Climate reporting: Current compliance and what's on the horizon

Recent developments in climate reporting and climate disclosure

1. Taskforce on Climate-related Financial Disclosures (TCFD) Recommendations

The Department for Business, Energy and Industrial Strategy (BEIS) consulted in March 2021 on proposals to require large organisations to disclose climate-related financial information in line with TCFD recommendations. The government published its response in October 2021, confirming that changes will be implemented largely as set out in the consultation. These changes are in addition to the government proposals that will require, from 2023, financial institutions and listed companies to publish transition plans that consider the government’s Net Zero commitment, or to provide an explanation if they have not done so.

Certain public companies, large private companies and LLPs will have to disclose climate-related financial information correlating to the four principal pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets) on a mandatory basis.  For a lot of in-scope companies, this will be an unprecedented disclosure. The mandatory TCFD-aligned requirements for the private sector were enshrined in law on 6 April 2022 in The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and The Limited Liability Partnerships (Climate-Related Financial Disclosure) Regulations 2022, the content of which is documented in more detail below.

2. New regulations on climate-related financial disclosure

The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations amend the Companies Act 2006 and require many large and/or listed UK companies, as part of their strategic reporting, to provide information in accordance with the recommendations of the TCFD. The Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations, which amend The Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008, introduce similar requirements for UK limited liability partnerships (LLPs) and require certain LLPs to incorporate TCFD-aligned climate disclosures in their annual reporting.

Companies are to disclose sustainability-related information in the non-financial information statement section of their strategic reports. LLPs are to include the requisite disclosure in either their ‘Energy & Carbon Reports’ (as those form part of their members’ reports), or within their strategic report (where an LLP prepares one). These reports will be publicly available, and filed at Companies House where investors and the general public can gain access free of charge.

The entities within scope of these disclosure requirements include: (1) all UK companies that are currently required to produce a non-financial information statement; (2) UK registered companies with securities admitted to AIM with more than 500 employees; (3) UK registered companies which are not included in the above categories with more than 500 employees and a turnover of more than £500 million, and; (4) LLPs with more than 500 employees and a turnover of more than £500 million. Disclosure will be at group level, and both climate-related reporting and the scope thresholds will apply on a consolidated basis.

Broadly, companies and LLPs will be required to disclose all of the below:

1. the way governance is organised within the company or LLP in respect of the assessment and management of climate-related risks and opportunities
2. how they identify and manage climate-related risks and opportunities
3. the process of how climate-related risks are integrated into the overall risk management process of the company or LLP
4. the main climate-related risks and opportunities they encounter, and the timescales within which those risks and opportunities are assessed
5. the impacts of the highlighted climate-related risks and opportunities on their strategies or business models
6. an analysis of the resilience of the company’s or LLP’s strategy, contemplating various climate-related scenarios
7. the targets used by the company or LLP to manage climate-related risks and to realise climate-related opportunities and performance against those targets
8. the KPIs through which progress against the set targets will be assessed, and the calculations on which they are based.

Becoming familiar with the TCFD’s recommendations will enable businesses to understand these key recommended climate-related disclosures and to identify the internal systems and procedures needed to ensure future/ongoing compliance. A key part of this process may be educating the board as to the recommendations and considering how they may impact upon the business’ governance, risk and strategy.

3. FCA reporting requirements

In December 2020, the FCA introduced a climate-related disclosure rule for premium-listed companies as part of a coordinated approach with the government to gradually phase in TCFD-compliant disclosures by 2025. The rule, known as Listing Rule 9.8.6(8), requires premium-listed companies to state the following in their annual financial reports:

1. that the company’s annual financial report includes disclosures consistent with the TCFD recommendations
2. an explanation of why disclosures are inconsistent with the recommended disclosures or that disclosures are included in documents other than the annual financial report (if applicable)
3. the section of the annual financial report (or other relevant document) in which the disclosures can be found.

The rule for premium listed companies came into effect for accounting periods beginning on or after 1 January 2021.

In December 2021, the FCA extended the new disclosure requirements to most standard-listed companies, asset managers, life insurers and pension providers. The rule for standard listed companies applies for accounting periods beginning on or after 1 January 2022.  For other entities, the rules are effective for the largest firms from 1 January 2022 and from 1 year later for smaller firms.

With effect from 1 January 2022, the FCA shares responsibility for monitoring and enforcing compliance with the new rules with the Financial Reporting Council (FRC) and the emphasis is on compliance, offering companies the flexibility to develop suitable governance processes and to expand their capabilities in respect of climate-related financial disclosure, rather than imposing a mandatory disclosure obligation

4. Streamlined Energy & Carbon Reporting

Streamlined Energy & Carbon Reporting (SECR) is industry legislation that was introduced in April 2019, replacing the Carbon Reduction Commitment (CRC) scheme. The scheme changed the requirements for energy and carbon emissions reporting, putting more responsibility on organisations to choose how they measure and report their emissions.

