The Consultation

The proposal subject to the Consultation is to require certain publicly quoted and large UK companies and limited liability partnerships (“LLPs”) (further detailed below) to disclose climate-related financial information in line with the four overarching pillars of the TCFD: Governance, Strategy, Risk Management, and Metrics and Targets.¹

If, following the Consultation, the UK Parliament approves the plan to enact these statutory disclosure requirements, the changes will be implemented through a statutory instrument which is expected to be made by the end of 2021 and to come into force on 6 April 2022, meaning the new regulations would be applicable to the relevant companies and LLPs with respect to accounting periods starting on or after 6 April 2022.

Background to the Consultation

In June 2019, the UK became the first major economy to legislate that all greenhouse gas emissions should be brought to net zero by 2050. In July 2019, the UK government published its Green Finance Strategy, where it set out an expectation that all listed companies and large asset owners would disclose in line with the TCFD recommendations by 2022. The UK government noted that one of the tools for “greening” the financial system is high-quality disclosure by organisations. The aim of such disclosure is to ensure investors and other market participants have the information they need to adequately understand and manage climate-related financial risks and opportunities to support the transition to net zero, including by ensuring they are in a position to compare different organisations’ exposure to climate-related risk. The UK government also hopes that more widespread climate-related disclosures will help influence behaviours of the disclosing organisations and their stakeholders.

Based on the current voluntary disclosure framework in the UK (as further described below), the UK government has determined that disclosure levels are still low, with only around one third of premium-listed companies making the relevant reports,² and that many organisations are not voluntarily disclosing against all four pillars of the TCFD recommendations. In order to increase the quality and quantity of the TCFD disclosures, the UK government has concluded that the UK should require mandatory TCFD-aligned disclosures by certain publicly quoted companies, large private companies and LLPs, as further detailed below. This follows a supervisory statement issued by the Prudential Regulation Authority of the Bank of England in 2019 which sets out its expectation that UK banks, building societies, and insurance and reinsurance firms and groups will consider disclosures to enhance transparency in their approach to managing the financial risks from climate change.

The use of the TCFD framework in voluntary disclosures is now relatively widespread. In its latest status report, the TCFD reports that 1,500 organisations globally now support the TCFD, including over 1,340 companies with a market capitalization of $12.6 trillion and financial institutions responsible for assets of $150 trillion; furthermore, over 110 regulators and governmental entities support the TCFD, including the governments of Canada, Chile, Belgium, France, Japan, New Zealand, Sweden and the UK. The European Commission described the TCFD recommendations as “widely recognised as authoritative guidance on the reporting of financially material climate-related information”.³ In light of its increasingly widespread uptake, BEIS considers it appropriate to base the proposed new requirements on the TCFD’s four pillars.

Proposed Disclosure Obligations

Under the proposal subject to the Consultation, companies will be required to include climate-related financial information in the non-financial information statement forming part of their Strategic Reports, while LLPs will be required to report in either the non-financial information statement forming part of their Strategic Report or in the Energy and Carbon Report which forms part of their Annual Report.

The proposed disclosures that relevant companies and LLPs will be required to make cover the following areas:

1. Governance

• A description of the governance arrangements in place to identify and manage risks and opportunities arising from climate change;
• Who has operational responsibility for climate change, including the experience of that executive or committee; and
• If the company has an audit committee, whether climate change is a matter considered by the company’s audit committee.

2. Strategy

• A brief description of the company’s business model and strategy (to the extent that the company is not already required to report such information); and
• A description of how the company’s business model and strategy may change in response to effects relating to climate change, and the trends and factors that affect this change.

3. Risk Management

• A description of the principal risks and principal opportunities, including material financial risks and opportunities, relating to transition risk, physical risk and regulatory risk arising from climate change which may affect the business and a description of how the company manages those areas of risk and opportunity including:
  • a description of its business relationships, products and services which are likely to cause adverse impacts in those areas of risk, and
  • a description of how it manages the principal risks, and
• A description of the risk management policies pursued by the company in relation to climate change, any due diligence processes implemented by the company in pursuance of those policies and a description of the outcome of those policies.

4. Metrics & Targets

• A description of the key performance indicators relevant to the entity’s exposure to climate change risk and opportunity, and the targets set by the business for those key performance indicators. “Key performance indicators” means factors by reference to which the development, performance or position of the company’s business, or the impact of the company’s activity, can be measured effectively.

Scenario analysis⁴ will be encouraged, but will not be required, with BEIS recognising that this is among the more challenging of TCFD’s recommendations to implement.

The Consultation does not intend for the new regulations to introduce new sanctions for failure by organisations to comply, nor does BEIS plan to bring in new monitoring or enforcement powers. Instead, the existing enforcement provisions and sanctions applicable to companies and LLPs under existing legislation and regulations will continue to be applicable to companies, their directors, LLPs and their members for a failure to prepare or file the relevant reports.

