BEIS is seeking to provide answers to businesses’ most commonly-asked questions about new rules on mandatory climate-related financial disclosures after issuing guidance that illustrates what is expected of them and helps them through potential sticking points.
The Q&A-style guidance issued by BEIS contains useful additional direction and detail across each of the specific requirements of the new reporting rules introduced by the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 that came into force on 17 January.
The new reporting rules have been introduced to highlight the climate risks and opportunities facing businesses, after recognising that disclosure of material climate-related financial information can help support investment decisions as we move to a low-carbon economy and provide other stakeholders with relevant information.
The new reporting regime forces certain publicly quoted companies, large private companies and LLPs to incorporate TCFD-aligned climate disclosures in their annual reports. The disclosures should be included in their Non-Financial and Sustainability Information Statement in the Strategic Report and apply to reporting for financial years starting on or after 6 April 2022.
ICAEW’s Financial Reporting Faculty has welcomed the guidance for giving preparers of annual reports a strong steer in terms of the level of disclosure expected of them. In addition to providing answers to commonly asked questions, the guidance sets out the expected reporting outcomes and practical guidance on the kinds of information that should be included on each element of the reporting requirements.
For example, the guidance includes additional explanation around group/subsidiary level reporting, that will clarify the rules for groups that operate internationally. Laura Tibbetts, Associate Director at Grant Thornton, said: “There was a consensus that UK companies would not be exempt from the requirements even if an overseas parent reports under TCFD, and now the guidance makes this very clear, including the point that the top UK parent is expected to report on the global operations of the UK group and not just their UK operations.”
The document also gives practical examples of the kinds of climate-related risks and opportunities that may be relevant to an organisation, while warning that the list is by no means exhaustive. “The description of the actual and potential impacts should be as granular as is necessary to understand the impact of crystallisation of that risk and should be specific. In describing the actual or potential impact, a business should consider both the actions that are being put in place now and contingency plans for actions that may be taken in the future,” BEIS notes.
The guidance also goes into detail about use of scenario analysis, generally considered to be one of the more challenging aspects of the new legislation. It answers questions on the level of detail required, how to approach disclosure of assumptions and estimates and urges organisations to evaluate and disclose resilience of their business model and strategy according to the scenario used. In addition, the guidance directs readers to the TCFD technical supplement that offers further help on how to approach scenario analysis, while acknowledging that this is an area of the regulations where both complexity and sophistication will likely grow over time.
The document also makes clear that the new disclosures are based on TCFD but are not a direct lift from the TCFD recommendations as they have been adapted for UK legislation. There is a dedicated section that explains how these regulations apply to companies that are already subject to the FCA ‘comply or explain’ rules.
Laura Woods, Technical Manager in ICAEW’s Financial Reporting Faculty, said: “We welcome the publication of this guidance by BEIS, which provides more substance and detail to the regulations issued. There are a number of helpful clarifications within the guidance, as well as useful information on how the new regulations interact with other regulations and frameworks. We recommend that members affected by the new climate-related financial disclosure rules refer to this when planning for the next reporting season.”
ICAEW’s Financial Reporting Faculty has produced an overview of the Task Force on Climate-related Financial Disclosures and associated recommendations. It also explains how TCFD fits in with UK reporting requirements and the IFRS Foundation’s new International Sustainability Standards Board (ISSB).
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