The announcement follows the Government’s consultation on the first stage of its proposals to extend mandatory reporting against the disclosure framework published by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (the TCFD Framework). For more information on that consultation, see our previous Corporate Law Update.

Alongside its announcement, the Government has published an official response paper, draft regulations to bring the regime into force and an accompanying draft explanatory memorandum. The Government also intends to publish non-binding Q&A to assist with reporting.

The Government has decided to implement its proposals largely as set out in the consultation, but with two changes. First, the new CRFD regime will be aligned more closely with the TCFD Framework. Secondly, and of critical importance to businesses, it has decided to require scenario analysis.

Full details of the new CRFD regime are set out below.

Which entities will be subject to the new regime?

The following entities will be required to make disclosures under the new CRFD regime.

• Companies that produce a non-financial information statement. This includes companies with transferable securities admitted to a UK regulated market (such as the London Stock Exchange’s Main Market or the AQSE Main Market), as well as banking and insurance companies. Importantly, this includes not only Main Market companies with a premium listing (which are already required to disclose against the TCFD Framework (see below)), but also Main Market companies with a standard listing.
• All AIM companies, irrespective of market capitalisation.
• All other companies with a turnover of more than £500m. This includes large companies that are not publicly traded, as well as large companies with securities admitted to a multilateral trading facility (MTF) other than AIM, such as the AQSE Growth Market.
• LLPs with a turnover of more than £500m.

In each case, to be within the scope of the new regime, an entity must have more than 500 employees and qualify as large for UK accounting purposes.

The new regime will apply only to UK-registered companies and LLPs. Non-UK entities will not be required to make disclosures under the regime. However, non-UK entities with a premium commercial listing are already subject to the requirement in the Financial Conduct Authority’s (FCA) Listing Rules to report against the TCFD Framework on a “comply or explain” basis (see below).

Having asked the question, the Government has decided not to extend reporting to all companies admitted to MTFs other than AIM, because the additional benefit would be marginal. But, as noted above, companies on other MTFs will be within the new regime if they are large, have more than 500 employees and a turnover of more than £500m.

Will reporting be at a group or individual level?

Parent companies will be required to make disclosures at a group level. In this context, the references to having more than 500 employees and a turnover of more than £500m are to the number of employees and the aggregate turnover across the relevant group.

Companies and LLPs that qualify as subsidiary undertakings will not be required to report at the individual level if they are included in their parent company’s group report. Otherwise, companies and LLPs will be required to report at the individual level.

Where will disclosures under the new regime appear?

Companies will need to include their disclosures in their strategic report. Companies that produce a non-financial information statement (to be re-named the “non-financial and sustainability information statement” (NFSIS)) will include the disclosures within that statement.

LLPs that produce a strategic report will need to include their disclosures in the NFSIS in their strategic report. LLPs that do not produce a strategic report will instead report the relevant information in their energy and carbon report under the Streamlined Energy and Carbon Reporting (SECR) regime.

What information will entities be required to disclose?

The Government had originally proposed to require reporting only against the four “pillars” of the TCFD Framework, rather than the 11 more detailed “recommendations”. In particular, it had originally proposed not to require entities to conduct and disclose scenario analyses.

However, following strong feedback from respondents, the Government has revisited these proposals. The new CRFD regime will now be more closely aligned to the 11 TCFD Recommendations. Rather than referring directly to the TCFD Framework, the Government has set out categories of information that effectively cover the content of virtually all the TCFD Recommendations. These are set out in the box below titled “The new climate-related financial disclosures”.

Of particular note, the Government has decided to require mandatory scenario analysis disclosures. Previously, the Government had proposed to encourage disclosure, rather than require it. However, feedback from respondents generally favoured scenario analysis (see our previous Corporate Law Update), and so the Government has revisited this proposal and concluded that disclosure of scenario analysis should be mandatory.

As a result, the only element of the TCFD Recommendations that will not be mandatory under the new regime is disclosure of scope 3 emissions. 

There was nonetheless notable support for making scope 3 emissions disclosure mandatory. The Government has said that officials will now consider whether to require scope 3 emissions for this broader range of entities in due course.

Finally, entities will not be required to disclose information if it is not necessary for an understanding of their business. However, if an entity omits climate-related information for this reason, it will need to provide a “clear and reasoned explanation” for its decision.

The new climate-related financial disclosures

The draft regulations will require companies within the new CRFD regime to disclose the following information. (The text below is taken directly from the draft regulations. Similar requirements will apply to LLPs.)

1. a description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities;
2. a description of how the company identifies, assesses, and manages climate-related risks and opportunities;
3. a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process;
4. a description of—
   1. the principal climate-related risks and opportunities arising in connection with the company’s operations, and
   2. the time periods by reference to which those risks and opportunities are assessed;
5. a description of the actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy;
6. an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios;
7. 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
8. 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.

When will the new regime come into effect?