Organisations Affected by the Consultation

The proposed disclosure requirements will be applicable to:

• all UK companies that are currently required to produce a non-financial information statement,⁵ being UK companies that have more than 500 employees and have transferable securities admitted to trading on a UK regulated market, banking companies or insurances companies (i.e., Relevant Public Interest Entities with more than 500 employees (“PIEs”));
• UK registered companies with securities admitted to the Alternative Investment Market (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 £500 million; and
• LLPs which have more than 500 employees and a turnover of more than £500 million.

Reporting would be at the group level on a consolidated basis and the employee size and turnover thresholds which determine applicability of the disclosure requirements would also apply on a consolidated basis. BEIS’s rationale for this scope is to ensure that PIEs and organisations with more than 500 employees that are both economically and environmentally significant to the economy are subject to the mandatory reporting so that their exposure to climate-related risk can be better understood and assessed.

Implications for UK Companies and LLPs

In December 2020, the UK Financial Conduct Authority (“FCA”) published a policy statement introducing a new listing rule (applicable for accounting periods beginning on or after 1 January 2021) which requires commercial companies with a UK premium listing to include a compliance statement in their annual financial report stating whether they have made disclosures consistent with the TCFD’s “four pillars” and “11 recommendations”⁶ and, if they have not, to explain why they have not done so (the “comply or explain” approach).⁷ UK premium listed companies are those listed on the London Stock Exchange with a minimum free float of 25% and with 75% of business supported by a revenue earning record of three years,⁸ and which are required to meet the UK’s highest standards of regulation and corporate governance.⁹ Importantly, the Consultation does not go quite as far as the FCA did, and relevant companies and LLPs the subject of the Consultation will not be required to disclose in line with the 11 recommendations of the TCFD, simply in accordance with the “four pillars”. BEIS considers that the proposed changes subject of the Consultation will be complementary to the FCA Listing Rules and would represent “a tiering between premium listed companies and those subject to proposed BEIS requirements”.¹⁰

Premium listed companies will already be subject to the newly introduced FCA listing rule and will, by now, be familiar with, and have the systems and mechanisms in place which will enable them to comply with, the new regulations proposed by the Consultation. However, a number of large organisations, including private companies and LLPs, are likely to fall within the scope of mandatory climate reporting for the first time as a result of the BEIS Consultation. It is important for those organisations to determine whether they are likely to be captured by the proposed new requirements, and if so, over the next few months, these organisations will need to put the appropriate mechanisms in place to enable them to track climate metrics and report them in the appropriate manner. This is likely to require significant adjustment, training and resources, and it is important that these organisations begin making preparations as soon as possible.

Organisations that fail to comply will face sanctions under existing legislation, including the Companies Act 2006, but, importantly, they are also likely to face pressure from shareholders, investors and other key stakeholders to comply. BEIS intends to produce non-mandatory Q&As in due course to support companies and LLPs as they navigate and implement the new requirements.

If finalised, a mandate from BEIS for TCFD-aligned disclosures would mark the third UK regulatory authority to require such alignment and would make the UK the first G20 country to make TCFD-aligned disclosures mandatory across the economy. As the adoption of requirements for TCFD-aligned disclosures grows in Europe, the corporate and financial regulators in the United States are simultaneously considering how to address climate risk in disclosures. In particular, the U.S. Securities and Exchange Commission is currently seeking comment on a broad array of topics including the potential role of third-party organisations, such as the TCFD, in setting U.S. disclosure standards, and the importance of international standardisation. What is clear is that the TCFD is emerging as the international paradigm for climate-related disclosures, and is beginning to be reflected in regulations. It will be interesting to see whether the U.S. adopts TCFD-aligned disclosures as well, in line with the UK government’s renewed commitment to mandatory climate-related disclosures.

¹ Task Force on Climate-related Financial Disclosures, ‘Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures’ (June 2017), https://www.fsb-tcfd.org/recommendations/.

² HM Treasury, Interim Report: Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce (November 2020), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/.

³ European Commission, No. C(2019) 4490 final, ‘Guidelines on non-financial reporting’ (2019), https://ec.europa.eu/finance/docs/policy/190618-climate-related-information-reporting-guidelines_en.pdf.

⁴ Climate Disclosure Standards Board, ‘The Use of Scenario Analysis in Disclosure of Climate-related Risks and Opportunities’, https://www.tcfdhub.org/scenario-analysis/.

⁵ Encompassing all English, Scottish, Welsh and Northern Irish companies that are subject to the Companies Act 2006 and that are subject to the requirements under section 414CA of the Companies Act 2006.

⁶ Task Force on Climate-related Financial Disclosures, ‘Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures’ (June 2017), https://www.fsb-tcfd.org/recommendations/.

⁷ Financial Conduct Authority, ‘FCA introduces rule to enhance climate-related disclosures’ (21 December 2020), https://www.fca.org.uk/news/news-stories/fca-introduces-rule-enhance-climate-related-disclosures.

⁸ https://www.londonstockexchange.com/raise-finance/equity/compare-markets-listing-equity?lang=en.

⁹ London Stock Exchange, Compare markets for listing equity, https://www.lseg.com/markets-products-and-services/our-markets/london-stock-exchange/.

¹⁰ Department for Business, Energy & Industrial Strategy, ‘Consultation on requiring mandatory climate-related financial disclosures by publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs). (March 2021), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/.