Climate reporting is still a relatively new concept, but its importance has grown significantly over the past 12-24 months. But exactly what should be reported and how it should be presented is changing at a fair pace.
This article covers the current requirements for preparers and looks further down the line at what will be required in future reporting seasons. More information can be found on ICAEW’s guidance page, Reporting on Climate Change.
Current UK requirements
Companies that are not classified as small are, under UK law, required to outline the principal risks and uncertainties that might impact the company as part of a strategic report. The report should contain information material to shareholders, helping them to assess whether directors have performed their duties correctly. Climate change should be disclosed in the strategic report if it is considered a principal risk or uncertainty.
Listed companies or public interest entities with more than 500 employees are subject to specific reporting requirements on environmental issues within the strategic report. Large companies must include a Section 172 Statement that describes how the directors have performed their duty under the aforementioned s172 of the Companies Act 2006. Section 172 obligates directors to promote the success of the company for the benefit of its members as a whole, which includes the impact of its operations on the local community and environment.
Large, listed and LLPs of a certain size also must comply with streamlined carbon and energy reporting requirements. How this is presented varies depending on the type of organisation; companies include disclosures in the directors’ report, while LLPs present this information in the Carbon and Energy report, part of their annual report.
Climate-related matters might be a consideration when preparing the financial statements, where their impacts are material in the context of the accounts. In that case, disclosures will be necessary in accordance with accounting standards. ICAEW produced a video in collaboration with Deloitte on how climate change might impact the financial statements.
New requirements in the pipeline
From April 2022, certain large organisations will be required to follow new climate-related financial disclosure requirements based on the Task Force for Climate-Related Financial Disclosures (TCFD) recommendations. This encourages disclosure around for main areas: governance, strategy, risk management, and metrics and targets.
The UK government has voiced its support and intention to align with IFRS Sustainability Disclosure Standards. These standards are still in development, overseen by the new International Sustainability Standards Board. Its standard on climate-related reporting will be the initial priority, with consultation on its first draft standard expected in the first half of this year.
Like other jurisdictions, the UK is developing a Green Taxonomy to define which economic activities classify as environmentally sustainable. Certain companies will be required to disclose the proportion of activities that are ‘taxonomy-aligned’. This will include six environmental objectives, with the first two, climate change mitigation and climate change adaptation, to be consulted on in 2022.