BEIS: Consultation response - Mandatory climate-related financial disclosures by publicly quoted companies, large private companies, and LLPs
On October 29, 2021 the Department for Business, Energy and Industrial Strategy (BEIS) announced that the UK will become the first G20 country to enshrine in law mandatory Task Force on Climate-Related Financial Disclosures (TCFD) - aligned requirements for its largest companies and financial institutions to report on climate-related risks and opportunities. From April 6, 2022, many of the largest UK-registered companies and financial institutions, including many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover, will have to disclose climate-related financial information on a mandatory basis.
With the announcement, BEIS published the Government’s response to its March 2021 consultation, Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs. Key points to note include the following:
Organisations in scope
The mandatory reporting requirements will apply to:
- All UK companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees and have either transferable securities admitted to trading on a UK regulated market, or are banking companies or insurance companies (Relevant Public Interest Entities (PIEs)).
- UK registered companies with securities admitted to AIM with more than 500 employees.
- UK registered companies which are not included in the categories above, which have more than 500 employees and a turnover of more than £500m.
- Limited liability partnerships (LLPs) which have more than 500 employees and a turnover of more than £500m.
Climate-related financial disclosures will apply at the group level so both climate-related reporting and the scope thresholds will apply on a consolidated basis.
Location of disclosures
Companies will be required to disclose their climate-related financial information in the Non-Financial Information Statement (NFIS) of the Strategic Report. Companies not currently required to produce a NFIS will be required to just produce the climate-related financial disclosure elements of that statement. The name of the NFIS is to be changed to the Non-Financial and Sustainability Information Statement to better take into account the information that will now be required under this section of the Strategic Report.
LLPs will be required to disclose their climate-related financial information in the NFIS of their Strategic Report, where relevant. For LLPs not currently required to produce a NFIS, they will be required to include the climate-related financial disclosures in their Energy and Carbon Report.
Approach to disclosure
The March 2021 consultation asked whether disclosure in line with the four pillars of the TCFD recommendations, rather than at the 11-recommendation level, was suitable. The Government states that it is aiming to align the approach of the UK’s regulations more clearly to the TCFD framework in response to stakeholders’ strong calls for consistency and clarity in this regard.
Responses to this part of the consultation led the Government to reconsider its proposal on scenario analysis. Given the clear message from stakeholders on the importance of scenario analysis for the policy to meet the Government’s stated ambitions, and recurring theme of respondents proposing that qualitative scenario analysis would be an appropriate first step, the final regulations will include a requirement for in scope companies and LLPs to include an analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios. In associated guidance, the Government will be clear that a qualitative assessment of resilience against different scenarios will be sufficient to meet the obligation.
Alignment of TCFD and SECR reporting
The March 2021 consultation asked whether alignment of the scope for climate-related financial disclosures and Streamlined Energy and Carbon Reporting (SECR) requirements, such that large unquoted companies and LLPs would be subject to the same reporting requirements under SECR as quoted companies, would aid reporting of climate related financial disclosures and simplify reporting procedures, as well as for views on the continuation of voluntary Scope 3 emissions reporting under SECR requirements.
There was strong support for better alignment between SECR and TCFD requirements, so the Government will now consider how best to achieve that. Any changes to the SECR regime to facilitate that alignment will require a separate consultation process, and that process will run in due course, but will take into account the proposed introduction of the Sustainability Disclosures Requirements (SDR) Regime, as set out in Greening Finance: A Roadmap to Sustainable Investment published on October 18, 2021 and the requirements introduced in the June 2021 Procurement Policy that require mandatory Scope 3 disclosures in carbon reduction plans when bidding for major government contracts. The Government will look to implement any changes to the SECR regime by 2023. In the accompanying Q&A guidance document, the Government will set out clearly to in-scope companies and other stakeholders to what extent current SECR requirements meet TCFD recommendation 4b, regarding the disclosure of emissions. In addition, given strong feedback regarding the need for clarity and a long-term plan for any Scope 3 disclosure requirements, officials will also now consider this issue in due course.
Non-disclosure of immaterial information
Feedback was more supportive of only requiring disclosure of material information. Accordingly, the draft regulations provide for a company’s directors to have flexibility, taking into account the nature of the business and how it is conducted, to omit all or part of some of the climate-related disclosures required. Specifically, this materiality filter will apply to disclosures made under the Strategy and Metrics and Targets elements of the TCFD recommendations, where directors reasonably believe these disclosures are not necessary for the understanding of the business. Where the directors omit part or all of these disclosures, they must offer a clear and reasoned explanation why they are doing this.
