Earlier this year the UK government consulted on plans to introduce reporting requirements in line with the Task Force on Climate-related Financial Disclosures (TCFD) for certain UK companies and LLPs. With draft company regulations now laid before Parliament and awaiting final approval, it is full steam ahead for the government, particularly when considered in the context of its recently published Greening Finance: A Roadmap to Sustainable Investing roadmap.
This article briefly summarises some key aspects of the expected new disclosure requirements for companies and LLPs. Further details can also be found in the Business, Energy and Industrial Strategy (BEIS) Consultation response: Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs.
Scope of new requirements
Once approved, the regulations introducing new mandatory climate-related financial disclosures will apply to:
- All UK companies that are currently required to produce a Non-Financial Information Statement. This includes UK companies that have more than 500 employees and are either traded companies, 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 above categories that 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.
Where relevant, the disclosures will be required at a group level. This means the reporting requirements (see below) and scope thresholds will apply on a consolidated basis.
Summary of new requirements
It is worth noting that draft changes to the LLP regulations are not yet available, as these will be made after the company regulations have been approved. However, the disclosure requirements are expected to mirror those applicable to companies.
This draft company regulations require in-scope companies to provide:
- 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:
o the principal climate-related risks and opportunities arising in connection with the company’s operations, and
o 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 (KPIs) used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those KPIs are based.
One key change from the proposals consulted on earlier in the year is the introduction of the requirement for scenario analysis ie, the requirement to provide an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios. The government’s consultation response clarifies that forthcoming BEIS guidance on the new requirements will make clear that ‘a qualitative assessment of resilience against different scenarios will be sufficient to meet the obligation.’
It is also worth noting that certain reporting requirements, for example those relating to strategy, metrics and targets, may be omitted in full or in part if the directors’ conclude that, taking account the nature of the business and how it is conducted, the information is not necessary for an understanding of the company’s business. If this is the case, directors will need to provide a clear and reasonable explanation for not providing the information.
For companies, the information will be required as part of the existing Non-Financial Information Statement (to be renamed the Non-Financial and Sustainability Information Statement or NFSI Statement) within the Strategic Report. One complication is that not all companies within scope are currently required to produce a NFI Statement. Such companies will now be required to produce a NFSI Statement for the first time but will only be required to disclose the new climate-related financial disclosures elements.
For LLPs, the information will also be required in a NFSI Statement within the Strategic Report. However, for LLPs not required to produce a Strategic Report (which is likely to be the majority of LLPs), the information will instead be included in the Energy and Carbon Report.
Once approved, the regulations will come into force on 6 April 2022 and will apply to financial years that commence on or after that date.
The draft company regulations will become law once they receive final approval from Parliament. As noted above, draft changes to the LLP regulations will then follow. In due course, BEIS is also planning to produce guidance to support companies and LLPs when applying the new disclosure requirements.
ICAEW’s Financial Reporting Faculty will be monitoring developments and providing further guidance to members in due course. In the meantime, further guidance and resources are available at icaew.com/nfr
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