On 29 October 2021, the Government announced that the UK will become first G20 country to make it mandatory for Britain’s largest businesses to disclose their climate-related risks and opportunities, in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Legislation, to be introduced through the Companies (Strategic Report) (Climate-related Financial Disclosures) Regulations 2021, has been laid before Parliament as is expected to be issued before the end of the year. The legislation is based on the Government’s consultation on proposals to require mandatory TCFD aligned reporting for companies and limited liability partnerships (LLPs) which ran between March and May 2021.
When does this apply from and which businesses are affected?
For accounting periods commencing on or after 6 April 2022, over 1,300 of the largest UK-registered companies and financial institutions will be required to disclose climate-related financial information aligned with the recommendations from the Task Force on Climate-Related Financial Disclosures. This will include many of the UK’s largest publicly traded companies, banks, and insurers, as well as private companies and LLPs with over 500 employees and £500 million in turnover. Disclosures will be required to be made in the strategic report for companies and the energy and carbon report for LLPs.
What will be required?
TCFD-aligned disclosures are part of an economy wide approach to addressing climate change and reaching net zero carbon emissions. To support the UK’s transition to net zero, the Government considers it important to ensure that companies with a material economic or environmental impact or exposure assess, disclose, and ultimately take action on climate-related risks and opportunities. The disclosures are intended to support companies to focus on the effects of climate change on their business and communicating how these are being managed to their investors and other stakeholders.
The Government recognises the recommendations of the TCFD as one of the most effective frameworks for companies to analyse, understand and ultimately disclose climate-related financial information against. TCFD is an industry-led group which helps investors understand their financial exposure to climate risk and works with companies to disclose this information in a clear and consistent manner through recommendations on climate-related financial disclosures.
TCFD sets out a framework of 11 recommendations for disclosure over four areas – governance; strategy; risk management; and metrics and targets – that could be used by businesses to provide information on how they manage material risks and opportunities arising from climate change. TCFD recommendations are only focused on climate-related issues and do not require companies to make disclosures on wider ESG or sustainability issues.
The broad requirement is disclosure on how climate-related risks and opportunities are assessed by the company’s management and overseen by the board.
Companies will be required to disclose how their strategy and financial planning will or may be impacted by climate-related risks and opportunities based on different climate scenarios, for example by affecting demand for products and services or supply chain, which, in turn, would have financial consequences for the company.
Companies will be required to disclose their processes to identify, assess and manage climate-related risks, including both physical risks from climate change and transition risks to adapt the business to a low carbon economy.
Physical risks are the risks relating to the physical effects of climate change itself and can be event-driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks can arise from damage to assets or disruption to supply chains.
Transition risks are the risks relating to the transition to a lower-carbon economy, which may entail extensive policy and legal, technology and market changes to address mitigation and adaptation requirements related to climate change.
Metrics and targets
Companies will be required to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities so that market participants can access whether these are aligned with the risks and opportunities that company has identified as being material to its business. This also provides a basis upon which companies can be compared within a sector or industry.
Where are we now
In December 2020, the Financial Conduct Authority (FCA) introduced a new listing rule and guidance which requires commercial companies with a UK premium listing to include a compliance statement in their annual financial report, stating whether they have made disclosures consistent with the recommendations of the TCFD or providing an explanation if they have not done so. These requirements apply for accounting periods beginning on or after 1 January 2021.
Companies within this scope must include a statement in the annual financial report setting out:
- whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures in the annual financial report
- where they have included some, or all, of the disclosures in a document other than the annual financial report, an explanation of why and a reference to where the disclosures can be found
- where they have not made disclosures, an explanation of why, and a description of any steps they are taking or plan to take to be able to make consistent disclosures in the future – including relevant time frames.
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You can also visit our COP26 Hub where we will share an article written by our experts each day the COP26 conference takes place with a focus on green taxation.