Timing of new disclosure requirements
Subject to Parliamentary approval of the draft regulations, the Government proposes these would come into force on April 6, 2022 and apply in respect of any financial year of a company or LLP which commences on or after that date.
Enforcement of disclosure obligations
Given there was no strong feedback suggesting the current monitoring and enforcement mechanisms for the proposals were insufficient and given there is limited scope for changes to be made via the proposed legislative process, the current enforcement and monitoring mechanisms will be applied to the regulations.
Responsibilities of auditors in relation to climate-related financial disclosures
The Government remains of the view that there is no need to alter the role of auditors specifically in relation to climate-related disclosures. Existing and future disclosures related to climate change which feature in companies’ financial statements will continue to be subject to a high standard of assurance by the statutory auditor in line with company law and auditing standards. Climate-related disclosures elsewhere in companies’ annual reports will continue be reviewed by the statutory auditor to ensure that they are legally compliant and materially consistent with the financial statements based on the auditor’s knowledge of the company and its environment gained through the course of the audit. The Government notes that separately, it will be publishing in due course its response to its consultation on ‘Restoring trust in audit and corporate governance’. That consultation features a number of proposals to enhance the role of auditors more generally, as well as a proposal that Public Interest Entities should publish an audit and assurance policy which sets out their approach to assuring corporate disclosures out-with the financial statements.
Two sets of regulations have been produced – one for companies and another for LLPs. The company regulations will be taken forward through an affirmative resolution procedure and were laid in Parliament on October 28, 2021. The company regulations will be made when they have been debated in, and approved by, Parliament. The LLP regulations will be made under the negative resolution procedure, so will be made and then laid before Parliament. However, because the LLP regulations will apply a modified form of the company provisions to LLPs, the LLP regulations will need to be made after the company regulations have been approved by Parliament and signed by the Minister. The companies’ regulations will now receive parliamentary scrutiny. The requirements will come into force on April 6, 2022 subject to parliamentary approval.
(BEIS: Consultation response - Mandatory climate-related financial disclosures by publicly quoted companies, large private companies, and LLPs, 29.10.2021)
(BEIS, UK to enshrine mandatory climate disclosures for largest companies in law, 29.10.2021)
(The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 – Draft)
(The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 – Draft Explanatory Memorandum)
BEIS: Corporate Re-domiciliation – Consultation on Government’s proposals
On October 27, 2021 the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation paper setting out proposals to make it possible for companies to move their domicile to and relocate to the UK, by enabling the ‘re-domiciliation’ of companies. This is in line with the Government’s determination to strengthen the UK’s position as a global business hub and an open, competitive, free market economy. The consultation paper sets out proposals for re-domiciliation and seeks views to help inform the development of this policy and future legislation.
Inward re-domiciliation would enable a company to move its place of incorporation from one jurisdiction to the UK while maintaining the same legal identity. Currently, it is not possible for a company to transfer incorporation to the UK and retain the same legal identity. Instead, alternative routes must be taken, which involve the creation of a new UK entity, either through transferring assets from the foreign entity to the UK one, or a new UK holding company acquiring shares in the foreign entity. This can result in lengthy and costly administrative or regulatory issues and/or unnecessary tax consequences. A number of other jurisdictions already permit inward re-domiciliation.
The Government does not believe that conditions around thresholds for economic presence in the UK (an economic substance test) are necessary for inward re-domiciliation, but is proposing a set of eligibility criteria. These are designed to protect the UK tax base, ensure firms meet the UK’s high corporate governance standards and ensure liabilities are properly dealt with in the departing country, while maintaining a flexible and open re-domiciliation regime. For example, firms will only be able to re-domicile to the UK if their current place of incorporation allows it and they have complied with all legal requirements in relation to the transfer of registration. This is likely to include, but not be limited to overdue obligations, relevant creditor and shareholder notice and agreement and deregistration in the departing country. Directors will have to be of good standing and the application should pose no national security risk, with UK authorities having discretion to assess the application and satisfy themselves that the application is being made in good faith and is not contrary to the public interest.
Among other things, the consultation paper seeks views on the eligibility criteria and views on what protections ought to be adopted for creditors of companies which become insolvent shortly after re-domiciling. The Registrar of Companies would be given new powers to ensure the veracity of information that re-domiciling entities provide to maintain confidence in the UK company registrar and views are sought on this and the tax consequences generally of such a regime.
