Corporate

Are you ready for mandatory TCFD reporting in the UK?

Published on 18th Mar 2022

The UK government has published guidance to help companies prepare climate-related financial disclosures

The UK has begun a programme of making it mandatory for a range of entities to report on their climate-related risk in line with the recommendations of the global Taskforce on Climate-related Financial Disclosures (TCFD). This is a coordinated action by the government and financial sector regulators who are rolling out TCFD-aligned reporting for asset managers and owners, including pension funds.

For commercial businesses, the government started with listed companies: commercial companies with a UK premium listing became subject to TCFD-aligned reporting for accounting periods beginning on or after 1 January 2021 and the first annual reports including mandatory TCFD disclosures are expected in spring 2022.

This was extended to issuers of standard listed shares and Global Depositary Receipts (GDRs) representing equity shares, for accounting periods beginning on or after 1 January 2022 and so we will see their first annual reports with TCFD disclosures in spring 2023. 

The next phase of roll out is for large businesses and will apply for accounting periods beginning on or after 6 April 2022. The Department for Business, Energy and Industrial Strategy (BEIS) has recently published guidance for businesses who are having to make mandatory TCFD-aligned disclosures.

What does the guidance cover?

The guidance is non-binding and can be found here. It contains answers to some commonly asked questions to help in-scope companies. It also contains a non-exhaustive list of further guidance provided by other bodies related to the TCFD recommendations. 

Which entities are in scope?

The following entities will fall within the scope of the new disclosure requirement:

  • Relevant Public Interest Entities (PIEs) – 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 (as defined in section 1173 Companies Act 2006), banking and insurance companies;
  • UK registered companies with securities admitted to AIM with more than 500 employees;
  • UK registered companies which are not included in the categories above and have more than 500 employees and turnover of more than £500 million; and
  • Limited liability partnerships (LLPs) which have more than 500 employees and turnover of more than £500 million.

The size thresholds are intended to engage the most significant companies, in economic and environmental terms, in analysing and disclosing their climate-related risks and opportunities.

Corporate groups

Companies are expected to report at the group level (or at the company level if not included within consolidated group reporting). If a parent company does not prepare consolidated accounts, the disclosures should relate to the parent company, including how climate-related risks and opportunities may affect the value of the investment in its subsidiaries. Any parent company must report on the global operations of the group. 

Where a UK company has an overseas parent which reports on a consolidated basis, the UK company is required to comply separately with the disclosure requirement.

Where must the disclosures be made?

Companies will be required to report climate-related financial information in the Non-Financial Information Statement (NFIS, renamed as the Non-Financial and Sustainability Information Statement (NFSIS)), which forms part of the Strategic Report. 

LLPs will be required to report in either their Strategic Report (if they prepare one) or the Energy and Carbon Report, which forms part of their Annual Report.

It is not necessary for all of the information to be located within the NFSIS, but if included elsewhere in the Annual Report and Accounts, the NFSIS must include a specific cross reference.

There is no prescribed format for the climate-related disclosures.

What needs to be covered by the disclosures?

The following information on climate related risks and opportunities must be disclosed: 

