From 6 April 2022, over 1,300 of the UK's largest companies and financial institutions will be required to disclose climate-related risks and opportunities in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The UK will be the first G20 country to introduce these requirements into law. This important announcement comes hot on the heels of the publication of the UK's Net Zero Strategy.
The disclosure requirements – "at a glance"
The Government has published its response to the consultation issued in March 2021 on mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs. The consultation sought views on the scope of requirements, the depth of requirements, the appropriate guidance and an appropriate monitoring and enforcement regime.
A broad range of climate-related information will be required to be disclosed in line with the 4 overarching pillars of the TCFD (Governance, Strategy, Risk Management and Metrics & Targets). It is proposed that an exception for immaterial information will be permitted if justified but a clear and reasoned explanation must be provided where information is not disclosed.
Importantly, following strong stakeholder feedback, the Government has decided to introduce a qualitative scenario analysis requirement. This will require an analysis of the resilience of business models and strategies, taking into consideration different climate-related scenarios.
Location of disclosures
Companies will be required to disclose their climate-related financial information in the non-financial information statement which forms part of the Strategic Report. This statement will also be renamed as the "non-financial and sustainability information statement".
LLPs can report climate-related financial information in either the non-financial information statement which forms part of their Strategic Report or, if no Strategic Report is prepared, the Energy and Carbon Report.
Who is in scope?
Those entities within scope of the disclosure requirements include:
- All UK companies that are currently required to produce a non-financial information statement so 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 (Relevant Public Interest Entities (PIEs))
- UK registered companies with securities admitted to AIM with more than 500 employees
- UK registered companies which are not included in the above categories with more than 500 employees and a turnover of more than £500 million
- LLPs with more than 500 employees and a turnover of more than £500 million.
The consultation response also confirms that disclosure will be at group level. Both climate-related reporting and the scope thresholds will apply on a consolidated basis.
Timing and next steps
Changes will be introduced via statutory instrument with one version for companies and one version for LLPs. The company regulations were laid before Parliament on 28 October 2021. The LLP regulations will follow based on the company version but with appropriate adaptations for LLPs.
Subject to Parliamentary approval, the regulations will come into force on 6 April 2022 and apply to financial years commencing on or after that date.
Non-binding Q&A guidance will be published to support the application of the disclosure requirements before the end of 2021, following Parliamentary scrutiny of the regulations.
This is a significant development. The hope is that proper disclosure of climate-related risks, in line with the TCFD recommendations, will better inform investors on how companies are likely to be impacted by climate change. Mandating climate related financial disclosures should also help companies to understand their own climate risk better, build up capabilities and raise awareness about the importance of addressing exposures to climate risks. The Government expects these measures will ultimately support a better allocation of capital in line with the UK's net zero target and reduce material financial risks from climate change. Time will tell!