New climate related reporting rules – NEDs beware

Blog | Company Secretarial
Published: 26th January 2022
Area: Corporate & Commercial

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In December 2020 the FCA introduced the reporting requirement for UK premium listed companies to disclose, on a comply or explain basis, a report against the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). As of December 2021, this has been extended further to capture certain public companies, large private companies and LLPs. This extension will apply for accounting periods beginning on or after 1 January 2022. Companies that meet the threshold will need to disclose climate-related financial information in line with the four overarching pillars of the TCFD recommendations; Governance, Strategy, Risk Management, Metrics & Targets on a mandatory basis.

What companies does this reporting requirement apply to?

It applies to
  • All UK companies that are currently required to produce a non-financial information statement, being UK companies with more than 500 employees and have either transferable securities admitted to trading on a UK regulated market (such as the LSE's main market), or are banking companies or insurance companies

  • UK AIM companies with more than 500 employees

  • UK companies which are not included in the categories above and have more than 500 employees and a turnover of more than £500m

  • LLPs which have more than 500 employees and a turnover of more than £500m

For many in-scope companies, this will be an entirely new disclosure and Non-Executive directors (NEDs), especially those responsible for stakeholder communication, will need to ensure disclosing against TCFD becomes a standard part of their annual report process. Standard list companies will need to comply with Listing Rule 14.3.27R and ensure certain topics are covered in their annual report. If a company includes some or all of its TCFD-aligned disclosures in a document other than its annual financial report, it must explain why it has chosen to do so.

What does need to be included?

Governance

The company must disclose its governance processes in relation to climate related risks and opportunities.  This could include whether the company considers climate related issues in its strategy, risk management policies, performance objectives and how it monitors targets for addressing climate related risks. It could also cover roles and responsibilities across the board of directors when it comes to climate related risks.

Strategy

Companies must look to disclose real and probable impacts of climate related risks and opportunities to their organisation’s business model, strategy and financial planning, ensuring disclosure of information that the board believes to be material. Companies should be assessing what they consider short, medium and long-term impacts and ensuring development of scenario analysis methodology, and metrics and targets tailored to the company's business.

Risk Management

Company boards should be assessing their risk management process and disclosing their methodology for identifying, assessing and managing climate-related risks. Non-executive directors should consider the organisation's decisions to mitigate, transfer, accept or control climate risks. Risk registers should also be reviewed and developed to ensure climate risk is accurately captured where applicable.

Metrics and Targets

Combining the three pillars mentioned above companies will need to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. NEDs will need to assess whether their company has access to relevant data and if not, how to source such data. Some companies may already be reporting their Scope 1 and Scope 2 emissions under the Streamlined Energy and Carbon Reporting. Other metrics may also be applicable such as energy use, waste, water and material consumption, real estate footprint and greenhouse gas emission targets etc.

Making it work

The TFCD reporting recommendations will be a key aspect of annual reports in the future and currently, this will be a new and potentially tricky area for the board directors. Companies are initially expected to grapple with the reporting process, however, models and reporting processes will become more streamlined in years to come as companies and industries converge towards a consistent adoption of standards, metrics and targets.

For further information or assistance to understand and implement these TCFD disclosures and your role in the process, contact Shaun Zulafqar or another member of the company secretarial team.

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Shaun works in our company secretarial team supporting various client companies, including AIM listed, technology start-ups and SME companies.

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