The entities required to comply with SECR regulations are those that exceed at least two of the following three thresholds in the preceding financial year: (1) turnover (or gross income) of £36 million or more; (2) balance sheet assets of £18 million or more; and/or (3) 250 employees or more. Many companies (approximately 12,000) are in scope.

Qualifying companies will need to include information in line with the SECR framework in their Directors’ Report, or in an equivalent Energy and Carbon Report for LLPs, with the reporting requirements summarised as follows:

1. businesses should include their energy use (including electricity, gas and transport) emissions and an intensity metric for financial years beginning on or after 1 April 2019
2. businesses should follow best practice guidance released by the government in respect of procedures and intensity metrics for energy and carbon reporting
3. businesses must provide a narrative commentary on energy efficiency action taken in the financial year
4. quoted companies must continue to report on scope 1 and 2 greenhouse gas emissions (direct greenhouse gas emissions from owned or controlled sources and indirect emissions generated by purchased energy respectively), as well as global energy use where appropriate
5. unquoted companies are required to report scope 1 and 2 emissions
6. quoted and unquoted companies can voluntarily report scope 3 emissions (all indirect emissions not included in scope 2).
7. International Sustainability Standards Board

International investors overseeing global investment portfolios are increasingly calling for reliable reporting by companies on specific sustainability metrics, so that they can be assessed against ESG criteria more comprehensively.

Addressing this demand began in 2011 with the Sustainability Accounting Standards Board (SASB), which was set up across 11 sector categories to encourage companies to report on their sustainability risks. On 3 November 2021 (and in light of COP26), the IFRS Foundation Trustees consolidated the SASB into the International Sustainability Standards Board (ISSB).

Building on SASB, the intention of ISSB is to deliver a concrete benchmark of sustainability-related disclosure standards. Having received support from institutions including the G7 Finance Ministers, the International Organisation of Securities Commissions and the UK government, it is hoped the transparency of target companies’ sustainability-related risks and credentials will be increased on a global scale.

On 31 March 2022, the ISSB released exposure drafts of the first two ISSB Standards for public consultation: the General Requirements for Disclosure of Sustainability-Related Financial Information and a Climate-Related Disclosures framework. The publication of these two draft standards represents the consolidation of voluntary corporate sustainability reporting frameworks, which could be a significant step towards the development of mandatory disclosure regimes. The ISSB intends to detail baseline requirements within these standards that ensure companies provide investors with a complete set of disclosures on sustainability risks and opportunities that could affect enterprise value, in order to complement the information provided in financial statements.

Although the ISSB has not yet provided specific guidance on where such disclosures must be made, it emphasises that sustainability-related information should be disclosed simultaneously with standard financial information, and in as integrated a way as possible. In practical terms, this means that such information be disclosed alongside an entity’s general purpose financial reports. The rationale for reporting in this way derives from the ISSB’s emphasis on the materiality of sustainability-related disclosures to investors, and, by consequence, the disclosure of information that could be expected to influence primary users’ assessments of an entity’s enterprise value. To make an assessment of materiality, the ISSB recommends that companies consult the industry-specific materiality factors outlined by the SASB Standards.

What’s on the horizon?

Companies should anticipate more ambitious requirements in relation to climate reporting/climate disclosure over the next couple of years. For example, the UK government mentioned (in the October 2021 consultation response mentioned above) that it is considering implementing changes to SECR by 2023. In particular, scope 3 emissions reporting is likely to become compulsory given the high percentage of total emissions they make up.

The government has signalled it intends to adopt the ISSB’s Standards as part of mandatory sustainability reporting requirements and so it would be wise for businesses to familiarise themselves with the ISSB exposure drafts in anticipation of their disclosure requirements becoming enshrined in law. In addition to regulatory compliance, this will be essential in light of the fact that such disclosures are increasingly likely to form part of any investors’ due diligence. Momentum also suggests that companies should prepare for a potentially rapid implementation of the new standards.

How we can help

Beyond the legal and regulatory framework, businesses today are increasingly commercially and socially motivated to voluntarily provide additional reports and claims relating to their environmental and sustainability ambitions. Understanding climate-related risks can also inform strategic development for identifying and capitalising upon potential opportunities.

Walker Morris is a multi-disciplinary commercial law firm, with specialist lawyers experienced in corporate and climate reporting, as well as all other aspects of the ESG (environmental, social, governance) agenda. Our specialists can therefore advise in relation to ensuring compliance with the evolving regulatory regime, and in respect of developing measurable adaptation strategies to further opportunities in the climate change arena. We can also help with training staff, and reviewing/implementing policies and contractual arrangements throughout clients’ businesses and supply chains, so as to effect real, positive and sustainable change.

Please do not hesitate to contact Ben Sheppard for further information or advice.