Size matters – guidance on climate-related disclosures for large companies and LLPs

The guidance confirms that entities in scope are:

• UK companies that
  • (a) have more than 500 employees; and
  • (b) either (i) have transferable securities admitted to trading on a UK regulated market or (ii) are banking companies or insurance companies;
• UK AIM companies with more than 500 employees;
• other UK companies (public or private) which have (a) more than 500 employees; and (b) a turnover of more than £500m;
• LLPs (other than traded or banking LLPs) which have (a) more than 500 employees; and (b) a turnover of more than £500m; and
• traded or banking LLPs which have more than 500 employees.

The new requirements, set out in the Companies (Strategic Report) (Climate-related Financial Disclosures) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (the "Regulations"), apply to financial years beginning on or after 6 April 2022. The Regulations require entities to make disclosures aligned with the recommendations issued by the International Task Force on Climate-related Financial Disclosures ("TCFD recommendations"). The disclosures are based on the TCFD recommendations but have been adapted to make them suitable for inclusion in UK legislation.

Companies should include the disclosures in the renamed Non-Financial and Sustainability Information Statement (NFSIS) (previously the Non-Financial Information Statement), which forms part of the strategic report. If some of the information is located elsewhere in the company's annual report, the NFSIS should include a specific cross-reference to the relevant location.

LLPs should include disclosures in their Energy and Carbon Report or, if a strategic report is prepared, within that report.

Listing Rules

Premium-listed companies and standard-listed companies are already required to make TCFD disclosures under the Listing Rules. As mentioned in our previous client note, the two regimes are slightly different – the Listing Rules directly reference the TCFD recommendations and recommended disclosures, whereas the Regulations set out disclosures that are broadly aligned with the TCFD recommendations but do not directly reference them. A UK registered listed company is subject to both sets of requirements, and the assumption is that if it complies with the Listing Rules requirements, it will also be complying with the Regulations. Please see "Listed companies: FCA guidance" for further details. It is worth noting that listed investment entities are excluded from not caught by these Listing Rule requirements and unlikely to be within scope of or the Regulations.

Streamlined Energy and Carbon reporting (SECR)

The Regulations complement, but do not duplicate, SECR. Entities already assessing and reporting their climate impact, via carbon emissions and energy usage under SECR, may have something of a head start when tackling their TCFD report, but the governance and strategic elements are still likely to require considerable effort.

Group vs subsidiary

The guidance confirms that:

• companies are expected to report at the group level, if they are included within consolidated group reporting;
• where a parent company does not produce consolidated accounts, the thresholds should be applied to the aggregated turnover and employee figures of the group and the climate-related financial disclosures should relate to the parent; and
• where a parent company does not produce consolidated accounts and a subsidiary is within scope on an individual basis, the subsidiary should also make climate-related financial disclosures in its individual accounts.

These principles are aligned with the treatment of group companies in respect of SECR.

Global vs UK operations

The top UK parent of a UK group should report on the global operations of that group, regardless of the jurisdiction of incorporation of the subsidiary though which the activities are conducted.

Overseas parent company

An exemption will apply if the subsidiary is included within consolidated reporting where the parent is a UK company. However, the exemption will not apply if the UK company has an overseas parent.

Consequences of failure to comply

The FRC is responsible for monitoring the contents of strategic reports (which will, going forward, include the climate-related financial disclosures) and could ultimately make an application to the court for a declaration that the accounts of a company do not comply with the legal requirements. Misstatements in the climate disclosures would also be noted by the company's auditors. However, stakeholder pressure is likely to be one of the strongest drivers of compliance.

Reliance on third party information

In-scope entities may choose to make use of information generated by a third party in order to help them assess the climate-related risks (the example given being contracting with a data provider to support the assessment and disclosure of physical risks for certain assets or infrastructure). However, this does not alter the legal duty of the directors to make the disclosures.

Format and level of detail

There is no prescribed format for the disclosures. The key is to enable a reader to understand the effect of climate-related financial risks and opportunities on the business. The information should be capable of being understood without referring to other sources and should contain all information which, if disclosed, would influence the decisions of investors. The less prescriptive approach under TCFD is somewhat in contrast to financial disclosure regimes, such as the EU's Sustainability Finance Disclosure Regulation, where, arguably, highly standardised information more clearly facilitates side-by-side comparisons of potential investments.

The table below indicates the sort of information which should be provided in relation to each of the eight disclosures. In relation to the highlighted items below, there is a discretion to omit some or all of the disclosure requirements. In such a case, directors must provide a clear and reasoned explanation for the omission.

Premium-listed commercial companies are already grappling with TCFD reporting, having been subject to the requirement for financial years starting on or after 1 January 2021. The requirement has been extended to standard-listed companies for financial years starting on or after 1 January 2022. The FCA has recently published the final text of its technical note, TCFD aligned climate-related disclosure requirements for listed companies, which clarifies the following:

• When providing the reasons for not including certain disclosures in their annual report, listed companies should provide full, clear and meaningful explanations which are written in plain, unambiguous language.
• Where a listed company provides details of any steps it is taking, or planning to take, in order to be able to make those disclosures in the future, and the associated timeframe, it should provide a sufficient level of detail so that investors and stakeholders can fully understand the nature of the proposed action.
• Where a listed company states in its compliance statement that it has made climate-related financial disclosures that are consistent with the TCFD recommendations, these disclosures should include sufficient, company-specific information to support decision-making by investors.
• While listed companies may seek the views of third parties (including external auditors and other advisers) when compiling and reviewing the climate-related financial information, ultimately it is the company who, using its knowledge of the company’s actual and expected activities, operating environment and exposure to physical and transition risks, must ensure it complies with the relevant Listing Rules.

The FCA also reminds listed companies that they may be required to make disclosures relating to climate-related and other ESG matters under other provisions of the Listing Rules, the Disclosure Guidance and Transparency Rules, the UK Market Abuse Regulation and /or the UK Prospectus Regulation.