The UK government has published guidance to help companies prepare climate-related financial disclosures
The UK has begun a programme of making it mandatory for a range of entities to report on their climate-related risk in line with the recommendations of the global Taskforce on Climate-related Financial Disclosures (TCFD). This is a coordinated action by the government and financial sector regulators who are rolling out TCFD-aligned reporting for asset managers and owners, including pension funds.
For commercial businesses, the government started with listed companies: commercial companies with a UK premium listing became subject to TCFD-aligned reporting for accounting periods beginning on or after 1 January 2021 and the first annual reports including mandatory TCFD disclosures are expected in spring 2022.
This was extended to issuers of standard listed shares and Global Depositary Receipts (GDRs) representing equity shares, for accounting periods beginning on or after 1 January 2022 and so we will see their first annual reports with TCFD disclosures in spring 2023.
The next phase of roll out is for large businesses and will apply for accounting periods beginning on or after 6 April 2022. The Department for Business, Energy and Industrial Strategy (BEIS) has recently published guidance for businesses who are having to make mandatory TCFD-aligned disclosures.
What does the guidance cover?
The guidance is non-binding and can be found here. It contains answers to some commonly asked questions to help in-scope companies. It also contains a non-exhaustive list of further guidance provided by other bodies related to the TCFD recommendations.
Which entities are in scope?
The following entities will fall within the scope of the new disclosure requirement:
- Relevant Public Interest Entities (PIEs) – 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 transferable securities admitted to trading on a UK regulated market (as defined in section 1173 Companies Act 2006), banking and 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 and have more than 500 employees and turnover of more than £500 million; and
- Limited liability partnerships (LLPs) which have more than 500 employees and turnover of more than £500 million.
The size thresholds are intended to engage the most significant companies, in economic and environmental terms, in analysing and disclosing their climate-related risks and opportunities.
Companies are expected to report at the group level (or at the company level if not included within consolidated group reporting). If a parent company does not prepare consolidated accounts, the disclosures should relate to the parent company, including how climate-related risks and opportunities may affect the value of the investment in its subsidiaries. Any parent company must report on the global operations of the group.
Where a UK company has an overseas parent which reports on a consolidated basis, the UK company is required to comply separately with the disclosure requirement.
Where must the disclosures be made?
Companies will be required to report climate-related financial information in the Non-Financial Information Statement (NFIS, renamed as the Non-Financial and Sustainability Information Statement (NFSIS)), which forms part of the Strategic Report.
LLPs will be required to report in either their Strategic Report (if they prepare one) or the Energy and Carbon Report, which forms part of their Annual Report.
It is not necessary for all of the information to be located within the NFSIS, but if included elsewhere in the Annual Report and Accounts, the NFSIS must include a specific cross reference.
There is no prescribed format for the climate-related disclosures.
What needs to be covered by the disclosures?
The following information on climate related risks and opportunities must be disclosed:
What level of detail does the disclosure need?
Disclosures must enable the reader to understand:
- the effect of climate-related financial risks and opportunities on the business;
- the information presented without needing to refer to other sources of information; and
- how the disclosures relate to the other information presented in the Annual Report,
and should not omit information which, if disclosed, would influence the decisions of investors.
Who has the legal duty to make the disclosures?
A business may choose to make use of third party information to help them assess the climate-related risks but the legal duty to make the disclosures will remain with the directors.
What are the penalties if an entity does not comply?
The Financial Reporting Council has the power to monitor strategic reports and to request that a court order the preparation of revised documents.
How do the requirements interact with other regulations and frameworks?
The guidance describes how the reporting requirements for large businesses interact with the Financial Conduct Authority's Listing Rule on TCFD disclosures, reporting requirements for occupational pensions schemes, Streamlined Energy and Carbon Reporting, financial statements and standards, and the development of International Sustainability Disclosure Standards.
UK registered premium or standard listed companies which disclose against the TCFD recommendations and recommended disclosures on a “comply or explain” basis, as required by the Listing Rules, and which are also PIEs, will likely comply with the new requirements for large businesses too.
Will the disclosures make a difference?
The TCFD suggests that widespread adoption of its Recommendations: "will ensure that the effects of climate change become routinely considered in business and investment decisions" and will "also help companies better demonstrate responsibility and foresight in their consideration of climate issues" leading to "smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy."
Osborne Clarke comment
The disclosures are a forwards step towards encouraging decarbonisation, but the disclosures will only be as good as the exercise undertaken to properly understand climate issues in an organisation. There is a risk that this becomes a somewhat mechanical exercise rather than encouraging businesses to really reflect on how they can make a meaningful difference to net zero.
For large businesses that will be required to report for accounting periods on or after 6 April 2022, it is important that they implement procedures for gathering the information and data that will allow them to provide clear and accurate TCFD-aligned disclosures.