UK Introduces New Climate-Related Disclosure Regulations for UK Companies and LLPs
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 ("the Regulations") came into force on April 6, 2022. The Regulations amend the Companies Act 2006 and largely implement the recommendations of the Task Force on Climate-related Financial Disclosures ("TCFD"). In doing so, the United Kingdom is the first G20 country to enshrine in law mandatory TCFD-aligned reporting requirements.
Many companies will already voluntarily report in line with the TCFD recommendations, but all in-scope companies will now need to familiarize themselves with the details of sections 414CA and 414CB of the Companies Act 2006 to consider their arrangements for reporting on climate-related risks and opportunities.
The Regulations apply to a UK-incorporated company which has more than 500 employees and is: (i) a traded company (one whose shares are traded on a UK-regulated market or on the Alternative Investment Market); (ii) a banking company; (iii) an authorized insurance company; or (iv) a company with a turnover of more than £500m.
The Department for Business, Energy & Industrial Strategy has published nonbinding guidance to accompany the Regulations, but in broad terms the following disclosures are required:
- A description of the company's governance and arrangements in relation to assessing and managing climate-related risks and opportunities;
- A description of how the company identifies, assesses, and manages climate-related risks and opportunities;
- A description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company's overall risk management process;
- A description of: (i) the principal climate-related risks and opportunities arising in connection with the company's operations; and (ii) the time periods by reference to which those risks and opportunities are assessed;
- A description of the actual and potential impacts of the principal climate-related risks and opportunities on the company's business model and strategy;
- An analysis of the resilience of the company's business model and strategy, taking into consideration different climate-related scenarios;
- A description of the targets used by the company to manage climate-related risks and to realize climate-related opportunities and of the performance against those targets; and
- A description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realize climate-related opportunities and of the calculations on which those key performance indicators are based.
In the event of noncompliance with the Regulations (and the other statutory requirements relating to strategic reports), the Conduct Committee of the Financial Reporting Council has the authority to go to court to compel a company to revise its strategic report. The court may order the company directors to personally pay for the costs associated with preparing a revised report.
The Regulations provide UK companies with a uniform way to assess the financial impacts of their exposure to climate-related risks and opportunities. The disclosures will reveal how companies are dealing with the challenges posed by a changing climate, and this in turn will help investors and stakeholders put climate change at the forefront of their decision-making.
Parallel changes have been made to the reporting requirements by certain limited liability partnerships with the introduction of The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022.
