The government has launched a consultation on introducing mandatory climate-related financial disclosures for publicly quoted companies, large private companies and LLPs, set to come into effect from April 2022
The consultation seeks views on proposals to mandate climate-related financial disclosures by publicly quoted companies, large private companies and limited liability partnerships (LLPs).
These proposals build on the expectation set out in the government’s 2019 Green Finance Strategy, that all listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022.
Although the voluntary disclosure of climate-related financial information has increased in quantity and quality, the government said that ‘now is the time to take regulatory action to support the UK’s transition to net zero and help cement the UK as a global centre of excellence for green finance’.
Changes to the current reporting rules are likely to cost the affected 1,600 businesses and LLPs an estimated £132.9m a year, according to the government’s impact assessment report.
The government expects that the mandatory climate reporting will allow investors to compare the climate credentials of companies as part of their investment decisions, with access to standardised, comparable information from those companies which will allow more informed decisions to be made.
The government plans to use the TCFD’s four pillar framework of governance, strategy, risk management, and metrics and targets as the basis of our disclosure requirements, with adjustments made where necessary to make the requirements coherent with UK company law.
‘Over time, these climate-related financial disclosures will support investment decisions aligned with our transition to net zero, and the increased transparency such disclosures provide will influence the behaviours of companies and their stakeholders,’ said Anne-Marie Trevelyan, minister of state for business, energy and clean growth.
The following entities will have to comply with the disclosure requirements:
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 transferable securities admitted to trading on a UK regulated market, banking companies or insurance companies, including relevant public interest entities (PIEs);
UK registered companies with securities admitted to AIM with more than 500 employees;
UK registered companies which are not included in the categories above, which have more than 500 employees and a turnover of more than £500m;
LLPs with more than 500 employees and a turnover of more than £500m.
Companies will be required to report climate-related financial information in the non-financial information statement which forms part of the strategic report. LLPs will be required to report climate-related financial information in either the non-financial information statement in their strategic report or the energy and carbon report in their annual report.
The non-financial information statement already includes some environmental information, and the proposals expand the required disclosures and provide an explicit requirement to consider climate change.
In terms of the role of auditors, the consultation states: ‘When climate-related risks are financially material for a company, auditors should consider whether and how these should be reflected in a company’s financial statements. It is not our intention here to alter the role of auditors in relation to climate-related financial disclosures.’
The proposed requirements will be monitored and regulated by the Financial Reporting Council (FRC) which will also have enforcement powers to ensure that companies are complying with the new regulations.
Sarah Dunn, ICAEW technical manager said: ‘Climate change is an urgent global issue, so we strongly support efforts to improve the quality and consistency of information that UK companies provide on their climate-related risks and opportunities.
‘The Task Force on Climate-related Financial Disclosures framework provides clarity and consistency for companies and has significantly raised the profile of climate change reporting. We will review the proposals in detail in the coming weeks, with a particular focus on the proposed scope and timetable for implementation of any new mandatory reporting requirements.’
Regulations will be passed through a statutory instrument by the end of 2021, with regulations coming into force on 6 April 2022, and to be applicable for accounting periods starting on or after that date.
The proposals have been developed in cooperation with the Treasury-led TCFD, which has considered an approach to economy-wide mandatory climate-related financial disclosure, as set out in the 2020 Roadmap and Interim Report. The proposals are an important step towards the UK’s intention to become the first G20 country to make TCFD-aligned disclosures mandatory across the economy as set out by the Chancellor on 9 November 2020.
The closing date for comment is 5 May 2021.