From 6 April 2022, for the first time certain large public and private companies and limited liability partnerships (LLPs) incorporated in the UK will be required to make annual climate-related financial disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). As we described last year, the Government committed to setting out regulations during the course of 2022 to create a framework for more companies and LLPs to report in line with the TCFD.
Following the publication in October 2021 of the long-awaited response to the consultation paper (Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs), this framework is being implemented for accounting periods commencing on or after 6 April.
The new mandatory regime will exist in addition to the Listing Rule provisions, which already require companies admitted to the Premium segment of the Main Market of the London Stock Exchange to report in line with TCFD or explain why they have not.
What were the outcomes of the consultation?
There was wholesale support from stakeholders responding to the consultation for the introduction of these climate-related disclosures. Whilst the Government is sticking to many of its original proposals, it has taken on-board some of the consultation feedback. In particular, it will now include scenario analysis reporting and an exemption for non-material information in the disclosures, and is addressing the interplay between these new regulations and the Streamlined Energy and Carbon Reporting (SECR) regime.
- Scenario analysis: One of the biggest changes to the regulations following the consultation is the Government's introduction of scenario analysis as part of the disclosures. There was widespread support in the consultation responses for the inclusion of this, despite it being one of the more challenging areas of the TCFD disclosures. The final regulations now include a requirement to disclose a qualitative assessment of the resilience of the company or LLP's business model and strategy, taking into account climate-related scenarios.
- Non-disclosure of non-material information: A more controversial change following the consultation is to permit non-disclosure of information where a director and/or member reasonably believes information in respect of a certain disclosure is not material for the understanding of the business. Where a clear and reasoned explanation as to why certain information is not material has been provided, then that information need not be disclosed. This will afford companies and LLPs with welcome flexibility with these new disclosures. However, some are questioning how this exemption will work in practice and whether inconsistencies will arise as companies and LLPs will have a difference of opinion as to what is material to disclose.
- SECR requirements: The consultation considered whether there should be alignment between the SECR requirements and the TCFD-aligned disclosures. Given that the ESG sphere is grappling with the "alphabet soup" of sustainability disclosure reporting requirements, it is no surprise that there was overwhelming support for alignment between SECR and TCFD. The Government will however run a separate consultation process on the SECR that is likely to take into account the Sustainability Disclosure Requirements (SDR) regime which was announced in October 2021. Any changes to the SECR regime will be implemented by 2023.
Which companies and LLPs are in scope?
Despite calls to widen the scope of the regulations in the consultation responses, the Government has adhered to the original proposal for the regulations to apply to:
- 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 (i.e. the Main Market of the London Stock Exchange) or are banking companies or insurance companies;
- 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; and
- LLPs which have more than 500 employees and a turnover of more than £500m.
What are the disclosures?
The consultation responses called for closer alignment of the regulations to the TCFD recommendations to allow for more consistency and clarity around sustainability disclosures. Whilst this has been taken on board to a degree in the regulations, disappointingly they are not exactly the same. Therefore, companies and LLPs in scope who already report under TCFD should check both frameworks to ensure appropriate disclosures are made.
The proposed disclosures under the regulations are to follow the themes of the TCFD disclosures, mainly:
- Governance – disclosures related to governance around climate-related risks and opportunities.
- Strategy – disclosures associated with the actual and potential impacts of climate-related risks and opportunities on strategy.
- Risk Management – disclosures of how climate-related risks are identified assessed and managed.
- Metrics & Targets – disclosures related to the way in which metrics and targets are used to assess and manage climate-related risks and opportunities.
As part of assisting companies and LLPs in managing and applying this new legal requirement to disclose, the Government will prepare non-binding Q&A guidance.
Where do you have to disclose?
Companies and LLPs will be required to report the climate-related financial disclosures in the non-financial information statement in the Strategic Report. If the relevant LLP is not required to produce a Strategic Report, then the disclosures will be reported in the Energy and Carbon Report (which forms part of the Annual Report).
What are the next steps to implementation?
The Government published draft regulations for climate-related financial disclosures for companies and LLPs, which directly amend the Companies Act and enshrine the disclosures into law. The draft regulations for companies were signed into law on 17 January 2022. The draft regulations for LLPs are currently being approved in Parliament. They are both due to come into force as law on 6 April 2022 and be applicable for accounting periods starting on or after that date.
The UK will be the first G20 country to make TCFD-aligned disclosures mandatory across the economy. Whilst the scope of the mandatory reporting will cover a small number of companies and LLPs, the Government has stated that it hopes more companies and LLPs will disclose voluntarily. In any event, the scope of these disclosures will likely widen in due course as the Government has committed to reviewing these regulations every 5 years, with the first review due to be published before 6 April 2027.
This was one of the important milestones set out in the Government's Sustainable Investing Roadmap published in October 2021 ahead of the UK-hosted COP26. Whilst there is much more to do to reach the Government's commitment to having an economy with net-zero greenhouse gas emissions by 2050, requiring certain companies and LLPs to make climate disclosures is progress.