The new CRFD regime comes into effect on 6 April 2022. Companies and LLPs within the scope of the regime will need to make disclosures for financial years beginning on or after that date.

We therefore expect the first disclosures under the new regime to be published no later than July 2023, when the first premium-listed commercial companies to hold their AGM circulate their annual reports to members. By January 2024, all companies within the regime should have published their disclosures.

How does the new regime interact with the existing FCA regime?

As noted above, under the FCA’s Listing Rules, companies with a premium commercial listing are already required to report against the TCFD Framework – both the four “pillars” and the 11 “recommendations”, as well as associated guidance – on a “comply or explain” basis.

There is natural overlap between the Listing Rules regime and the new CRFD regime. Companies subject to both regimes will likely find that the same information satisfies both reporting requirements.

There are, however, a few differences between the two regimes that are worth noting.

• The new CRFD regime will not apply to non-UK entities. The Listing Rules regime, however, will continue to apply to non-UK entities with a premium commercial listing.
• The new regime will not apply to small and medium-sized entities. However, the Listing Rules regime applies to all premium-listed commercial companies, regardless of size (although, in reality, few premium-listed companies are small or medium-sized).
• Entities will not be required to report on scope 3 emissions under the new regime. However, premium-listed companies are required under the Listing Rules regime to report on scope 3 emissions or explain why they have not done so, and the vast majority of premium-listed commercial companies are required to report on scope 3 emissions under the SECR regime.
• The new CRFD regime will be set out in statute and so will need to be enforced by the appropriate prosecuting authorities. By contrast, the FCA will continue to have the power to levy fines and other sanctions directly against issuers that fail to follow the regime in the Listing Rules.

How does the new regime interact with SECR?

The new CRFD regime will sit alongside the existing SECR regime. The thresholds for AIM companies and private companies and LLPs under the new CRFD regime are higher than those for SECR, and so many entities will continue to report under SECR without needing to report under the new regime.

However, larger companies will find themselves subject to both regimes. This has the potential to make reporting confusing and is exacerbated by the fact that SECR disclosures sit within a company’s directors’ report, whereas CRFD disclosures will need to sit within the strategic report.

There was strong support from consultation respondents for aligning CRFD with SECR and, as a result, the Government will consider how best to achieve this. It notes, however, that any changes to SECR to facilitate alignment will require a separate consultation. This will take place in due course, with a view to implementing any changes to SECR by 2023.

Nonetheless, in the meantime, the interaction of the two regimes will be complicated. Companies and LLPs should seek specialist advice to determine exactly which reporting requirements apply to them.

Which climate reporting regimes apply to my company?

From 6 April 2022, there will be three separate regimes mandating climate-related disclosures. The three regimes apply to different types of entity, and deciding which are relevant will be tricky. We have set out in this table some common types of entity and whether each of the three regimes is likely to apply. In each case, a company or LLP should take specific professional advice on which regimes apply.

What does this mean for me?

For premium-listed UK commercial companies (which includes most UK companies on the London Stock Exchange’s Main Market), the new regime does not expand the scope of disclosures. However, for financial years beginning on or after 6 April 2022, these companies will no longer be able to report on a purely “comply or explain basis”. Disclosure will be mandatory except where it is not necessary for an understanding of the company’s business. In reality, given the combination of investor pressure and the sheer breadth of ground covered by the TCFD Framework, we suspect that few companies will omit disclosures on this basis.

The key challenge for these companies, therefore, will be in ensuring that disclosures under the three regimes to which they will be subject – SECR, the Listing Rules regime and the new CRFD regime – link together consistently and coherently and present a cogent picture of the company’s business.

A company should consider including suitable cross-referencing and signposting to direct readers between SECR disclosures in its directors’ report and CRFD information in its strategic report, as well as Listing Rules disclosures (which can appear in either report). Companies should also bear in mind that they are permitted to re-site directors’ report disclosures in their strategic report if they consider the information to be of strategic importance to the company. This may be a means of ensuring that all climate-related information is presented together in one place and so made more accessible.

For AIM companies and other larger companies, the new regime represents a step change. Whilst larger AIM companies are already required to report metrics under SECR, they are not currently required to make broader disclosures in relation to climate strategy and scenario analysis in the way encouraged by the TCFD Framework.

These companies will need to engage immediately with the TCFD Framework (if they have not already done so) so as to be in a position to monitor performance and strategy and collect data from 6 April 2022. The requirement for scenario analysis, in particular, is a key consideration for smaller companies, which will need to devote considerable thought to how best to manage and deploy this.

Finally, the new regime has consequences for premium-listed companies that might be considering a move to AIM or to a standard listing for whatever reasons (including, if it were to regard the existing Listing Rules regime as a burden and wished to avoid mandatory reporting against the TCFD Framework). Whilst this would remove a company from the Listing Rules regime, most companies would be subject to the new CRFD regime and so such a move would achieve very little. And it is worth remembering that the FCA is proposing in any event to extend TCFD reporting to standard-listed companies (see our previous Corporate Law Update).