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Mandatory climate-related financial disclosures by large UK corporates: government guidance issued

  • United Kingdom
  • Corporate
  • ESG - ESG Corporate
  • Consumer
  • Food and drink
  • Retail

24-02-2022

The UK government has published non-binding guidance to accompany the regulations requiring mandatory climate-related disclosures to be made in the Annual Report by in-scope UK publicly quoted companies, large private companies and LLPs. The final regulations (the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022) (Regulations) were made in January 2022, and come into force on 6 April 2022 for accounting periods starting on or after that date. The Regulations essentially amend the Companies Act 2006 provisions regarding the contents of the strategic report. For the background and further details see our earlier briefing (Introduction of mandatory climate-related disclosures for large UK corporates).

Entities in scope

As a reminder, the following entities will be required to make disclosures under the Regulations:

  • 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 shares traded on a UK regulated market (including the main market of London Stock Exchange) 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 not included in the categories above, which have more than 500 employees and a turnover of more than £500m;
  • Large LLPs, which are not traded or banking LLPs, and have more than 500 employees and a turnover of more than £500m; and
  • Traded or banking LLPs which have more than 500 employees.

Required disclosures

Disclosures are aligned to the Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). Specifically, companies and LLPs in scope are required to make the following 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.

Government guidance

The guidance has been published to provide answers to common questions to help companies in scope to make the required disclosures under the Regulations. Some of the key points clarified by the guidance include the following.

  1. Companies should report at group level. Subsidiaries are not required to report separately if their activities are consolidated within a group report of a UK parent.
  2. If a UK group is in scope, the UK parent is expected to report on the global operations of the UK group.
  3. Where a UK company has an overseas parent which reports on a consolidated basis, the exemption from the disclosure requirements at company level does not apply.

Information to be included in disclosures

Question 4 of the guidance sets out further details as regards the information that should be included in relation to the disclosure requirements set out in the Regulations, including the desired outcomes in respect of each element of the disclosure requirements. In-scope entities should review this section of the document in particular, which includes the guidance summarised below.

Governance arrangements in relation to assessing and managing climate-related risks and opportunities:  a company or LLP should disclose information which allows a user of its accounts to understand how risks and opportunities relating to climate change are identified, considered, and managed within its governance structure. The disclosures should enable a user of the accounts to understand who has the responsibility for identifying and managing climate-related risks and opportunities, and the extent to which those risks and opportunities have been considered by the Board.

Identification, assessment and management: disclosures should identify the systems and processes in place to identify, assess and manage the risks and opportunities associated with climate change.

Processes for identifying, assessing, and managing climate-related risks: disclosures should also explain the extent to which climate-related risk is currently integrated into the overall approach to risk management.

Principal risks and time periods: the risks and opportunities should be categorised, wherever possible, into short term, medium term and long term, and the company or LLP should explain how it has determined the time periods that it is treating as short, medium and long term. Where material to the business, it may be relevant to distinguish between ‘physical’ climate change risks, such as increased frequency of extreme weather events or sustained impacts from temperature rises, for example, to supply and distribution arrangements, and ‘transition’ risks, that is, risks associated with transition to a net zero economy, which might prompt review or adaptation of business models and which have the potential to have a significant negative or positive impact on the company or LLP’s business model and/or strategy.

Analysis of business model and strategy, taking into account consideration of different climate-related scenarios:  disclosures should enable a reader to understand which scenarios have been used, including, where appropriate, the source of those scenarios, and the effect that operating within that scenario would have on the resilience of the current business model and strategy. The guidance acknowledges and expects that assumptions and estimates may be needed to complete scenario analysis.

Targets and KPIs: where a company or LLP has set targets to help assess its progress in managing climate-related risks and opportunities, the target should be properly explained, including the relevance of the targets to the future operations of the company or LLP. The disclosure should include a timeframe over which the company or LLP intends to meet those targets and how it monitors and assesses progress in meeting those targets.

Other matters covered

The guidance also comments on the following:

The level of detail required – this should be sufficient to enable a reader to understand the information presented without needing to refer to other sources of information produced by the company. Disclosures should enable the reader to understand how the climate-related financial 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.

Use of third party information – the guidance notes that directors are responsible for the information disclosed in the Annual Report. Where information generated by a third party is relied upon, the legal duty remain on the directors.

Directors, particularly those of publicly traded companies, may be concerned about claims from investors in relation to enhanced climate-related disclosures. We commented in a previous briefing in relation to TCFD-aligned disclosures by listed companies how directors can mitigate potential liability for misleading statements and omissions in the annual report (Disclosure of climate-related information by listed companies: examining the new rules published by the FCA).

In terms of enforcement for non-compliance, the guidance notes that this will be a matter for the Financial Reporting Council (FRC) (or its successor body). Some insight into how the FRC might approach this is given by the FCA’s outline of its approach in relation to TCFD disclosures made by listed companies, and the joint approach that will be taken with the FRC to encourage meaningful disclosure and best practice. This is discussed in more detail in our earlier briefing (FCA sets out expectations for climate-related disclosures by UK listed companies and outlines its supervisory approach).

Interaction with other regulation and frameworks

UK companies with more than 500 employees that are in scope of the FCA Listing Rule requirements will be subject to both the regulations and the FCA rules. In summary, the guidance states that for listed companies that are subject to the requirements in the FCA’s Listing Rules to make TCFD aligned “comply or explain” disclosures, disclosure in accordance with the Listing Rule requirements is “normally likely” to meet the requirements under the Regulations.

The government believes that the reporting requirements under the Regulations complement but do not duplicate the requirements for quoted companies and large companies and LLPs in relation to streamlined energy and carbon reporting.

Comment

The UK is ahead of many other countries in requiring mandatory climate-related disclosures. The UK government is moving ahead with its proposals as set out in the HM Treasury Roadmap published in November 2020 and the Roadmap to sustainable investment published in October 2021 to require TCFD-aligned disclosures across the wider economy by 2025.  The mandatory requirements introduced by the Regulations mark the next step along the UK roadmap, following the FCA requirements for TCFD-aligned disclosure on a “comply or explain” basis introduced for both premium and certain standard listed companies.

UK companies in scope, including larger private companies, are now subject to mandatory disclosures from April 2022, so climate-related disclosures are no longer just an issue to be addressed by listed companies in the UK. The government guidance will be welcomed by entities that are in scope to report under the Regulations.   

How Eversheds Sutherland can help

Our ESG solutions team can help you with the drafting and review of climate-related disclosures for the Annual Report. See our webpage here for further details.

Useful Links

Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs – Non-binding guidance