Review of the Climate-related financial disclosure reforms and guidance for companies and LLPs
This article will review the regulatory changes the UK are making to meet the climate change objectives and announced at COP26 to guide companies on the financial disclosures under the Companies Act 2006. This article will provide;
A brief overview of The Regulations
Who will it apply to?
What is required to be disclosed
Where will it be disclosed
At COP26 the United Kingdom announced its intention for the UK to be the world’s first net zero aligned financial center, it is the first country in the G20 to incorporate the Taskforce on Climate-related Financial Disclosure recommendations into its national regulations.
Leading up to COP26, the UK government released some updates on the new regulations, in particular “The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021”.
The regulations mean the UK will become the first G20 Country to make it mandatory for the largest businesses to disclose climate related financial information.
On 28 October 2021, the UK government released a draft of The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 (“the Regulations”) will be integrated into the Companies Act 2006.
Subject to approval by resolution of each House of Parliament, the Regulations will come into force from 6 April 2022.
Brief overview of the Regulations
The Regulations follow the UK government’s consultation that was launched in 2021. The Regulations will broaden the scope of existing disclosure rules that require a particular group of big companies to disclose non-financial information.
The changes will require large companies and financial institutions in the UK to disclose their climate-related financial information in line with the recommendations of the Task Force on climate related Financial Disclosure (TCFD) and will apply to qualifying companies on a mandatory basis.
The TCFD set out a roadmap towards the coverage of disclosures increasing each year as potential new regulatory and legislative measures come into force.
The roadmap provides a strategic roadmap on seven categories of organisation, further information on the TCFD’s recommendations can be found here.
Regulation 4 inserts s 414CB(2A) into the Companies Act 2006 which defines climate related financial disclosures. It also recognises the instances in which companies obligated to disclose climate-related information may be exempted from doing so.
Regulation 5 gives the Secretary of State the power to review the Regulations before 6 April 2027 and in intervals of 5 years thereafter.
Who will it apply to?
From 6th April 2022 over 1300 of the largest UK registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis.
The regulations will cover banks, insurers, and private companies with over 500 employees and GBP500 million ($685 million) in turnover.
The requirement to disclose climate-related financial information will apply to traded companies, banking companies, authorized insurance companies, any insurance companies carrying out market activity, and large LLPs with more than 500 employees.
Additionally, Regulation 3 also requires companies which have securities admitted to trading on the Alternative Investment Market and those with a high turnover of over £500 million within the same financial year to make climate-related financial disclosures.
What is required to be disclosed?
Regulation 4, which is set to amend s. 414CB of the Companies Act 2006 sets out the necessary climate-related financial information to be disclosed 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 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;
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 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.
Where will it be disclosed?
Companies required to disclose climate-related financial information will have to do so within their strategic report under the Non-Financial and Sustainability Statement or in the Energy and Carbon Report for LLPs that do not prepare a strategic report.
There are also guides produced by the Financial Reporting Council (FRC) on the analysis and current approaches to disclosure requirements.
The guide looks into the governance and management issues, business model and strategy, risk management and metrics for targets to meet the climate related reporting requirements.
The Financial Conduct Authority (FCA) issued a rule effective for periods beginning on or after 1 January 2021, for UK premium listed companies to report against TCFD on a “comply or explain” basis.
Further information on the FCA’s disclosure requirements for climate related disclosure can be found here. The FCA announced at COP26 an ESG Strategy.
The strategy sets out their target outcomes and actions they expect to deliver, including the transition to net zero.
There appears to be a lack of consensus as to whether the disclosure requirements will provide investors, regulators and other stakeholders with sufficient information to assess climate related risks or whether the information that is being gathered will be sufficient to make an impact.
The UK government has confirmed that disclosures would be limited to material information, despite feedback from participants to provide directors with flexibility to take into account the nature of the business and how it is conducted.
The regulatory proposals are currently in draft format awaiting parliamentary approval. There is no doubt, the global economy requires a transition to rapidly decarbonise that implicates the investment, business and finance communities.
Moving companies away from potentially unaddressed climate risks will take a multi-level approach. The proposed regulatory changes are a step into the direction to move capital away from activities with climate risks towards a low carbon economy and support Green Economy growth activity.
The proposed regulation is a step in the right direction, how the changes will be implemented or what impact the regulatory changes will bring are yet to fruition, continual analysis and feedback from those impacted by these regulations will be required.
The UK’s commitment to climate change is exemplary as the first G20 country to implement the mandatory Taskforce on Climate-related Financial Disclosure into national law.
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