Item Summary of key guidance
Governance arrangements in relation to assessing and managing risks and opportunities
  • Set out which person or committee has the responsibility for identifying and considering the risks and opportunities, and detail frequency of consideration, and who has responsibility for managing those risks and opportunities.
  • Detail extent to which these are considered by the Board. 
  • If no oversight by directors, this must be stated. 
Method of identification, assessment, and management of risks and opportunities
  • Detail systems and processes.
  • Clarify if these tasks are done at subsidiary level and reported up, or only at group level. 
  • Detail frequency of risk identification exercise.
  • Help assess the likely completeness of the disclosures.
How processes for identifying, assessing, and managing risks are integrated into the overall risk management process
  • Explain the extent to which climate-related risk is integrated into the overall approach to risk management or whether the identification, assessment and management of climate-related risks are subject to separate processes and procedures.
  • Clarify the maturity of the approach adopted, the level of resource that has been assigned to understanding this systemic risk and whether process changes are likely to occur in the future.
The principal risks and opportunities of the business and the time periods by reference to which those risks and opportunities are assessed
  • Consider all relevant time horizons, not just those that are usually considered for budgetary, strategy or planning purposes.
  • Detail the risk or opportunity posed by climate change and the potential effect of that risk or opportunity on the business together with the mitigations that a business has already put in place or is planning for.
  • Disclose the likely time periods over which the risk or opportunity is expected to crystallise.
  • Categorise risks and opportunities into short term, medium term and long term.
  • Distinguish between physical risks (such as increased extreme weather) and transition to net zero risks. The guidance provides detailed notes and examples on these. 
The actual and potential impacts of the principal risks and opportunities on the business model and strategy
  • Principal climate-related risks identified above are those which have the potential to have a significant negative or positive impact.
  • Any description of the actual and potential impacts should be as granular as is necessary to understand the impact of crystallisation of that risk (the guidance gives detailed examples).
  • Consider both the actions that are being put in place now and contingency plans for actions which may be taken in the future.
Analysis of the resilience of the business model and strategy, taking into consideration of different climate-related scenarios (for example, percentage of global temperature increase; gradual versus immediate emissions reduction) 
  • Select scenarios which are most relevant to the business (having regard to risks and opportunities to which it is exposed) but which are sufficiently varied to cover a range of future outcomes.
  • Explain which scenarios have been chosen, the source of the scenario, the effect on the business (including when mitigations are adopted) and why that particular scenario has been chosen.
  • Disclose assumptions and estimates that underpin the analysis.
  • Analysis should be qualitative and should be reviewed at least every three years or on a material change in assumptions.
  • Disclose resilience in the various scenarios – this can focus on key parts of the business only initially.

This analysis exercise will be new to many businesses, so there will likely be significant divergence in methodology, assumptions and estimates. The TCFD has published guidance on scenario analysis.

The targets used to manage risks and to realise opportunities,  performance against those targets, the key performance indicators used to assess progress against targets and a description of the calculations on which performance indicators are based
  • Explain the target, including the relevance of the targets to the future operations.
  • Include a timeframe over which the business intends to meet those targets and detail how it monitors and assesses progress.
  • Link targets to risks and impacts identified.
  • Disclose the reason for any key performance indicator (KPI) change together with an explanation why the new KPI is more effective than previous measurements.

What level of detail does the disclosure need? 

Disclosures must enable the reader to understand: 

  • the effect of climate-related financial risks and opportunities on the business;
  • the information presented without needing to refer to other sources of information; and
  • how the disclosures relate to the other information presented in the Annual Report,

and should not omit information which, if disclosed, would influence the decisions of investors.

Who has the legal duty to make the disclosures? 

A business may choose to make use of third party information to help them assess the climate-related risks but the legal duty to make the disclosures will remain with the directors.

What are the penalties if an entity does not comply?

The Financial Reporting Council has the power to monitor strategic reports and to request that a court order the preparation of revised documents.

How do the requirements interact with other regulations and frameworks?

The guidance describes how the reporting requirements for large businesses interact with the Financial Conduct Authority's Listing Rule on TCFD disclosures, reporting requirements for occupational pensions schemes, Streamlined Energy and Carbon Reporting, financial statements and standards, and the development of International Sustainability Disclosure Standards. 

UK registered premium or standard listed companies which disclose against the TCFD recommendations and recommended disclosures on a “comply or explain” basis, as required by the Listing Rules, and which are also PIEs, will likely comply with the new requirements  for large businesses too.

Will the disclosures make a difference?

The TCFD suggests that widespread adoption of its Recommendations: "will ensure that the effects of climate change become routinely considered in business and investment decisions" and will "also help companies better demonstrate responsibility and foresight in their consideration of climate issues" leading to "smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy."

Osborne Clarke comment

The disclosures are a forwards step  towards encouraging decarbonisation, but the disclosures will only be as good as the exercise undertaken to properly understand climate issues in an organisation. There is a risk that this becomes a somewhat mechanical exercise rather than encouraging businesses to really reflect on how they can make a meaningful difference to net zero. 

For large businesses that will be required to report for accounting periods on or after 6 April 2022, it is important that they implement procedures for gathering the information and data that will allow them to provide clear and accurate TCFD-aligned disclosures. 

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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