Mandatory climate-related financial disclosures proposed

Mandatory climate-related financial disclosures proposed for publicly quoted companies, large private companies and LLPs

The UK government has published a consultation on mandatory climate-related financial disclosures for publicly quoted companies, large private companies and limited liability partnerships (LLPs) (March 2021).

These proposals build on:

• the Government's expectation (in its 2019 Green Finance Strategy) that all listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022; and

• the UK's intention to become the first G20 country to make climate-related financial disclosures mandatory.[1]

They also compliment work being carried out by other Government departments and the regulators, such as the recent rule changes for premium listed companies (see Hot news: More climate-related disclosures for listed companies for more information) and the proposal to introduce a mandatory resilience statement which could be used for climate-related financial disclosures (see ARGA and PIEs: reform of UK corporate reporting/governance regimes for more information).

Which entities will be in scope?

Entities with more than 500 employees will have to make the mandatory disclosures, namely:

• UK companies with more than 500 employees and transferable securities admitted to trading on a UK regulated market, banking companies or insurance companies (PIEs);[2]

• UK registered companies with securities admitted to AIM and that have more than 500 employees;

• UK registered companies not included in the categories above, which have more than 500 employees and a turnover of more than £500 million; and

• LLPs which have more than 500 employees and a turnover of more than £500m.

These are considered to be economically significant companies that have a material impact on the  

environment as well as an exposure to climate risk.

But the Government will also consider whether the definition should be aligned with the new definition proposed in the White Paper on audit, corporate reporting and corporate governance reforms. (See the ARGA and PIEs article above for more information).   

Climate-related financial disclosures will be required at the group level on a consolidated basis and the scope thresholds will apply on a consolidated basis. There will be an exemption for subsidiaries if their results and relevant climate-related disclosures are included in a consolidated report of a UK parent company.

What disclosures will be required?

Companies and LLPs in scope will be required to disclose climate-related financial information in line with the four overarching pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets) on a mandatory basis, with adjustments made where necessary to make the requirements coherent with UK company law.

These additional disclosures are intended (1) to give market participants more information so that they can understand climate-related financial risks and opportunities to support the transition to net zero; and (2) to help companies decide what they need to do to address climate change as an important risk and opportunity for their organisation, operations and people.

The Government wants companies to ensure that the impact of climate change is considered in major decisions. And that appropriate behaviours are "embedded into organisational culture so that climate change is considered at all levels of an organisation".

Where will the disclosures be made?

Companies will report this information in the non-financial information statement which forms part of the strategic report, as there are overlaps and synergies with disclosures which are already made in the strategic report.

LLPs will report in either the non-financial information statement which forms part of their strategic report or the energy and carbon report which forms part of their annual report.

As the strategic report only requires disclosure of information that is material to a company, if these climate-related financial disclosures are not made, companies and LLPs will have to include a clear and reasoned explanation for the omission. That explanation will have to state why climate change is not expected to materially affect the company's business model or strategy and provide a reasoned explanation of the basis on which it has come to that position.

Interaction with other reporting requirements

*Streamlined Energy and Carbon Reporting (SECR) regulations[[3]](file:///C:/Users/KAYM/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/N0MCKK7U/Climate%20related%20disclosures%20consultation49905185v1.DOCX#_ftn3)*

These regulations require large UK companies and large LLPs to make disclosures on energy use and emissions in their annual reports for financial years which started on or after 1 April 2019.

Companies must make these disclosures in the directors' report and LLPs must make them in an Energy and Carbon Report.

The Government is seeking views on whether to amend the SECR requirements to:

• require large unquoted companies and LLPs to make the same disclosures as quoted companies; and

• whether reporting of Scope 3 emissions under SECR should continue to be voluntary given the increased interest of stakeholders in indirect emissions, including in supply chains.

Listing Rules requirements

The Listing Rules require companies with a UK premium listing to state, in their annual report, whether they have made climate-related financial disclosures consistent with the TCFD's four recommendations and 11 recommended disclosures or provide an explanation of why not and the steps they are taking/plan to take to make those disclosures in the future.

The proposed new mandatory disclosures will sit alongside those required under the Listing Rules. But the Government is not proposing to require or prescribe the disclosure of climate-related

financial information in line with the 11 recommended disclosures as it considers that some of the granularity required would be inconsistent with current strategic report requirements.

The FCA is also going to consult on extending its rules to issuers of standard shares (excluding listed funds).

Timing

The consultation closes on 5 May 2021. The Government expects the relevant regulations to be made by the end of 2021 and to come into force on 6 April 2022.

The disclosure requirements will apply to accounting periods starting on or after 6 April 2022.

BEIS also expects to publish non-binding Q&As on how to apply the new requirements.

