Climate-related financial disclosure – What does the Government’s proposal for mandatory reporting mean for businesses?

The UK Government is consulting [link to article] on a proposal to make reporting on climate-related financial disclosures compulsory for publicly quoted companies, large companies and Limited Liability Partnerships (LLPs).

What is the intention of mandatory reporting?

The intention is for mandatory reporting to reflect the voluntary reporting framework proposed by the Task Force on Climate Related Financial Disclosures (TCFD). As set out in the Government's Green Finance Strategy, one of its aims is to "green" the financial system, and using disclosure as a mechanism for change is one of the ways in which it intends to achieve this.

The consultation seeks views on:

1. The scope of requirements;
2. The depth of requirements;
3. The appropriate guidance; and
4. An appropriate monitoring and enforcement regime.

Why is the Government proposing to introduce mandatory reporting?

Climate change poses a risk to companies, financial institutions and individuals. Physical and transition risks could have material impacts on the value of companies and their assets.

The Government believes that mandatory reporting is important to ensure that companies with a material economic or environmental impact or exposure assets should disclose and ultimately take actions against climate-related risks and opportunities. This will also provide investors with more of the information they need to adequately understand and manage climate-related financial risks and "to provide other stakeholders with a greater level of information on climate-related matters".

What will the reporting framework look like?

The intention is that it will be mandatory for companies (including some LLPs) to make disclosures in their non-financial information statement which forms part of their Strategic Report. For LLPs the reporting will be in either their non-financial information statement which forms part of their Strategic Report or the Energy and Carbon Report which forms part of their Annual Report.

Reporting will be under each of the four reporting pillars that are currently set out by the TFCD and are proposed to be:

Governance – to include:

• a description of the governance arrangements in place to identify and manage risks and opportunities arising from climate change;
• who has operational responsibility for climate change, including the experience of that executive or committee;
• if the company has an audit committee, whether climate change is a matter considered by the company's audit committee;

Strategy – to include:

• a brief description of the company's business model and strategy (to the extent that the company is not already required to report such information);
• a description of how the company's business model and strategy may change in response to effects relating to climate change, and the trends and factors that affect this change;

Risk Management – to include:

• A description of the principal risks and principal opportunities, including material financial risks and opportunities relating to transition risk, physical risk and regulatory risk arising from climate change which may affect the business and a description of how the company manages those areas of risk and opportunity including:
  • a description of its business relationships, products and services which are likely to cause adverse impacts in those areas of risk, and
  • a description of how it manages the principal risks, and
• A description of the risk management policies pursued by the company in relation to climate change, any due diligence processes implemented by the company in pursuance of those policies and a description of the outcome of those policies; and

Metrics and Targets – to include:

• A description of the key performance indicators relevant to the entity's exposure to climate change risk and opportunity, and the targets set by the business for those key performance indicators, being factors by reference to which the development, performance or position of the company's business, or the impact of the company's activity, can be measured effectively.

Which businesses will have to report?

It is proposed that the following businesses will have to comply with the mandatory reporting requirements:

1. Those that are currently required to produce non-financial information statements;
2. UK registered companies with securities admitted to the Alternative Investment Market with more than 500 employees;
3. UK registered companies which are not included in the categories above and which have more than 500 employees and a turnover of more than £500m;
4. LLPs which have more than 500 employees and a turnover of more than £500m.

When will mandatory reporting come into force?

The Government intends that regulations (which have not yet been published) will come into force on 6 April 2022 and that reporting will apply to the accounting period starting on or after that date.

The regulations will be made using powers under the Companies Act 2006 and the Limited Liability Partnerships Act 2000.

How will mandatory reporting be enforced?

Enforcement will be via the mechanisms under the existing reporting regime set out in the Companies Act 2006 and the relevant LLP regulations. This will also include where necessary the Secretary of State or the Financial Reporting Council (FRC) requiring the preparation of revised accounts and/or reports.

The proposed requirements in terms of mandatory reporting will be monitored and regulated by the FRC. The Financial Conduct Authority's new "comply or explain" rule in the FCA's Listing Rules which references the TCFD's recommendations will be separate but complementary to the current proposals for mandatory reporting.

The FRC will be primarily responsible for the supervision and enforcement of the Companies Act 2006 provisions proposed in the consultation. Information disclosed outside the Annual Report and reporting by in-scope listed companies that are headquartered overseas will fall within the FCA's remit.

What may come next in terms of environmental reporting?

In addition to the mandatory reporting requirements the Government is seeking views on how best to simply the interaction of the proposed TCFD requirements with the SECR framework. The SECR requires large UK companies and large LLPs to make disclosures on energy use and emissions in their Annual Reports.

The consultation also invites responses on whether the SECR should be standardised so that companies within its scope should be required to disclose information to the same degree. The Government believes that doing so will bring consistency to disclosures and would simplify reporting procedures.

Although not a topic for consultation, the consultation document identifies a common framework for determining which economic activities can be defined as environmentally sustainable is being developed. This is known as the UK Green Taxonomy and will be based on the EU's Taxonomy for sustainable activities. A UK Green Technical Advisory Group is to be launched this year to advise the Government on the UK Green Taxonomy.

Comment

The pace of progress in terms of "greening" businesses particularly those in the financial services sector remains unrelenting. The demands and expectations of investors and consumers of products and services in relation to the impact of business on climate change is increasingly present in their decision making. Detailed and thorough reporting requirements on climate change risk, environmental and social impact and good governance will continue to develop and businesses will need to ensure from a reputation perspective that they fully understand the requirements that will be placed on them. This will include making appropriate preparations to engage relevant professionals to support them in complying with reporting requirements.

Please contact Christian Silk for more details and support.