To support the UK’s transition to net zero, the UK government has introduced legislation that will make it mandatory for the UK’s largest businesses to disclose their climate-related risks and opportunities. Subject to Parliamentary approval, the new rules will come into force in respect of financial periods starting on or after 6 April 2022.

To which businesses will the new requirements apply?

The new reporting requirements will apply to:

• UK-incorporated companies that have more than 500 employees and either have transferable securities admitted to trading on a UK regulated market (such as the Main Market of the London Stock Exchange), or are banking or insurance companies;
• UK-incorporated companies with securities admitted to AIM with more than 500 employees;
• UK-incorporated companies not included in the categories above that have more than 500 employees and a turnover of more than £500 million; and
• UK-incorporated LLPs that have more than 500 employees and a turnover of more than £500 million.

For groups, the thresholds will apply on a consolidated basis. 

What will businesses have to disclose?

Businesses in scope will have to disclose climate-related financial information in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). First published in 2017 and updated in 2021, these set out how businesses across sectors and geographies can assess and disclose their governance, strategy, risk management, metrics and targets related to climate change, and disclose to markets and other stakeholders their climate-related risks and opportunities.

Under the legislation before Parliament¹, which will amend the Companies Act 2006, the required climate-related financial disclosures include: 

• a description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
• a description of how the company 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 the company’s overall risk management process;
• 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;
• a description of the actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy;
• an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios;
• 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; and
• 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.

This information will form part of the Non-Financial Information Statement (to be renamed the Non-Financial and Sustainability Information Statement) within the Strategic Report. In the case of LLPs that are not required to produce a Strategic Report, the information will form part of the Energy and Carbon Report within the Annual Report.

The government will produce non-binding Q&A to support companies and LLPs in their application of these requirements. 

Interaction with the Financial Conduct Authority Listing Rules

The Listing Rules already require 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 TCFD recommendations and providing an explanation if they have not done so. This requirement applies to financial periods beginning on or after 1 January 2021. The FCA has also published proposals to extend the requirement to certain issuers with a UK standard listing for financial periods beginning on or after 1 January 2022.

In-scope listed companies will be subject to both the Listing Rules regime and the new Companies Act 2006 disclosure requirements.

Interaction with the Streamlined Energy and Carbon Reporting (SECR) framework

The SECR energy use and emissions reporting framework, part of the company law reporting framework since 2019, will continue to apply to in-scope businesses (quoted companies and certain large unquoted companies and LLPs).

The government will consult in due course on how better to align the TCFD and SECR regimes, with a view to implementing any changes to the SECR regime by 2023.

Conclusion

The new climate-related disclosure requirements are integral to the UK’s commitment to net zero and will make the UK the first G20 nation to introduce mandatory TCFD-based disclosure requirements for large businesses. Although there were some calls during the consultation for the range of businesses in scope to be expanded, the government has retained its original policy position that those businesses with the greatest economic and environmental impact should be required to assess and disclose their climate risk first. Its longer-term ambition is for this to lead to the development of best practice, to support smaller companies to disclose should they wish to.

1. Draft Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021. The equivalent provisions for LLPs will be in separate regulations.