The consultation paper notes that Companies House has three separate Registrars in the UK – one for England and Wales, one for Scotland and one for Northern Ireland. Firms cannot currently redomicile between nations while retaining their existing legal identity. The Government is not minded at present to change this, but welcomes views on any bearing the situation may have on decisions to re-domicile.
The consultation paper notes that not all jurisdictions that permit inward re-domiciliation also permit outward-domiciliation and it seeks views on the demand for, and benefits of, the latter. It also seeks views on potential conditions if outward re-domiciliation from the UK were introduced.
Responses are requested by January 7, 2022.
(BEIS, Corporate Re-domiciliation – Consultation on Government’s proposals, 27.10.2021)
FRC: Annual Review of Corporate Reporting 2020/21
On October 27, 2021 the Financial Reporting Council (FRC) published its Annual Review of Corporate Reporting, which outlines the FRC’s ‘top’ areas where improvements to reporting are required. The FRC reviewed 246 reports and accounts and wrote to 97 companies with substantive questions about their reports. Overall, the review found the quality of reporting remained unchanged, despite the impact of the Covid-19 pandemic. However, significant non-compliance was found at 15 companies that were required to restate their accounts.
The most frequent areas of FRC findings are set out below, and the review suggests ways of addressing these areas:
- Judgements and Estimates
- Statement of Cash Flows
- Impairment of Assets
- Alternative Performance Measures (APMs)
- Financial Instruments
- Strategic Report and Companies Act
- Provisions and Contingencies
- Income Taxes
- Fair Value Measurement
- Business Combinations.
In terms of expectations for 2021/22 reporting, the FRC will expect to see:
- A clear explanation of the significant judgements made by management, including those used in their assessment of going concern, with sufficient detail to understand the specific judgements made and their financial reporting effects.
- A clear description of key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of amounts recognised in the financial statements to changes in assumptions.
- Information in the financial statements that is consistent with that reported in the rest of the annual report and accounts.
- Material climate change policies, risks and uncertainties being discussed in narrative reporting and appropriately considered and disclosed in the financial statements, particularly where investors may reasonably expect a significant effect on the expected life or fair value of an asset or liability.
- The nature and extent of material risks arising from financial instruments and related risk management being adequately addressed, including: the use of factoring and reverse factoring in working capital financing; the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
- Alternative Performance Measures (APMs) not being given greater prominence or authority than amounts stemming from the financial statements and the basis for classifying amounts as adjusting, ‘non-underlying’ or ‘non-core’ explained.
- Information that meets the disclosure objectives of the relevant accounting standards, as well as the specific disclosure requirements.
- Material information that is not obscured by immaterial items.
The FRC’s routine monitoring of annual reports and accounts during the 2021/22 cycle will include a focus on climate-related risks, including the new disclosures required for premium listed companies, and judgements and estimation uncertainty in the face of the continuing economic and social impact of Covid-19. Companies will be expected to ensure that the impact of these matters on their business is appropriately reflected in the financial statements and wider annual report.
(FRC, Annual Review of Corporate Reporting 2020/21, 27.10.2021)
(FRC, Annual Review of Corporate Reporting 2020/21: Corporate Reporting Highlights, 27.10.2021)
FRC: Key matters for 2021/22 reports and accounts
On October 27, 2021 the Financial Reporting Council (FRC) published, alongside its Annual Review of Corporate Reporting, a summary of key matters that are relevant to the 2021/22 financial reporting season. This summary addresses the FRC’s areas of focus for the coming year and identifies what the FRC expects to see in high quality reports and accounts. It highlights key messages and provides links to other documents in which more information can be found, including sections outlining relevant FRC publications and year-end developments. It also discusses recent changes to corporate governance, and narrative and financial reporting.
This summary replaces the annual year-end advice letter to preparers of annual reports. It is primarily targeted at CEOs, CFOs and Audit Committee Chairs but the FRC states that it is likely to be helpful for all preparers, reviewers and auditors. The FRC encourages all reporting teams and relevant committees to consider the messages when they prepare and review annual reports.
In terms of year-end developments to be taken account of, the FRC refers to the following:
- IFRS developments, particularly Covid-19 related rent concessions beyond 30 June 2021, interest rate benchmark reform – Phase 2 and extension of the temporary exemption from applying IFRS 9 (amendments to IFRS 4 for insurers).
