Climate reporting – Mandatory legislation for the UK’s largest listed (including AIM) companies, banks, insurers and private companies aligned with TCFD

What’s the issue? Legislation has been published The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 that mandates the UK’s largest listed companies, banks and insurers, as well as some private companies, to report on how they are considering the impact of climate change using the Task Force on Climate-Related Financial Disclosures (TCFD) framework.  Premium listed commercial companies have already been required by the FCA to report, on a comply and explain basis, against the recommendations of the TCFD from the start of their 2021 financial year as part of the Government’s Roadmap towards mandatory climate-related disclosures, and standard listed companies fall into the listing requirements from the start of 2022. This new legislation will, however, extend the climate-related reporting requirements to certain of the UK’s largest private and AIM listed companies. In total, around 1,300 companies and financial institutions will have to disclose climate-related financial information on a mandatory basis under this new legislation.

Why? The Government’s publication of this draft legislation came days ahead of the G20 summit (in Rome on 30 to 31 October 2021) and COP26 (in Glasgow from 31 October to 12 November 2021), and finalises the consultation that ran from March to May 2021. This new legislation therefore forms only a part of the significant wider proposals and plans that are being put in place by the UK Government and other world organisations to mandate climate-related reporting. Specifically, in the UK, this legislation follows the Government’s announcement of the Net Zero Strategy and its commitment to making the “UK financial system the greenest in the world.”

What does this mean? This draft legislation mandates certain companies and financial institutions to consider the risks and opportunities they face as a result of climate change and to set out their emission reduction plans and sustainability credentials. Specifically, companies are required to report on their:

(i) Governance;

(ii) Risk management;

(iii) Business model and strategy; and

(iv) Targets

in relation to climate-related matters. These new requirements therefore place significantly more pressure on UK businesses to become an important part of the UK’s Net Zero Strategy.  

Which organisations must comply with the new legislation? The legislation amends Section 414CA of the Companies Act 2006, which defines those companies which must produce a Non-Financial (and Sustainability) Information Statement.  Prior to the amended legislation, a Non-Financial Information Statement was required to be prepared by UK: (i) traded companies (i.e. those listed on the UK’s main market); (ii) banks; and (iii) insurance companies and those carrying on an insurance market activity.

Following implementation of this legislation, Section 414CA will also apply to:

• AIM listed companies with more than 500 employees; and
• Companies with more than 500 employees and with turnover of more than £500 million (for groups, this £500 million threshold applies on a group basis to the parent, whether or not producing consolidated accounts).  These are to be known as “high turnover companies”.

There is, however, a group exemption for subsidiaries of UK parent companies (intermediate or ultimate) that produce a “Non-Financial and Sustainability Information Statement” under this legislation.

What has to be reported? The following information is required to be reported on:

Governance

a. A description of the company’s governance related to arrangements in relation to assessing and managing climate-related risks and opportunities.

Risk management

b. A description of how the company 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 company’s overall risk management process.

Business model and strategy

d. A description of the principal climate-related risks and opportunities arising in connection with the company’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 company’s business model and strategy.

f. An analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios.

Targets

g. A description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets.

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.

There is an exemption allowing companies to omit all or part of the disclosures relating to e) and f) (from the business model and strategy disclosures) and g) and h) (from the targets disclosures) where the directors reasonably believe that, having regard to the nature of the company’s business and the manner in which the business is carried on, it is not necessary to understand the company’s business.  If this exemption is taken, companies must provide a clear and reasoned explanation of their decision.

The content of these requirements is based on the TCFD framework but, unlike the current FCA’s requirements for premium and standard listed companies, this new legislation does not refer directly to the TCFD recommendations report, which could develop in time. The scope of the new legislation does capture listed companies, so these requirements should be considered for listed companies too (albeit the new legislation is currently aligned with the June 2017 TCFD recommendations).

Where do the disclosures need to be reported? The previous legislation requires companies to include a section in their strategic report called the “Non-Financial Information Statement”.  The new legislation adds additional disclosure requirements to that statement and requires the statement to be called the “Non-Financial and Sustainability Information Statement”.

When does the new legislation apply from? The new requirements are applicable for accounting periods beginning on or after 6 April 2022. So, an entity with an April year-end will be required to apply the new legislation for the first time for the year ending 30 April 2023.

Does the new legislation apply to LLPs? Yes, the new legislation also applies to LLPs, although the specific requirements for LLPs are set out in a separate statutory instrument The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/46).

For further information, please refer to the publication: Climate-related Financial Disclosures.