Green Finance Strategy will increase companies’ disclosure requirements

Green Finance Strategy will increase companies’ disclosure requirements

On 2 July 2019, the UK Government published its Green Finance Strategy: Transforming Finance for a Greener Future, which is intended to ensure that “our financial system is robust and agile enough to respond to the profound challenges that climate change and the transition to a clean and resilient economy bring with them”.  The paper includes proposals which will increase the requirements for listed companies and pension funds to disclose climate-related risks.

Climate change presents companies with far-reaching financial risks from physical factors, such as extreme weather events, and transition risks that arise from the adjustment to a low-carbon economy.  There are also great opportunities: the expected transition is estimated to require around $1 trillion of investments a year for the foreseeable future.

There are already requirements for companies to disclose these risks and opportunities:

• The UK Corporate Governance Code 2018 requires that a company’s annual report should include a description of its principal risks, what procedures are in place to identify emerging risks, and an explanation of how these are being managed or mitigated.

 • The FRC’s Guidance on the Strategic Report states “an entity should consider the risks and opportunities arising from factors such as climate change and the environment, and where material, discuss in its Strategic Report the effect of these trends on the entity’s future business model and strategy”.

However, the Task Force on Climate-related Financial Disclosures (TCFD), in its Final Report (June 2017), found that there were inconsistencies in companies’ disclosure practices and warned that inadequate information about risks can lead to a mispricing of assets and misallocation of capital.  The report recommended a new framework for disclosing:

• The organisation’s governance around climate-related risks and opportunities.

• The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.

• The processes used by the organization to identify, assess, and manage climate-related risks.

• The metrics and targets used to assess and manage relevant climate-related risks and opportunities.

Action against climate change has become more urgent following the publication in October 2018 by the Intergovernmental Panel on Climate Change (IPCC) of its Special Report: Global Warming of 1.5 ºC, which highlighted the potential catastrophic impacts of global warming if it exceeds 1.5°C above pre-industrial levels.  Following considerable political pressure, the UK Government recently legislated to reduce carbon emissions to net zero by 2050.

In the Green Finance Strategy, the Government set out its expectation for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022.  It has established a joint taskforce with UK regulators to “examine the most effective way to approach disclosure, including the appropriateness of mandatory reporting”.

In addition, from October 2019, occupational pension schemes will be required to publish their policy on financially material considerations, including those arising from climate change.

Companies will therefore need to demonstrate not only that they have a good understanding of how the risks and opportunities arising from climate change will affect them but also that they have integrated their response to these in their business strategies and governance procedures.  The Government has promised further guidance on these issues.  In the meantime, some companies will find it helpful to participate in initiatives such as CDP (formerly the Carbon Disclosure Project), the Transition Pathway Initiative (TPI) and Science-Based Targets.

Once companies have fully integrated their plans to deal with climate change and the transition to a low carbon economy within their business strategies, they must ensure that their performance targets for executive incentive arrangements are aligned with them. The Investment Association’s Principles of Remuneration state that “Remuneration committees may consider including non-financial performance criteria in variable remuneration, for example relating to environmental, social and governance (ESG) objectives, or to particular operational or strategic objectives. ESG measures should be material to the business and quantifiable”.

The Shell Sustainability Report 2018 demonstrates how Royal Dutch Shell has already included climate change targets as part of its executive incentives.

For further information contact Michael Landon.

The Holt – MM&K – Buyouts Insider North American PE Compensation Survey 2018

The Holt – MM&K – Buyouts Insider North American PE Compensation Survey 2018

Holt Private Equity Consultants, MM&K’s allied firm in the US for Private Equity compensation matters, recently published the results of its North American PE Compensation Survey.  This survey is the sister survey of our European PE and VC Compensation Survey.  The results from the North American survey make for interesting reading.

The survey analyses compensation data from over 100 North American PE and VC firms. The headlines include:

• In 2018, compensation in North American Private Equity and Venture Capital spiked for many employees.

• For non-partner level employees, the median total cash (salary + bonus) increased by 20%.

• The biggest increases were seen at the Associate and Vice-President levels.

• The standard model of two and twenty still pertains.

• Partners tend to take 71% of the carry pot.

• The vesting of carry plans now is spread over a longer period.  The typical length of time that it takes to get to full vesting is now eight years.

• Only 31% of VC funds in North America require a hurdle rate of return before carry clicks in.

MM&K is pleased to announce that copies of the North American survey report are available to be purchased from us at a price of £2,000 (plus VAT).

A copy of the Preview of the North American PE Compensation report can be found here:

For further information contact Nigel Mills or Margarita Skripina

Please click here for the notes from our 11 June 2018 MM&K Remuneration Dinner for Chairmen, CEO’s and Remuneration Committee Chairs.

The theme for discussion was: “Bonus plans and how to make them better”