Climate-related Financial Disclosure Regulations

Overview

Listed and FCA regulated entities have been providing climate and sustainability reporting in line with the TCFD since 2021, however regulations are starting to widen the net for this type of reporting to include private entities as investors and other stakeholders call for more transparency.

To this end, the UK government released the Climate-Related Financial Disclosure Regulations 2022 as part of its efforts to mandate climate-related financial disclosure across the UK by 2025. Separate regulations were issued for large companies and LLPs and these regulations are applicable for the accounting periods beginning on or after 6 April 2022.

1. The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31)

Companies in scope will include public interest entities (traded companies, banking companies, insurance companies) and AIM-listed companies with more than 500 employees, as well as private companies with more than 500 employees and turnover of more than £500 million.

For a parent company, the turnover and employee thresholds apply on an aggregated basis to the group headed by the parent.

The disclosures are to be included in a 'non-financial and sustainability information statement' in the Strategic Report. This renames the existing 'non-financial information statement' currently required for large public interest entities although it is worth noting that there will be differences in the overall contents of this statement for different types of in-scope entities.

2. The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/46)

LPs in scope will include banking and traded LLPs and other large LLPs with more than 500 employees and turnover of more than £500 million.

The disclosures are to be included in the Strategic Report, or if no Strategic Report is prepared, a LLP’s Energy and Carbon Report.

What are the required disclosures?

The regulations do not directly reference the TCFD but require disclosures that are in line with the four core elements (or pillars) of the TCFD (governance, strategy, risk management and metrics and targets), as follows:

a description of the company's governance 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 the principal climate-related risks and opportunities arising in connection with the company's operations, and 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 realise climate-related opportunities and of 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 realise climate-related opportunities and of the calculations on which those key performance indicators are based.

There is a high degree of consistency between the Financial Conduct Authority (the 'FCA')'s listing rules requirement of TCFD disclosures and the Regulations, but there are some important differences to note. One key difference is that the FCA requirement is applied on a 'comply or explain' basis whilst it is mandatory to apply the disclosure requirements of the Regulations.

For those entities that already provide TCFD disclosures as required by the FCA listing rules, disclosures made in compliance with the FCA listing rules TCFD requirement are likely to meet the disclosure requirements of the Regulations. Entities are encouraged to analyse their TCFD disclosures to ensure it fulfils the disclosure requirements of the Regulations. Information required to be disclosed under the Regulations can be cross-referenced if it is already disclosed elsewhere in the annual report.

How can we help?

BDO have issued guidance to help you prepare your first set of disclosures in your 2023 Annual Report.

This guidance addresses:

Scoping questions and useful decision trees
and a comparison between the two
What to do if an entity is in scope of both FCA Listing Rules and the Regulations; and
Summarises non-binding guidance issued by the government.