial information by companies?

Yes, we agree that it would integrate well into the Strategic Report’s existing framework and help to link climate strategy with broader corporate strategy. It would also mean that the information on the four TCFD pillars would be subject to auditor scrutiny. In turn this would reassure investors that the information is an accurate reflection of the extent to which climate risks and impacts are being managed by the reporting organisation. We are hopeful that the inclusion of climate-related financial information in a prominent corporate document, such as the Strategic Report, will act as a catalyst for companies to redouble their efforts to tackle climate change and improve organisational resilience.


QUESTION 6: Do you agree that requiring disclosure in line with the four pillars of the TCFD recommendations, rather than at the 11 recommendation level is suitable?

We believe that larger companies with greater reporting resources would be able to disclose in line with the 11 recommendations but can see that this would be burdensome further down the market cap scale. We see that there is an opportunity for larger listed businesses (such as the FTSE 100) to be leading best practice in this area and would view increased reporting requirements for this group of companies.


QUESTION 7: Do you agree that information provided in line with the obligations set out above would provide investors, regulators and other stakeholders with sufficient information to assess the climate-related risks and opportunities facing a company or financial institution? 

We would agree that the level of disclosure suggested should be enough to allow external investors to assess the climate-related risks and opportunities facing the company. In particular, the summary of the business model, and how that might respond to changes as a result of climate risks affecting the business, is an important new development. Investors should be able to rely on a higher level of transparency in the “metrics and targets” disclosures, including the new “key performance indicators” specific to each business. These should allow investors to make a realistic assessment of how changes in the KPIs are impacting upon the company’s business model and whether climate-related change is causing a shift in strategy.


QUESTION 8: Do you agree with our proposal that scenario analysis will not be required within a company or LLP’s annual report and accounts?

Yes. We welcome moves by the government to encourage listed companies to report on climate-related scenario analysis and agree that the annual report is not the best place to document such analysis. 

The concept of climate-related scenario analysis is still in its infancy and, in the short term, most companies are ill-equipped to produce scenarios of the depth or quality needed for inclusion in an audited document such as the annual reports and accounts (ARA). Indeed, auditors too would need guidance on what constitutes accurate climate-related scenario analysis.

Moreover, for companies that do decide to report on their climate-related scenario analysis (and this is something that we would welcome), getting sufficient space in an ARA to allow for detailed, nuanced reporting on scenario analysis may be a challenge.

The very nature of scenario analysis means that it is likely to be fluid and subject to change as data quality and modelling improve over time. As investors, we would rather read a separate and longer report on a company’s scenario analysis that explains in a detailed and transparent way the assumptions made in the analysis, the changes made to models year-on-year, etc. In our view, this kind of reporting, rather than a truncated version in the ARA, would be more effective in helping investors to better understand the climate risks and impacts of existing or prospective investments.


QUESTION 10: Do you have comments on the proposed qualification to a company’s duty to make climate-related financial disclosures for companies? 

Permitting a company not to disclose climate-related metrics, strategy or targets would align with the “comply or explain” approach adopted by other organisations such as the FRC in the past when considering other inclusions in a company report. Whilst we feel this would hamper our and other investors’ understanding of how these issues are affecting the companies in which we invest, we also acknowledge the potential difficulty for some smaller companies in collating some of this data. We feel that the requirement to explain is significant and the materiality of the disclosure relative to the size or complexity of the firm can be assessed by investors and discounted accordingly.


QUESTION 11: Do you have comments on the proposed timing for these regulations coming in to force?

The proposed timing for the regulations seems suitable as it will enable companies to set up procedures for reporting ahead of the accounting periods starting on or after 6th April 2022. We would not want the timeline for implementation to be pushed back substantially after the time period proposed.


QUESTION 12: Do you have any comments regarding the existing enforcement provisions and the BEIS proposal not to impose further provisions?

We are supportive of the BEIS proposal not to impose further provisions at this stage. However, we encourage BEIS to monitor corporate disclosure in this area over the next couple of years. If widespread non-disclosure or poor disclosure is detected, we would encourage BEIS to take swift action to introduce additional enforcement provisions.

QUESTION 14: Do you have any comments on the responsibilities of auditors in relation to climate-related financial disclosures?

While we recognise that there are limitations on the scope of auditor services with regard to climate-related financial disclosures, we feel that third-party verification of key disclosures can increase confidence in the information provided by businesses about their exposure to climate risk and the impact of their operations. By situating key disclosures within the individual report and requiring auditors to have an understanding of these requirements, this will provide investors and other stakeholders with a level of assurance that the information has been disclosed in keeping with the framework.

QUESTION 15: Do you have any comments regarding the proposed enforcement of our disclosure requirements?

We would agree that a ‘comply or explain’ approach is appropriate in the first instance but would also be supportive of a ‘comply and explain’ approach in future if disclosure levels are below expectations.





[2] See p11

[3] See p13


This article is for information purposes only and is not intended to constitute a personal recommendation or inducement to invest. The financial products or investment strategies discussed in this article may not be appropriate for all investors. All information quoted is obtained from sources which we believe to be accurate at the time of publication, but may be subject to change. We therefore cannot be held responsible for the implications of relying on this information.