Mandatory climate reporting across the economy by 2025
The government announced in November 2020 that the UK will become the first G20 country to make disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”) fully mandatory across the economy by 2025. It published an indicative timeline showing the phased roll out of the rules to different types of organisations (see here).
Premium listed companies are already under a duty to disclose in line with the TCFD on a ‘comply or explain’ basis as a result of a new Listing Rule introduced by the Financial Conduct Authority (“FCA”), which applies to accounting periods beginning on or after 1 January 2021 (see here). The FCA has said it will consult this year on moving to mandatory disclosures for premium listed companies and extending the obligation to other listed companies.
Meanwhile, the Department for Business, Energy & Industrial Strategy (“BEIS”) has launched a consultation on mandatory TCFD-aligned disclosures for publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs). The consultation closes on 5 May 2021. This new rule is intended to be separate but complementary to the FCA rule for premium listed companies.
The UK government sees disclosure as a key mechanism for change. The government wants to increase the quantity and quality of climate-related financial information to:
- provide investors and other stakeholders with the information they need to make better-informed decisions and so that climate risk can priced appropriately and so that greater capital can be reallocated to activities that are compatible with the net zero transition. The FRC concluded in a review in November 2020 that corporate reporting on climate change needs to improve to meet the expectations of investors and other users (see here); and
- help companies think about what they need to do to address climate risks and seize the opportunities. Companies are coming under increased pressure from investors to produce climate transition plans, and in some cases put these to a vote at their AGMs (see here). The government plans to use the G7 and COP26 to encourage other countries to make climate-related financial disclosure mandatory.
The requirement would apply to the following types of organisations:
- all UK companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees that either have transferable securities admitted to trading on a UK regulated market or are banking or insurance companies;
- UK registered companies with securities admitted to AIM with more than 500 employees;
- UK registered companies which are not included in the categories above, which have more than 500 employees and a turnover of more than £500m; and
- LLPs which have more than 500 employees and a turnover of more than £500m.
BEIS proposes that climate-related reporting will apply at the group level on a consolidated basis and that the scope thresholds should also apply on a consolidated basis. It also proposes including a subsidiary exemption if a company’s results and relevant climate-related disclosures are included in a consolidated report of a UK parent company.
Companies and LLPs would be required to disclose climate-related financial information in line with the four overarching pillars of the TCFD recommendations (governance, strategy, risk management, and metrics and targets) on a mandatory basis.
However, companies and LLPs would not be required to disclose in line with the 11 more detailed TCFD recommendations, as BEIS believes that the level of granularity in some of those recommendations would be inconsistent with current legislative requirements in the strategic report. Having said that, BEIS notes that companies which also have a premium listing will be required by the new FCA Listing Rule to report against the 11 detailed recommendations on a comply or explain basis. BEIS thinks this provides a proportionate approach which recognises the greater resources and expertise that listed companies generally have access to.
BEIS proposes that scenario analysis will be encouraged but will not be required. It recognises that this is one of the most challenging areas of the TCFD recommendations, and, while some companies are quickly developing capabilities in this area, there remains a significant skill and expertise gap for many companies. Where companies are already able to produce quantitative scenario analysis, BEIS encourages those companies to continue to disclose their outputs to support the disclosures provided in the strategic report. It also notes that such disclosures may be disclosed outside of the annual report.
The strategic report only requires disclosure of information that is material to a company. If required climate-related financial disclosures are not made, BEIS proposes that the non-financial information statement must provide a clear and reasoned explanation for the omission. The company or LLP must 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 this position.
Companies would be required to report climate-related financial information in the non-financial information statement which forms part of the strategic report.
LLPs would be required to report climate-related financial information 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.
The changes will be implemented through regulations, using powers under the Companies Act 2006 and the Limited Liability Partnerships Act 2000. The government has said it will produce a non-binding Q&A to help companies understand what it would be appropriate to disclose under each of the four pillars.
The consultation closes on 5 May 2021 and regulations are expected to be made by the end of 2021.
The intention is that the regulations would come into force on 6 April 2022 and apply in respect of accounting periods starting on or after 6 April 2022. In practice, this means that, as many companies have a calendar year-end, most of these reports will first be filed in 2024.
Interaction with SECR regime
The Streamlined Energy and Carbon Reporting (“SECR”) regime requires large UK companies and large LLPs to make disclosures on energy use and emissions in their annual reports (see here). The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 came into force on 1 April 2019 and apply to financial years which started on or after 1 April 2019. The 2018 Regulations introduced new obligations for what must be included in the directors’ report for quoted and large unquoted companies as well as placing an obligation on large LLPs to prepare an energy and carbon report.
BEIS is seeking views on how best to simplify the interaction of the proposed TCFD requirements with the SECR obligations, including ways in which the SECR obligations may be changed to make them more effective. For example, BEIS is seeking views on whether reporting of Scope 3 emissions under the SECR should continue to be voluntary given the increased interest of stakeholders in indirect emissions, including supply chains.
Interaction with proposed “resilience statements”
The government’s White Paper on audit and corporate governance reform includes a proposal to introduce a new “resilience statement” in a company’s strategic report, setting out how directors assess the company’s prospects and challenges to the business model in the short, medium and long term (see here). Suggested content includes climate change risk, among other things.
The government is seeking views on whether the resilience statement could be the place where TCFD disclosures are made. It envisages that the requirement to produce a resilience statement would apply to premium listed companies first, extending to other public listed entities within two years.