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Introduction of mandatory climate-related disclosures for large UK corporates

  • United Kingdom
  • Corporate
  • ESG - ESG Corporate

03-11-2021

To coincide with the COP 26 climate change summit, the UK government has published its proposals to introduce mandatory climate-related disclosures by publicly quoted companies, large private companies and LLPs. The response statement and draft regulations follow the consultation published in March 2021 (see our earlier briefing for details). The disclosures are aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

What disclosures will be required?

New regulations will require companies and LLPs that are in scope (see further below) to report climate-related financial information in the Non-Financial Information Statement (which will be re-named the Non-Financial and Sustainability Information Statement – “NFIS”) which forms part of the Strategic Report. LLPs will be required to report this information in either the NFIS or the Energy and Carbon Report, which forms part of their Annual Report. The disclosures are aligned to the four pillars of the TCFD (ie Governance, Strategy, Risk Management and Metrics and Targets), and will cover the matters set out below.

The proposals and draft regulations largely follow the approach set out in the consultation. However, following feedback to the consultation, the government has decided to introduce a requirement for qualitative scenario analysis – ie requiring companies to include an analysis of the company’s business model and strategy, taking into consideration different climate-related scenarios. The Financial Reporting Council have recently noted that reporting on scenarios remains a key area of investor interest, but an area where voluntary TCFD disclosures have been weaker. The response statement notes that accompanying guidance (which is yet to be published) will make clear that a qualitative assessment of resilience against different scenarios will be sufficient to meet the obligation. The wording of the disclosures set out in the draft regulations has also been more closely aligned with the language of the TCFD recommendations.

Required disclosures:

  • 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—

  (i) the principal climate-related risks and opportunities arising in connection with the    company’s operations, and

(ii) 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.
  • 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.

Entities in scope

The disclosure requirements will apply to companies meeting the criteria set out below:

  • UK companies currently required to produce a non-financial information statement, being companies which have more than 500 employees and have transferable securities admitted to trading on a UK regulated market (including the main market of London Stock Exchange), 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 £500 million (for parent companies, turnover will be looked at on a group wide basis); or
  • LLPs with more than 500 employees and turnover of more than £500 million.

Next steps and timing

There will be separate regulations for companies and for LLPs. The draft regulations for companies have been laid before Parliament and will be approved by Parliament. Further draft regulations relating to LLPs will be published once the company regulations have been made. Subject to Parliamentary approval, the requirements will come into force on 6 April 2022 and will apply in respect of financial years commencing on or after that date. The government has made a commitment to review the requirements in 2023.

Non-binding guidance (in the form of a Q&A) will be published before the end of the year to help in scope entities implement the new requirements.

Comment

The UK is ahead of many other countries in requiring climate-related disclosures. The consultation on mandatory climate-related disclosures generally received favourable responses from a wide range of stakeholders, so the government is moving ahead with its proposals as set out in the HM Treasury Roadmap published in November 2020 and the recent Roadmap to sustainable investment to require TCFD-aligned disclosures across the wider economy by 2025.  We have already seen the requirement for TCFD-aligned disclosure on a “comply or explain” basis introduced for premium listed companies for accounting periods beginning on or after 1 January 2021, with the Financial Conduct Authority (FCA) due to publish the final rules for standard listed commercial companies before the end of the year.

UK companies in scope, including larger private companies, will now be subject to mandatory disclosures from as early as April 2022, so climate-related disclosures are no longer just an issue to be addressed by listed companies. For larger listed companies that will be subject to the new requirements, the mandatory disclosures are not the same as those introduced by the FCA, although there will be overlap. The FCA noted in its recently published Climate Change Adaptation Report that as both regimes build on the TCFD recommendations, they consider that the two regimes can work effectively together. This may be addressed further by the government guidance when this is published.

For more information on how we are helping clients with climate-related and ESG obligations, see our brochure here.

Useful links

Government response statement

Press release

Draft Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021

Explanatory Memorandum