The UK became the first major economy to require listed companies to report against the Task Force on Climate-related Financial Disclosures (TCFD) framework, with premium-listed companies required by the Financial Conduct Authority (FCA) to make enhanced climate-related disclosures on a ‘comply or explain’ basis for accounting periods beginning on or after 1 January 2021. Standard-listed companies are required to make disclosures on the same basis for accounting periods beginning on or after 1 January 2022.
In addition to the FCA requirements and as part of the UK government’s roadmap to sustainable investing, legislation has also been introduced to extend climate-related disclosure requirements to additional organisations for financial years starting on or after 6 April 2022.
This represents a significant development in corporate reporting for those organisations affected. While it is important to note that the size thresholds included in the new requirements mean that a significant majority of UK businesses will be out of scope, those that are within scope should not underestimate the work that will be involved when preparing the new disclosures.
This article sets out some of the most commonly asked questions relating to the new legislation.
Where can I find the new requirements?
The legislation is included in two statutory instruments - SI 2022/31 The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 contains the requirements for companies with equivalent requirements for limited liability partnerships (LLPs) contained in SI 2022/46. These are referred to hereafter as ‘the regulations’.
Which entities are within the scope of the regulations?
Organisations within scope are:
- All UK-registered companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees and have either transferable securities admitted to trading on a UK-regulated market or are banking companies or insurance companies, ie relevant public interest entities (PIEs);
- UK-registered companies with securities admitted to AIM that have more than 500 employees;
- UK-registered companies not included in the categories mentioned that have more than 500 employees and a turnover of more than £500m (referred to as ‘high turnover’ companies);
- LLPs, which are not traded or banking LLPs, that have more than 500 employees and a turnover of more than £500m; and
- traded or banking LLPs that have more than 500 employees.
What information needs to be reported?
An organisation’s climate-related financial disclosures should include the following:
(a) a description of the organisation’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
(b) a description of how the organisation identifies, assesses and manages climate-related risks and opportunities;
(c) a description of how processes for identifying, assessing and managing climate-related risks are integrated into the organisation’s overall risk management process;
(d) a description of the principal climate-related risks and opportunities arising in connection with the organisation’s operations and the time periods by reference to which those risks and opportunities are assessed;
(e) a description of the actual and potential impacts of the principal climate-related risks and opportunities on the organisation’s business model and strategy;
(f) an analysis of the resilience of the organisation’s business model and strategy, taking into consideration different climate-related scenarios;
(g) a description of the targets used by the organisation to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
(h) 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.
If the directors of the company or members of the LLP reasonably believe that all or some of a climate-related financial disclosure required by (e), (f), (g) or (h) above are not necessary, they may omit the relevant disclosures. In cases where this option is taken, a clear and reasoned explanation as to why it is appropriate to omit the information must be given.
How similar are the requirements to those of the TCFD?
There is a close correlation between the disclosures required by the regulations and those in the TCFD framework. Differences are simply aimed at achieving consistency between the language in the regulations with other areas of legislation.
Where should the disclosures be made?
A company should make its climate-related financial disclosures in a non-financial and sustainability information statement, which for PIEs will expand the existing non-financial information statement. Those companies that are not currently required to prepare a non-financial information statement need only include the climate-related disclosures already discussed in the new statement.
This statement must be included in the strategic report, but it can cross-refer to other parts of the annual report where appropriate. Any material information must be included in the annual report; references outside the annual report can relate only to complementary information.
LLPs should include their disclosures in an energy and carbon report or, if a strategic report is prepared, within that report.
What impact do the regulations have on groups and parent companies?
A parent company is considered a ‘high turnover’ company if, in the relevant year, the group headed by the company had an aggregate net turnover of more than £500m and more than 500 employees.
If a company’s strategic report is a group strategic report, the non-financial and sustainability information statement must also be prepared on a group basis and relate to all of the undertakings included in the consolidation.
A subsidiary undertaking is exempt from preparing this statement if it is included in a group strategic report of a parent that includes a group non-financial and sustainability information statement in respect of all the undertakings included in the consolidation. Non-financial information provided by groups other than as part of a non-financial and sustainability information statement under the Companies Act will therefore not make a subsidiary exempt.
Where a parent does not produce a group strategic report, the climate-related disclosures would, however, only need to relate to the parent entity. Where relevant, the parent’s disclosures should address how climate-related risks and opportunities may affect the value of investments in subsidiaries.
Are there any exemptions from reporting?
As already mentioned, subsidiaries are only exempt if they are included in a UK parent company’s group non-financial information and sustainability statement.
LLPs are only exempt if they are included in a UK parent’s consolidated energy and carbon report or directors’ report (ie, where the energy and carbon disclosures are made).
There are no exemptions for traded and banking LLPs.
What are the implications for listed companies already required to report under the FCA listing rules?
The regulations are closely aligned with the recommended disclosures in the TCFD framework, so a company that reports against the TCFD recommendations under the Listing Rules is normally likely to meet the requirements of the regulations.
In relation to the location of disclosures, a company that reports against the TCFD recommendations under the Listing Rules is able to explain why it has included TCFD recommendations or recommended disclosures in another document. However, for a company to comply with the regulations, all information provided to meet the disclosure requirements must be included within the annual report. Where that information is included in the annual report but outside of the non-financial and sustainability information statement, the statement must cross-refer to it.
Where to go for more information?
The government has produced non-binding guidance to help businesses understand how to meet the new requirements, available at gov.uk
The Financial Reporting Faculty held a webinar on the regulations in March. The recording is available at icaew.com/frfwebinars
By All Accounts July 2022
Faculty members can view the whole edition.
Non-financial reporting resources
A range of resources on non-financial reporting requirements for UK companies.