[1] https://www.gov.uk/government/speeches/chancellor-statement-to-the-house-financial-services

[2] Namely those UK companies that are currently required to produce a non-financial information statement

[3] The Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018

The UK government has published a consultation on mandatory climate-related financial disclosures for publicly quoted companies, large private companies and limited liability partnerships (LLPs) (March 2021).

These proposals build on:

• the Government's expectation (in its 2019 Green Finance Strategy) that all listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022; and

• the UK's intention to become the first G20 country to make climate-related financial disclosures mandatory.¹

They also compliment work being carried out by other Government departments and the regulators, such as the recent rule changes for premium listed companies (see Hot news: More climate-related disclosures for listed companies for more information) and the proposal to introduce a mandatory resilience statement which could be used for climate-related financial disclosures (see ARGA and PIEs: reform of UK corporate reporting/governance regimes for more information).

Which entities will be in scope?

The following entities will have to make the mandatory disclosures, namely:

• UK companies with more than 500 employees and transferable securities admitted to trading on a UK regulated market, banking companies or insurance companies (PIEs);²

• UK registered companies with securities admitted to AIM and which have more than 500 employees;

• UK registered companies not included in the categories above, which have more than 500 employees and a turnover of more than £500 million; and

• LLPs which have more than 500 employees and a turnover of more than £500m.

These are considered to be economically significant companies that have a material impact on the environment as well as an exposure to climate risk.

But the Government will also consider whether the definition should be aligned with the new definition proposed in the White Paper on audit, corporate reporting and corporate governance reforms. (See the ARGA and PIEs article above for more information).   

Climate-related financial disclosures will be required at the group level on a consolidated basis and the scope thresholds will apply on a consolidated basis. There will be an exemption for subsidiaries if their results and relevant climate-related disclosures are included in a consolidated report of a UK parent company.

What disclosures will be required?

Companies and LLPs in scope will be required to disclose climate-related financial information in line with the four overarching pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets) on a mandatory basis, with adjustments made where necessary to make the requirements coherent with UK company law.

These additional disclosures are intended (1) to give market participants more information so that they can understand climate-related financial risks and opportunities to support the transition to net zero; and (2) to help companies decide what they need to do to address climate change as an important risk and opportunity for their organisation, operations and people.

The Government wants companies to ensure that the impact of climate change is considered in major decisions. And that appropriate behaviours are "embedded into organisational culture so that climate change is considered at all levels of an organisation".

Where will the disclosures be made?

Companies will report this information in the non-financial information statement which forms part of the strategic report, as there are overlaps and synergies with disclosures which are already made in the strategic report.

LLPs will report in either the non-financial information statement which forms part of their strategic report or the energy and carbon report which forms part of their annual report.

As the strategic report only requires disclosure of information that is material to a company, if these climate-related financial disclosures are not made, companies and LLPs will have to include a clear and reasoned explanation for the omission. That explanation will have to state why climate change is not expected to materially affect the company's business model or strategy and provide a reasoned explanation of the basis on which it has come to that position.

Interaction with other reporting requirements

Streamlined Energy and Carbon Reporting (SECR) regulations³

These regulations require large UK companies and large LLPs to make disclosures on energy use and emissions in their annual reports for financial years which started on or after 1 April 2019.

Companies must make these disclosures in the directors' report and LLPs must make them in an Energy and Carbon Report.

The Government is seeking views on whether to amend the SECR requirements to:

• require large unquoted companies and LLPs to make the same disclosures as quoted companies; and

• whether reporting of Scope 3 emissions under SECR should continue to be voluntary given the increased interest of stakeholders in indirect emissions, including in supply chains.

Listing Rules requirements

The Listing Rules require companies with a UK premium listing to state, in their annual report, whether they have made climate-related financial disclosures consistent with the TCFD's four recommendations and 11 recommended disclosures or provide an explanation of why not and the steps they are taking/plan to take to make those disclosures in the future.

The proposed new mandatory disclosures will sit alongside those required under the Listing Rules. But the Government is not proposing to require or prescribe the disclosure of climate-related financial information in line with the 11 recommended disclosures as it considers that some of the granularity required would be inconsistent with current strategic report requirements.

The FCA is also going to consult on extending its rules to issuers of standard shares (excluding listed funds).

Timing

The consultation closes on 5 May 2021. The Government expects the relevant regulations to be made by the end of 2021 and to come into force on 6 April 2022.

The disclosure requirements will apply to accounting periods starting on or after 6 April 2022.

BEIS also expects to publish non-binding Q&As on how to apply the new requirements.

¹ https://www.gov.uk/government/speeches/chancellor-statement-to-the-house-financial-services

² Namely those UK companies that are currently required to produce a non-financial information statement

³ The Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018