Mandatory climate-related disclosures coming soon
On 28 October 2021, the government published its response to its consultation on mandatory climate-related disclosures by publicly quoted companies with more than 500 employees (including AIM companies as well as those admitted to the Main Market), large private companies and LLPs. The response was accompanied by draft Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 (Regulations), which amend sections 414C, CA and CB of the Companies Act 2006 (CA 2006). Companies that fall within the scope of the Regulations will be required to disclose climate-related financial information in line with the four overarching pillars of the TCFD Recommendations (defined below).
Equivalent regulations for LLPs (LLP Regulations) will apply a modified form of the Regulations, and therefore, the LLP Regulations will be made after the Regulations have been approved by Parliament.
Subject to Parliamentary approval, the Regulations and the LLP Regulations will come into force on 6 April 2022 and shall apply in respect of any financial year of a company or LLP which commences on or after that date.
Whilst publicly quoted companies and large private companies and LLPs will be directly affected by the Regulations, the requirements imposed will affect many more entities indirectly as, in order to assess the climate risks associated with their operations, business model and strategy, in-scope companies and investors will require companies in their supply chain and/or their investees to disclose more information about climate risks.
What are the TCFD Recommendations?
The Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) was established in 2015, with a view to improve and increase reporting of climate-related financial information.
In 2017, the TCFD published a report setting out 11 recommended climate-related financial disclosure obligations, sat under the following four recommendations (TCFD Recommendations):
- Governance: aimed at providing an insight into an organisation’s internal operations, policies and governance around climate-related risks and opportunities;
- Strategy: an assessment of the actual and potential impacts of climate-related risks and opportunities on a company’s business, strategy, and financial planning;
- Risk Management: to provide an understanding of the processes used by an organisation to identify, assess, and manage climate-related risks; and
- Metrics and Target: providing mechanisms and goals that provide tangible feedback on the effectiveness of a company’s strategy to mitigate climate-related risks.
Entities within scope
The following entities will fall within the scope of the Regulations and LLP Regulations:
- Relevant Public Interest Entities (PIEs) – all UK companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees and have transferable securities admitted to trading on a UK regulated market (as defined in s 1173 of the CA 2006), banking and 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 and have more than 500 employees and turnover of more than £500 million; and
- LLPs with more than 500 employees and turnover of more than £500 million.
Both the scope thresholds and climate-related reporting will apply on a consolidated basis. When a UK group is within scope, all the subsidiaries (both UK and overseas) belonging to that UK group, are expected to bear some degree of reporting burden. The top UK parent entity is expected to report on their global operations, including on both activities conducted through a UK subsidiary or an overseas subsidiary, provided these companies are included in the consolidated reporting.
The government's Final Impact Assessment relating to the Regulations anticipates that 1,350 groups of companies will fall within scope and 10,700 active UK subsidiaries will be affected.
In scope companies will be required to make disclosures in the Non-Financial Information Statement (NFIS), which forms part of the Strategic Report, and which is to be renamed the Non-Financial and Sustainability Information Statement. In scope LLPs will be required to make disclosures in either the NFIS or the Energy and Carbon Report, which forms part of the Annual Report.
The disclosures required will be inserted into s414CB (2A) of the CA 2006 as follows:
- A description of the company's governance arrangements in relation to assessing and managing climate-related risks and opportunities.
- A description of how it identifies, assesses, and manages climate-related risks and opportunities.
- A description of how processes for identifying, assessing, and managing climate-related risks are integrated into its overall risk management process.
- A description of the principal climate-related risks and opportunities arising in connection with its operations, and the time periods by reference to which those risks and opportunities are assessed.
- A description of the actual and potential impacts of the principal climate-related risks and opportunities on its business model and strategy.
- An analysis of the resilience of the business model and strategy, taking into consideration different climate-related scenarios (Scenario Analysis).
- A description of the targets used to manage climate-related risks and to realise climate-related opportunities and of performance against those targets.
- 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.
Following consultation on the draft Regulations, the government chose to introduce a qualitative Scenario Analysis requirement in the final Regulations. The TCFD report describes Scenario Analysis as "a process for identifying and assessing the potential implications of a range of plausible future states under conditions of uncertainty... scenarios provide a way for organizations to consider how the future might look if certain trends continue or certain conditions are met. In the case of climate change, for example, scenarios allow an organization to explore and develop an understanding of how various combinations of climate-related risks, both transition and physical risks, may affect its businesses, strategies, and financial performance over time."
The Regulations provide flexibility, in some circumstances, for a company’s directors to omit all or part of the climate-related disclosures required, taking account of the nature of the business and how it is conducted. This materiality filter will only apply to disclosures made under the Strategy and Metrics and Targets TCFD Recommendations, where directors reasonably believe these disclosures are not necessary for the understanding of the business. Directors will be required to provide a clear and reasoned explanation as to why they are making any such omission.
