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Out-Law News 2 min. read

UK progresses with climate-related financial disclosures for companies

Large UK companies and limited liability partnerships (LLPs) will have to make climate-related financial disclosures after a consultation showed strong support for the move.

In its consultation response on mandatory climate-related financial disclosures (41 page / 496KB PDF), the government said it was moving forward with plans to require in-scope companies and LLPs to make disclosures in line with the four overarching pillars of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) – governance, strategy, risk management, metrics and targets.    

The final rules will be more closely aligned with TCFD recommendations than originally envisaged.

In line with the TCFD recommendations, the government is adding a requirement for companies to include a qualitative assessment of resilience against different climate-related scenarios within their reporting, after feedback suggested scenario analysis was a key part of meaningful climate-related disclosures.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said the introduction of scenario analysis was the most significant change from the consultation proposals.

“Although this is acknowledged to add to the cost of reporting for business – set against voluntary reporting – the qualitative nature of the obligation means that a narrative and exploratory approach can be taken in addition to, where appropriate, using data,” Proverbs-Garbett said.

Proverbs-Garbett said the position was consistent with that taken by the Financial Reporting Council (FRC) in its 2020 thematic review of climate disclosures, which identified that scenarios remain a key area of investor interest, and a series of FRC-led publications have furthered that message.

Analysis by Manchester Business School on scenario analysis (39 page / 3.54MB PDF), commissioned and published by the FRC, highlights the various approaches adopted, instances of good practice, typical challenges and common steps taken to conduct climate-related scenario analysis.

That analysis was published alongside reports by the FRC’s Financial Reporting Lab, focusing on developing practice in relation to TCFD disclosures (23 page / 2.98 MB PDF),  and providing a snapshot of current practice (3 page / 4.35MB PDF).

Another area where the government said it would respond to consultation feedback is in relation to the reporting of ‘scope 3’ carbon emissions – indirect emissions such as those caused through business travel, investments and goods and services.

Although scope 3 emissions will not come within the scope of this particular regulation, the government said it would look at aligning climate-related financial disclosures with existing Streamlined Energy and Carbon Reporting (SECR) requirements. It said changes to SECR would require further consultation, but would be implemented by 2023.

These changes will also need to take into account the proposed introduction of the Sustainability Disclosures Requirements (SDR) Regime, as set out in the recent greening finance: a roadmap to sustainable investment proposals.

“This is no easy task, despite the confident tone of the response,” Proverbs-Garbett said.

The consultation response confirmed that disclosure would remain at group level on a consolidated basis, reducing the burden on subsidiary management.

Reporting will be included in the non-financial information statement of the strategic report, renamed the ‘non-financial and sustainability information statement’ to recognise the sustainability information that will now be required.

“This will be welcome news to investors and users of annual reports, whose hearts may have sunk if the material was to be included elsewhere or simply cross-referenced. Having the material in one location will assist the reader,” Proverbs-Garbett said.

The financial disclosure requirements will apply to listed UK companies and public interest entities that have more than 500 employees, and large unquoted companies or LLPs with over 500 employees and turnover in excess of £500 million.

The requirements will be brought in through two sets of regulations, one for companies and the other for LLPs. The company regulations were laid before parliament on 28 October 2021, while the LLP regulations will be based on the agreed company regulations and published later. Subject to parliamentary approval, the rules will come into force on 6 April 2022.

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