TCFD reporting as part of the Non-Financial Report

TCFD disclosures would impact all UK Public Interest Entities (PIEs) already in the scope of the UK's Non-Financial Reporting Directive (NFRD) implementing legislation. It would also cover AIM-registered companies with more than 500 employees, as well as unlisted UK companies and LLPs with more than 500 employees and a turnover of more than £500m. It is proposed that groups may report on a consolidated basis and the scope thresholds would apply at group level. Subsidiaries which themselves are in scope due to their size are not expected to have to report independently if they are included in the group report.

The proposals will therefore impact a much higher number of organisations than if the UK had followed the EU in requiring climate reporting for NFRD organisations only (SFDR requirements aside) - the Taxonomy Regulation requires organisations within the scope of the NFRD to report the extent of their activities' Taxonomy alignment (please see our related briefing here) but this would not, currently at least, impact non-listed entities. The EU is, however, expected to amend the NFRD which may bring non-listed companies into scope.  

The TCFD climate disclosure will form part of the non-financial information statement in the Strategic Report, or in the Streamlined Energy and Carbon Report (SECR) which forms part of the Annual Report (SECR may be subject to consequential amendments through the TCFD legislation to reduce overlap and inconsistency). Precise reporting deadlines are expected to be driven by organisations' accounting periods rather than a fixed date determined by the legislation.

The proposals aim to increase both the quantity and quality of climate-related disclosures. Behind the disclosures, the Government expects entities to use the reporting not as a check-box exercise but as a trigger for climate risk assessment and reflection of the entity's climate impact, with a view to future improvement. It is not yet clear whether historical reporting will be required, to demonstrate that the entity is following the right trajectory.

Unlike the EU, which has started from a blank page in drafting its sustainability disclosure requirements under the SFDR and Taxonomy Regulation, the UK adoption of TCFD recognises that TCFD is already widely used in voluntary disclosure programmes and as such, the value of TCFD disclosures has already been proven. TCFD lacks the high degree of granularity present in the SFDR, rather disclosures focus on four core pillars: governance, strategy, risk management, metrics and targets. All four will have to be disclosed against in the entities' reports, but reporting of the further 11 voluntary recommendations is not required (note that this further reporting will be required on a comply-or-explain basis for companies with a premium listing, under the FCA listing rules). Even though not technically required, organisations are likely to find it helpful to review the voluntary disclosure recommendations to get at least a feel for how and what to report under the four main recommendations.

The consultation also acknowledges that the existing SECR requirements will result in data collection and reporting practices useful for TCFD reporting. The Government is considering whether to align SECR requirements for quoted companies and unquoted companies/LLPs, with the latter currently under fewer disclosure requirements than the former. If unquoted companies are bound to measure and report all direct emissions under TCFD, it would seem sensible that the same metric should be reported under SECR.

Briefly, the consultation states that the content of the TCFD report will include:

1. Governance: a description of governance arrangements in place to identify and manage risks and opportunities from climate change, who has operational responsibility, and whether climate change is considered by the entity's audit committee, if any.
2. Strategy: a description of the entity's business model and strategy if not disclosed elsewhere, and how it may change in response to climate change.
3. Risk management: a description of principal risks and opportunities relating to transition risk, physical risk and regulatory risks of climate change, and how the company manages them, including risk management and due diligence policies.
4. Metrics and targets: KPIs and targets relevant to the entity's exposure to climate change.

Scenario analysis will be encouraged but not required.

The absence of detailed disclosure metrics in the consultation is in contrast to recent developments around TCFD disclosures for the pensions sector. The Department of Work and Pensions published draft regulations in January which will introduce new duties for UK pension scheme trustees to report in line with TCFD. The draft Regulations, however, specify that the report must include an absolute emissions metric, an emissions intensity metric and an additional climate change metric. It is possible that the draft regulations which follow the present TCFD/non-financial reporting consultation will be more specific as to the metrics required to be disclosed, but there is no indication currently that they will be so prescriptive. It is proposed that BEIS produce guidance in the form of non-mandatory Q&As to support companies and LLPs in their application of the proposed requirements.

Reporting will be monitored by the FRC, which will not have any new enforcement powers, meaning that enforcement is likely to be light-touch in the same way as it is for existing reporting obligations.

The consultation document also reaffirms that the Government intends to implement a green taxonomy. Conspicuous by its absence is any reference to the relationship between the nascent UK taxonomy and the taxonomy which the EU has been working on intensively for the last few years. Chancellor Rishi Sunak said back in November 2020 that the UK taxonomy would take the scientific metrics established in the EU taxonomy as its basis, to be reviewed by a UK Technical Advisory Group to ensure fitness for the UK market. This fact is not expressly confirmed by the TCFD consultation, but it is inferred that the UK will use the EU's technical screening criteria, improving and adding to them on the advice of the Advisory Group.

This could result relatively quickly in a two tier system – as soon as there is any divergence between EU and UK standards, thresholds or other quantitative or qualitative requirements in the screening criteria, any business with activities in both the UK and the EU will be forced to revisit any "Taxonomy aligned" statements and any who are in the scope of both regimes (whether as PIEs or financial market participants) will have to assess their activities under both. The consultation states that the Government will "continue to align work in these areas where suitable and will seek to align obligations where possible", which is unlikely to provide much certainty or indeed comfort. The Government is currently expected to bring into force UK-specific technical screening criteria by 1 January 2023 for climate change mitigation and adaptation, and by 1 January 2024 for the remaining environmental objectives.

The consultation is open until 5 May 2021. Regulations are expected to be made before the end of 2021, to enter into force on 6 April 2022. The requirements are provisionally to apply to accounting periods starting on or after this date.

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