The new rules are likely to have particular implications for UK public companies listed outside the UK (particularly on the NYSE or NASDAQ) or on AIM, large UK subsidiaries of multinational corporate groups and large portfolio companies of financial sponsors that have a UK topco structure, where the new rules may require them to grapple with climate-related financial reporting for the first time.
The required disclosures are aligned to the four overarching pillars of the Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), being Governance, Strategy, Risk Management, Metrics & Targets.
We answer below some of the key questions raised by the new rules.
Who will the rules apply to?
- All UK companies that are currently required to produce a non-financial information statement, being UK companies that have (a) more than 500 employees and (b) either securities admitted to trading on a UK regulated market (like the main market of the London Stock Exchange), or are banking companies or insurance companies (Relevant Public Interest Entities);
- UK registered companies with securities admitted to trading on 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; and
- LLPs which have more than 500 employees and a turnover of more than £500m.
Category 3 will pick up, among others: (a) UK public companies listed on NYSE or NASDAQ; (b) UK subsidiaries of multinational corporate groups; and (c) portfolio companies of private equity sponsors and other financial investors that have a UK topco structure, which, in each case, have more than 500 employees and a turnover of more than £500m.
When assessing whether the employee threshold is met, you look at the aggregate number of (UK and overseas) employees employed by the UK company and its (UK and overseas) subsidiaries. When assessing whether the turnover threshold is met, you look at the consolidated turnover of the UK company and its (UK and overseas) subsidiaries.
There are limited exceptions where the UK company in question is a subsidiary of another UK or EEA company and certain conditions are satisfied.
The UK Government expects that approximately 1,300 UK companies will be in-scope, which will be a significant increase to the approximately 200 UK companies that currently refer to the TCFD framework in their annual report and accounts on a voluntary basis.
When will the rules come into force?
The new disclosure requirements will apply to accounting periods beginning on or after 6 April 2022. For the majority of companies that have a calendar financial year, they will need to include the mandatory climate-related financial disclosures for the first time in their annual report and accounts for the financial year commencing on 1 January and ending on 31 December 2023.
What disclosures will the rules require?
In-scope companies will need to include the following climate-related financial disclosures in their non-financial information statement (which is being renamed the “non-financial and sustainability information statement”) which forms part of the strategic report within the annual report and accounts:
1. a description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
2. a description of how the company identifies, assesses, and manages climate-related risks and opportunities;
3. a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process;
4. a description of:
a. the principal climate-related risks and opportunities arising in connection with the company’s operations, and
b. the time periods by reference to which those risks and opportunities are assessed;
5. a description of the actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy;
6. an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios;
7. a description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
8. a description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those key performance indicators are based.
These disclosures are aligned to the four overarching pillars of the Recommendations of the TCFD, being Governance, Strategy, Risk Management and Metrics & Targets. However, following mixed feedback received during the consultation, the UK Government decided against mandating disclosure of all 11 of the more detailed recommended disclosures under the TCFD framework. The UK Government plans to publish non-mandatory guidance to support in-scope companies in their disclosure by the end of 2021.
What to do now?
This depends to a large extent on whether the company in question has already started making (or is preparing to make) climate-related financial disclosures and the extent of such existing disclosures.
A number of the largest UK publicly traded companies (particularly those in the FTSE 100) have already started to disclose voluntarily against the TCFD recommendations (although the extent of disclosure varies widely). In addition, all UK premium-listed companies will be required to report against the TCFD recommendations on a “comply or explain” basis for accounting periods beginning on or after 1 January 2021 and the FCA has announced that it intends to extend this requirement to certain standard-listed companies for accounting periods beginning on or after 1 January 2022.
For other in-scope companies where the new rules may require them to produce climate-related financial disclosures for the first time, we have gathered below some useful resources as a starting point. Although in-scope companies have a reasonable amount of time to prepare for the new disclosures, given the lead time involved in gathering the required information (which in many cases will require companies to make thoughtful judgments about their risks, opportunities and strategies as they relate to climate change) and the likely scrutiny of the disclosures from investors, employees and other stakeholders, we recommend that in-scope companies start preparing now.
Cleary Gottlieb’s leading sustainability practice is ideally placed to help in-scope companies navigate and prepare for the new rules. Please contact the authors of this post or any member of our sustainability practice listed on our website if you would like to discuss further.
The recently updated TCFD Guidance on Implementing the TCFD Recommendations
The recently updated TCFD Guidance on Metrics, Targets and Transition Plans
The UK Financial Reporting Lab’s recent Report on Developing Practice in TCFD Disclosures (which includes examples of “best practices”)