New mandatory TCFD reporting for more UK companies

Certain public companies, large private companies and LLPs will have to disclose climate-related financial information in line with the four overarching pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets) on a mandatory basis.  For many in-scope companies, this will be an entirely new disclosure.

Under the FCA's Listing Rules, premium listed companies are already required, for financial years beginning on or after 1 January 2021, to make disclosures in accordance with the TCFD recommendations on a "comply or explain basis" and the FCA has consulted on extending this to standard listed companies and to asset managers, life insurers and FCA-regulated pension providers.

Whereas the Listing Rules disclosures include the four pillars and the associated eleven recommended disclosures, the new requirements in the draft regulations focus on (but do not entirely map) the four pillars and do not cover all eleven recommended disclosures. We therefore anticipate that, where a listed company is complying with the TCFD disclosures under the Listing Rules, it should not need to include any further disclosures in its strategic report as a result of the new legislation. Another difference is that the Listing Rules allow companies to provide explanations of non-disclosure for reasons other than immateriality, for example where the underlying data is not available. By contrast, under the new legislation, all material disclosures are required to be made, and explanations of non-compliance may be provided only where a disclosure is not material (see Is there a materiality threshold for disclosure? below).

The new requirement will apply to:

• 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 either transferable securities admitted to trading on a UK regulated market (such as the LSE's main market), or are banking companies or insurance companies;
• UK AIM companies with more than 500 employees;
• UK companies which are not included in the categories above and have more than 500 employees and a turnover of more than £500m; and
• LLPs which have more than 500 employees and a turnover of more than £500m.

The term "employees" in this context is not limited to UK employees. Where the company is a parent company, the threshold refers to the aggregate number of employees in the group.

Subject to Parliamentary approval, the new requirement will come into force on 6 April 2022 and will apply to accounting periods starting on or after that date.

For companies, the disclosures will be in the strategic report. For LLPs they will be in what is currently called the non-financial information statement ("NFIS") of the strategic report. The Government's response confirms that reporting will be at the group level on a consolidated basis.

There are two key changes to the original proposals: (i) a qualitative scenario analysis will now be required; and (ii) the Government states that it is more closely aligning the regulations to the language used in the TCFD recommendations themselves (although draft regulations were not included in the original consultation). The required disclosures are:

• 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 (i) the principal climate-related risks and opportunities arising in connection with
• the company’s operations, and (ii) 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.

There will be two sets of regulations: one for companies and one for LLPs. The Government has published the draft Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 which have been laid in Parliament. These regulations will be made when they have been debated in, and approved by, Parliament, and will be implemented through changes to the Companies Act 2006. The LLP regulations will be made and then laid before Parliament once the company regulations have been approved.

The regulations provide for a company’s directors to have flexibility, taking account the nature of the business and how it is conducted, to omit all or part of some of the climate-related disclosures required where they consider that the whole or part of a required disclosure is "not necessary for an understanding of the company’s business". The Government states that this "materiality filter" will apply specifically to disclosures made under the Strategy and Metrics and Targets elements of the TCFD recommendations. Where some or all of the disclosures are omitted, the directors must offer a clear and reasoned explanation as to why.

The Government states that it had mixed feedback on this issue but remains of the view that there is no need to alter the role of auditors specifically in relation to climate-related disclosures. It confirms that it will be publishing in due course its response to its consultation on "Restoring trust in audit and corporate governance", which contained proposals to enhance the role of auditors more generally.

The Government states that it intends to publish guidance to help companies comply with the new disclosure requirement in due course. However, although not published specifically in connection with this new requirement, there have been some useful recent publications on making disclosures in accordance with the TCFD recommendations. These include:

• a report published by the FRC's Financial Reporting Lab, which offers practical guidance to listed companies on how to provide better disclosure and gives examples of good practice by companies already reporting voluntarily on climate-related risks and opportunities in line with the TCFD recommendations;
• guidance from the London Stock Exchange to support best practice and to educate companies on how they can implement the TCFD recommendations. The guidance is addressed to companies on the LSE's markets, regardless of size or sector; and
• TCFD guidance on metrics, targets, and transition plans.