Climate change reporting to be mandatory for largest UK entities
The UK will become the first G20 country to enshrine in law mandatory Task Force on Climate-related Financial Disclosures (TCFD) aligned requirements for Britain’s largest companies and financial institutions.
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 will (subject to parliamentary approval) apply to the largest UK-registered companies and financial institutions for financial years commencing on or after 6 April 2022.
From this date, entities in scope will have to disclose to report on their climate-related risks and opportunities on a mandatory basis in line with recommendations from the TCFD.
The regulations introduce mandatory TCFD-aligned reporting requirements for:
- All UK companies that are currently required to produce a non-financial information
statement, being UK companies that have more than 500 employees and have either
transferable securities admitted to trading on a UK regulated market, or are banking
companies or insurance companies (Relevant Public Interest Entities (PIEs));
- UK registered companies with securities admitted to AIM with more than 500 employees;
- UK registered companies which are not included in the categories above, which have
more than 500 employees and a turnover of more than £500m.
- LLPs which have more than 500 employees and a turnover of more than £500m.
Both climate-related reporting and the scope thresholds will apply at the group level. Companies will be required to disclose their climate-related financial information in what is currently called the Non-Financial Information Statement (NFIS) of the Strategic Report. This already includes a number of disclosures relating to environmental matters, of which climate-related matters are an important subset. The Strategic Report more broadly is also where a company includes information about its strategy, business model, risks and key performance indicators, or metrics. For companies not currently required to produce a NFIS they will be required to just produce the climate-related financial disclosure elements of that statement. Additionally, to better reflect the information that will now be required under this section of the Strategic Report, the name of the NFIS will be changed to the Non-Financial and Sustainability Information Statement.
The required climate-related financial disclosures are as follows:
- a description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
- a description of how the company identifies, assesses and manages climate-related risks and opportunities;
- a description of how processes for identifying, assessing and managing climate-related risks are integrated into the company’s overall risk management process;
- a description of:
- the principal climate-related risks and opportunities arising in connection with the company’s operations and
- the time periods by reference to which those risks and opportunities are assessed;
- a description of the actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy;
- an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios;
- a description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
- a description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those key performance indicators are based.”
As a result of the consultation process, two policy changes were made and incorporated in the above: (1) the introduction of a qualitative scenario analysis requirement; and (2) closer alignment of the regulations to the language used in the TCFD recommendations themselves. The government intends to set out in associated guidance that a qualitative assessment of resilience against different scenarios will be sufficient to meet the scenario analysis obligation.
No change has been made to the current role of the auditor through these new requirements. Existing and future disclosures related to climate change which feature in companies’ financial statements will continue to be subject to audit by the statutory auditor in line with company law and auditing standards. Climate-related disclosures elsewhere in companies’ annual reports will continue be reviewed by the statutory auditor to ensure that they are legally compliant and materially consistent with the financial statements based on the auditor’s knowledge of the company and its environment gained through the course of the audit.
It was acknowledged that scenario analysis, under the TCFD framework, is a tool to drive critical strategic thinking, and allows companies to include an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios. In associated guidance, it will be made clear that a qualitative assessment of resilience against different scenarios will be sufficient to meet the obligation.
Overall, feedback was more supportive of only requiring disclosure of material information. Accordingly, the proposed regulations provide for a company’s directors to have flexibility, taking account the nature of the business and how it is conducted, to omit all or part of some of the climate-related disclosures required. Specifically, this materiality filter will apply to disclosures made under the Strategy and Metrics and Targets elements of the TCFD recommendations, where directors reasonably believe these disclosures are not necessary for the understanding of the business. Where the directors omit part or all of these disclosures, they must offer a clear and reasoned explanation why they are doing this.
The new requirements will help investors and businesses to better understand the financial impacts of their exposure to climate change, and price climate-related risks more accurately, while supporting the greening of the UK economy. By applying a common set of requirements aligned with the TCFD recommendations, UK companies will be provided with a uniform way to assess how a changing climate may impact their business model and strategy, and ensure they are well placed to harness opportunities from the UK’s transition to net zero.