What this means in practice?
It is anticipated that entities will need to make governance changes in order to meet the requirements of the Regulations / LLP Regulations and that compliance costs will increase accordingly. Anticipated additional costs include one-off familiarisation and legal costs and the following ongoing costs:
- Costs to subsidiaries of collecting and submitting information - all active subsidiaries are expected to provide information to their UK parent on an annual basis for analysis and reporting purposes.
- Cost to parent companies of processing information - once a UK parent company receives information from their subsidiaries, companies must to evaluate the information in order to determine which matters are material to the group.
- Governance - entities are likely to incur costs when adapting their governance structures and in the course of documenting and disclosing their governance of climate-related risks and opportunities.
- Strategy - costs relating to the identification, documentation and disclosure of climate-related risks and opportunities, as well as reporting on the impact of these risks on the business, strategy and financial planning. Costs are likely to include the cost of performing research, quantification and writing of scenarios to deliver scenario analysis.
- Risk Management - costs relating to the identification and assessment of risks and their integration into the company’s overarching risk-management strategy.
- Metrics and Target - costs relating to development, calculation and disclosure of the metrics and targets used to assess and manage climate related risks and the collection of data to report against such metrics and targets.
- Publication and sign-posting - costs of dispersing information publicly.
- Quality assurance and Internal verification - costs relating to the internal verification and quality assurance of disclosures.
- External audit - companies are not formally required to audit climate related financial information. However, auditors may need to perform verification and checks for consistency and completeness if the outcomes from scenario analysis reference any of the other information subject to audit from the Annual Report or, if risks are identified to be material, auditors might need to assess whether such risks have been reflected in the Annual Report.
A full cost benefit analysis can be found in the government's Final Stage Impact Assessment which can be viewed here.
The government intends to publish non-binding Q&A guidance to help companies and LLPs comply with the new disclosure requirements which will follow in due course.
Marcus Stuttard will provide his unique insight and a "state of the nation" market update.
Is Buy Now, Pay Later creating a new debt crisis?
BNPL providers are quick to claim that their services are offered with “no interest and no fees”, but is this really the case?
Charles Russell Speechlys advises Topland Group on two key transactions
Topland Group is one of the largest multi-billion pound, privately owned investment groups.
Yahoo and Food Business Africa cover the firm's involvement in Oba Pack's investment in the Babator Farming Company
Oba Pack Company Limited, a Ghanaian-owned agribusiness, purchased the Babator Farming Company Limited (BFC) on 31 December 2021.
Le Monde du Droit and Fin Year cover the firm's involvement in Resilience's acquisition of Betterise
The Paris office has advised Resilience on their acquisition of Betterise.
Diversity and Inclusion: Clear transparency?
This article focuses on the published its Consultation Paper on diversity and inclusion on company boards and executive committees in July.
Listing Rules changes are in...exciting times for founders and fast-growing companies
Charles Russell Speechlys advises FairXchange on investment from United Fintech
FairXchange was founded in 2016, to bring clarity and transparency to execution performance through the provision of independent data.
ESG - do your priorities need to change with a changing landscape?
This article lists the forthcoming legislation and other initiatives which impact on public and quoted companies.
Sustainable Rural Estate Management: The Penpont Project
Listen for an insight into the thinking behind the Penpont Project.
Charles Russell Speechlys advises Acora on the acquisition of M9 Holdings
The acquisition of M9 Holdings marks the latest stage in Acora’s growth journey.
Reform of the UK Prospectus Regime
This article focuses on three aspects of the consultation: Quality and Duplication, Widening participation in public offers, Agility
Judicial Review Reform
Judicial review is a mechanism available to various interested parties to challenge the legality of decision made by a public body.
Sustainability Leaders: Colin le Duc, Generation Investment Management
What is the future for ESG?
Ingrid Saffin writes for Property Week on green leases and their role on the journey to reaching net zero
COP26 has brought into sharp focus the gap between promises to limit environmental damage and real action.
Piers Master and James Broadhurst write for eprivateclient on the goals of a family office
What are the goals, priorities or concerns often raised by families?
Rebecca Burford quoted by Citywealth on family offices’ ESG considerations for their private market investments
Family offices are increasingly deploying a growing portion of their assets to the private markets.
The Surrey Chambers of Commerce report on the Dental team’s involvement in Dentex’s acquisition of its 100th dental practice
The Dental team in Guildford has advised Dentex on the acquisition of Courtyard Dental Practice based in Saffron Walden in Essex.
Charles Russell Speechlys advises Dentex on the acquisition of Courtyard Dental Practice
Dentex is a fast-growing dental group focussed on developing its practices and optimising how dental practices operate.
COP26 and the impact on Property Finance
There is a strong focus on countries ‘building back better’ their economies through green, resilient recovery.