UK imposes mandatory climate-related financial disclosures – a first in the G20

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In the wake of COP26, the UK has become the first G20 country to enshrine into law mandatory climate-related financial disclosures. The two new statutory instruments, The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 (together, the “CFD Regulations”) were published by the Department for Business, Energy and Industrial Strategy (“BEIS”) on 17 January 2022 and will impact over 1,300 of the UK’s largest companies and financial institutions. In making climate-related disclosures mandatory, the UK has set the tone for the G20, with a view to ensuring firms and investors put climate change at the heart of their activities and decision making. 

Who will be impacted?

The disclosure requirements will apply to all UK Relevant Public Interest Entities (PIEs) (being companies currently required to produce a non-financial information statement) as well as all other UK registered companies or LLPs with over 500 employees and a turnover of more than £500 million (determined on a consolidated basis).

What and where do you disclose?

In-scope entities will be required to disclose climate-related financial information in line with the four overarching pillars of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations:

  • Governance: a description of the governance arrangements in place to assess and manage climate-related risks and opportunities;
  • Strategy: a description of the entity’s business models and strategy, and the potential and actual impacts of climate-related risks and opportunities on these as well as an analysis of their resilience, taking into consideration different climate-related scenarios;
  • Risk Management: a description of the principal climate-related risks and opportunities that the entity may face in connection with its operations and how the processes for identifying, assessing, and managing these risks are integrated into the company’s risk management process; and
  • Metrics and Targets: a description of the entity’s targets to both manage climate-related risks and realise climate-related opportunities as well as the entity’s performance against such targets and its key performance indicators relating to its exposure to climate change risks and opportunities.

Companies will make their climate-related disclosures in the non-financial information statement included in their strategic report, with LLPs disclosing in their energy and carbon report made as part of their annual report.

What’s next?

The CFD Regulations will come into force on 6 April 2022 and apply to financial years beginning on or after that date. We are also waiting Q&A guidance from BEIS, with the deadline for that pushed back to early this year. This should provide helpful clarification to support in-scope entities with their disclosure obligations.

What this means for you

The CFD Regulations represent a significant development to the UK government’s 2019 Green Finance Strategy and its commitment to make the UK financial system the greenest in the world. They are also in line with (and expand the application of) the recent change to the Listing Rules made by the Financial Conduct Authority (FCA) extending the requirement for premium listed companies to ‘comply or explain’ against the TCFD’s four pillars and the 11 recommended disclosures to issuers of standard listed shares starting this year.

All companies and partnerships will need to carefully assess whether they will be subject to the new disclosure requirements and ensure compliance. We expect that the regime will continue to expand, and entities who are not directly caught may also wish to consider complying with the spirit of the CFD Regulations on a voluntary basis.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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