Climate-related disclosures to be mandatory for large companies

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

It has also published the draft regulations for companies (The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021). The draft regulations for LLPs will be published once these have been finalised as they will be based on them.

The government has stated that its objective with these proposals is “to increase the quantity and quality of climate-related financial disclosures in a proportionate manner. This is to ensure market participants have better information to adequately understand climate-related financial risks and opportunities to support the transition to net zero.”

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. This has been reiterated in its recent Greening Finance: A Roadmap to Sustainable Investing;
• the UK's intention to become the first G20 country to make climate-related financial disclosures mandatory;
• new rules requiring premium listed companies to make climate -related disclosures (see Hot news: More climate-related disclosures for listed companies); and
• the FCA’s proposals to require standard listed issuers, asset managers, life insurers and FCA-regulated pension providers to make climate-related disclosures (see Proposals to extend climate-related disclosures to standard issuers).

Which entities will be in scope?

As originally proposed, the government has decided that the new rules will apply to those companies considered to be economically significant (i.e. that have a material impact on the environment as well as an exposure to climate risk).

These are:

• UK companies with 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 PIEs)¹;
• 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.

The government hopes this will lead to the development of best practice, to assist smaller companies that may want to disclose on a voluntary basis.

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.

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).

In response to feedback, the government will also require companies to include a qualitative analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios.

As there was strong support for aligning the disclosures under the Streamlined Energy and Carbon Reporting (SECR) regime² and TCFD requirements, the government will now consider how it can best achieve that. In the meantime, the government’s Q&A guidance document (that will accompany these regulations but has not yet been published) will specify to what extent current SECR requirements meet the TCFD recommendations.

The government will also consider the need for clarity and a long-term plan for any Scope 3 (indirect) disclosure requirements.

Will non-disclosure be allowed?

Companies will have some flexibility - depending on the nature of the business and how it is conducted, they will be allowed not to make some of the climate-related disclosures. This will be particularly relevant for disclosures made under the Strategy and Metrics and Targets elements of the TCFD recommendations, where directors reasonably believe these disclosures are not necessary for an understanding of the business.

If disclosures are not made, there must be a clear and reasoned explanation for the omission.

Where will the disclosures be made?

Companies will report this information in the non-financial information statement (NFIS) which forms part of the strategic report, as there are overlaps and synergies with disclosures which are already made in that report. Any companies that don’t currently have to prepare a NFIS, will only have to include this new information in the NFIS.

The NFIS will be renamed the Non-Financial and Sustainability Information Statement.

LLPs will also report this information in the NFIS. Those LLPs that do not need to prepare one, will instead include it in their climate-related disclosures in the Energy and Carbon Report which forms part of their annual report.

Timing

The Government expects the relevant regulations to be made by the end of 2021 and to come into force on 6 April 2022, subject to parliamentary approval. The disclosure requirements will apply to financial years starting on or after 6 April 2022.

Draft regulations for LLPs will be published once the company regulations have been made.

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

¹ Namely those UK companies that are currently required to produce a non-financial information statement.
² The Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.