Under the Climate-related Financial Disclosure Regulations that apply for financial years beginning on or after 6 April 2022, mandatory provision of climate-related information will now be required by publicly-quoted companies, large private companies and large LLPs, with the new rules expected to bring 1,350 groups of UK companies and LLPs into scope.
Bearing in mind the speed with which the legislation has come about, the requirements will likely take many preparers into uncharted territory. A recent webinar, Introducing the Climate-related Financial Disclosure Regulations, hosted by ICAEW’s Financial Reporting Faculty and available for all ICAEW members to view, explains the scope and requirements of the new regulations. It also highlights key points from recent government guidance issued to assist preparers and summarises the experience of reporters to date.
The scope of the new regulations emerges as a particularly complex area. Use of the terminology ‘large’ has the potential to cause confusion as it isn’t the same as ‘large’ when thinking about company size thresholds. In the context of the regulations, large means turnover of more than £500m and more than 500 employees.
Anne Warner, a senior manager in Deloitte’s National Audit and Accounting team and one of the webinar presenters, warns that the scope in relation to groups is another area to be aware of: “A parent company needs to look at the size of the group it heads to work out if it is in scope, even if it’s exempt from preparing consolidated accounts.”
ICAEW is warning that even those entities that fall outside of the scope of the regulations would do well to brush up on the rules. As climate risk and ESG moves up the corporate and investor agenda, the expectation is that the scope of the regulations will be expanded in the future, bringing more and more smaller organisations within scope.
Certain companies are already feeling pressure to disclose more in this area, particularly if they supply companies that are in scope. Companies not forced to do so by law are also choosing to voluntarily expand the scope of their climate-related disclosures.
The regulations include eight different requirements that are closely aligned to the recommendations of the Task Force on Climate-related Financial Disclosures (the TCFD recommendations). They include 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 those risks and opportunities, and how these processes are integrated into the company’s overall risk management process. More detail of the requirements is covered in the webinar.
While half of the eight disclosure requirements are mandatory with no exceptions, disclosures on strategy, metrics and targets may be omitted “if not necessary for an understanding of the business”, Warner explains. “If you do omit these disclosures, you have to explain why they’re not considered necessary. The government wants to make sure that if the information is material to users it is included and that if management don’t see it as material, they include an explanation why.”
Highlighting key points from recently issued Q&A-style guidance on the regulations, webinar co-presenter Ollie Law, a senior manager at PwC, said preparers should bear in mind how the governance links to risk and strategy and targets. “That flow should be really clear throughout the entirety of the disclosure. The guidance is not putting organisations under pressure to put together rafts of quantitative analysis but set them on that journey – it’s about thinking what information is useful for your stakeholders.”
Analysis of reporting by preparers who are required to apply the FCA listing rules to disclose against TCFD recommendations on a comply or explain basis, which came into effect for December 2021 year-ends, suggests that organisations are stepping up to the climate disclosure reporting challenge. “We have seen a substantial increase in the level of information companies are providing which is an indication of how serious companies are taking this,” Law said.
However, Law warned that lots of disclosures had been process driven and tended to focus on risk management and it was sometimes hard to see a thread between the pillars of governance, strategy, risk management, and metrics and targets and how they relate to each other. “There is also a need to include the outcomes and detail on how it has affected the business,” Law says. “More companies are disclosing the underlying assumptions but the next step will be to address the financial implications of their commitments and risk management.”
Sally Baker, ICAEW’s Head of Corporate Reporting Policy, says: “With a significant number of companies and LLPs falling in scope of the new regulations, and the direction of travel only likely to increase that number in the future, it’s important for preparers and their advisers to familiarise themselves with the requirements and start planning for implementation as early as possible. We hope this webinar will prove a useful starting point for members.”
As experience builds, the Financial Reporting Faculty will host more events on the topic. Details of all future faculty webinars can be found here.
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