Recent BEIS guidance on climate-related financial disclosures applies to financial years starting 6 April. In-scope entities need to prepare to meet this mandatory compliance requirement
March 16, 2022
Last month, the Department for Business, Energy & Industrial Strategy (BEIS) published its non-binding guidance on ‘Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs.
The purpose of the document is to assist companies and LLPs to understand how to meet the new mandatory climate related financial disclosure requirements under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnership (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (together, the Regulations) which apply to reporting for financial years starting on or after 6 April 2022.
This note briefly discusses the main details of the guidelines.
To whom do these regulations apply
- all UK companies that have more than 500 employees and have either (i) transferable securities admitted to trading on a UK regulated market, or (ii) are a banking or insurance company
- AIM companies with more than 500 employees
- other UK registered companies which have (i) more than 500 employees, and (ii) turnover of more than £500 million
- trading or banking LLPs which have more than 500 employees
- other large LLPs which have (i) more than 500 employees, and (ii) turnover of more than £500 million.
Where do the regulations apply
- England, Wales and Scotland; they will also apply to Northern Ireland by agreement.
Group v subsidiary
- Companies are expected to report at group level; subsidiaries are not required to report separately if within consolidated group reporting
- If the parent company does not produce consolidated accounts, the employee and turnover criteria should be applied to the group and the climate-related financial disclosures should relate to the parent
- If the parent company does not produce consolidated accounts, a subsidiary that is within the scope on an individual basis should make climate-related financial disclosures in its accounts.
- If a UK group is within the scope, the UK parent should report on the global operations regardless of whether the activities are conducted through a UK or overseas subsidiary
- A subsidiary whose activities are reported in the consolidated reporting by the UK parent is exempt from reporting; however, this exemption will not apply to a UK subsidiary with an overseas parent.
Consequences of non-compliance
- The Financial Reporting Council is responsible for monitoring the contents of Strategic Reports and has the power to make an application to the court for a declaration that the Annual Report and Accounts of a company does not comply with the requirements of the Companies Act; the court could order the accounts to be prepared accordingly.
- The auditors would also have the responsibility of noting uncorrected material misstatements in the Auditor’s Report.
Companies and LLPs are both required to disclose the following information regarding climate-related risks and opportunities:
- A description of the governance arrangements for assessing and managing these risks and opportunities
- A description of how such risks are identified, assessed and managed
- A description of how identifying, assessing and managing these risks are integrated in the overall management process
- A description of the (i) principal risks and opportunities arising in connection with the business operations and the (ii) time periods by reference to which those risks and opportunities are assessed
- A description of the actual and potential impacts of these risks and opportunities on the business model and strategy
- An analysis of the resilience of the business model and strategy taking into consideration the risks and opportunities
- A description of the targets used to manage the risks and opportunities and performance against those targets
- The key performance indicators used to assess progress against the risks and opportunities and a description of the calculations on which those key performance indicators are based.
Level of detail
- There is no prescribed format for the disclosures
- The legal duty to disclose the required information lies with the directors
- Disclosures must enable the reader to understand:
- the effect of climate-related financial risks and opportunities on the business without the need to refer to other sources
- how such disclosures relate to the other information presented in the Annual Report and should not omit information that would influence the decision of the investors
- Where information has been omitted because it is not considered necessary for the understanding of the business, the directors must provide a clear and reasoned explanation
- All information required to be disclosed under the Regulations must be included in the Annual Reports and Accounts; if reported elsewhere, it must be clearly sign posted.
Interaction with other disclosure rules
- Since 1 January 2021, premium listed companies are required to make disclosures under the Task Force on Climate-Related Financial Disclosures recommendations (TCFD) pursuant to the Listing Rules
- The Listing Rules further extended the disclosure requirements to standard listed companies (excluding standard listed investment entities and shell companies) from 1 January 2022
- The Financial Conduct Authority (FCA) published new rules on climate change disclosures in its Policy Statement 21/24 (PS 21/24) which applies to certain asset managers, life insurers and FCA-regulated pension providers from 1 January 2022 (a brief discussion can be found here)
- UK companies with more than 500 employees that are within the Listing Rules will be subject to both the Regulations and the Listing Rules. However, as the disclosure requirements in both the Regulations and the Listing Rules have been based on the TCFD recommendations and there being a high degree of consistency between them, it is assumed that complying with one would mean complying with the other
- The disclosure of emission requirements in the Streamlined Energy and Carbon Report for quoted companies complements the Regulations
- The impact of the climate-related risks and opportunities identified by a company or LLP must be considered in accordance with the relevant accounting standards and financial statements.