- UK GAAP developments, particularly amendments due to the UK exit from the European Union, interest rate benchmark reform (Phase 2), Covid-19-related rent concessions beyond 30 June 2021 and going concern assessments in interim accounts.
- Taskforce for Climate-related Financial Disclosures (TCFD) – the FRC notes that it is important to ensure that the information presented in relation to this does not appear to be an ‘add-on’ containing boilerplate messages. The FRC has found that reporting under the TCFD recommendations is improved where it is better integrated with the company’s strategy with the use of cross-referencing.
(FRC, Key matters for 2021/22 reports and accounts, 27.10.2021)
FRC: Taskforce on Climate-related Financial Disclosures (TCFD) - ahead of mandatory reporting: Developing practice
This year, premium listed companies will need to report against the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations on a comply or explain basis in their annual reports. On October 28, 2021 the Financial Reporting Council’s Financial Reporting Lab published a report to help companies prepare for mandatory TCFD reporting. It includes practical advice and examples that better address aspects of TCFD reporting from those companies already adopting the framework on a voluntary basis. Alongside the report, the Lab has also published a snapshot of the status of current reporting against the TCFD framework in the UK which highlights the increased uptake in the last year.
The report follows a review conducted by the Lab. The review is based on the recommendations set out in the Lab’s previous reports on climate-related reporting. It also considers how reporting has developed in response to the FRC’s Climate Thematic. The report notes that previous Lab publications have set out questions for companies to consider addressing in response to each TCFD pillar and the related eleven recommended disclosures. The Lab notes that these questions remain relevant in view of the developing nature of reporting practice and to meet investor needs.
In addition, when preparing TCFD disclosures, companies are reminded that they should consider existing related requirements, in particular those set out in the Guidance on the Strategic Report, the UK Corporate Governance Code and the Streamlined Energy and Carbon Reporting (SECR) rules. Companies also need to consider the impact of climate risk on the financial statements.
The report also looks at investor expectations and suggests a number of areas which companies may need to consider when preparing their TCFD and other climate-related disclosures:
- Due to exemptions, SECR metrics may not include all entities within a group. Therefore, SECR disclosures may not be the most appropriate metrics to meet the TCFD requirement unless they are representative of the whole group’s emissions.
- It is not always clear how companies decide which climate information to present in their annual reports as opposed to a standalone sustainability, climate change or TCFD report. Companies should consider what disclosures are included in the annual report, compared to other standalone reports, as they will need to provide an explanation why, besides a reference to where the disclosures can be found, to meet Financial Conduct Authority (FCA) requirements.
- Reference to disclosures in reports external to the annual report, particularly third party reports such as responses to CDP questionnaires, should be made easily available, ideally through the use of hyperlinks within the annual report.
The FRC has also published research by the Alliance Manchester Business School which investigates climate-related scenario analysis in more detail. The research, Climate Scenario Analysis: Current Practice and Disclosure Trends, highlights the various approaches companies have adopted, instances of good practice, typical challenges faced, and the common steps taken to conduct the analysis.
(FRC: Taskforce on Climate-related Financial Disclosures (TCFD) - ahead of mandatory reporting: Developing practice, 28.10.2021)
FCA: Joint statement by the FCA, PRA, TPR and FRC on the publication of Climate Change Adaptation Reports
On October 28, 2021 the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), the Pensions Regulator (TPR) and the Financial Reporting Council (FRC) published a Joint Statement in relation to the Climate Change Adaptation Reports they are required to publish under the Climate Change Act 2008. The FCA, PRA and TPR have published their reports which set out how climate change affects their respective responsibilities and the actions they, and the financial sector, are taking in response to it.
FCA Climate Change Adaptation Report
In the FCA’s report, the FCA sets out the steps it has seen the industry take to mitigate the risks climate change presents and identifies areas, such as retail investments and mortgages, where more needs to be done. The FCA’s assessment comes within the context of the FCA’s developing strategic approach to climate change issues. This will see climate considerations embedded in everything the FCA does, from how it operates, to its policy choices, to how the FCA supervises and enforces against firms. Additionally, the FCA’s report examines how the industry is making commitments to reach net-zero. The FCA comments that it is keen to see these commitments put into action, backed up by appropriate governance and transition plans that will turn pledges into reality.
PRA Climate Change Adaptation Report
In the PRA’s report, the PRA sets out the risks from climate change to its objectives and its response to them. This includes how climate-related financial risks affect the firms the PRA regulates, its work to support and drive improvements in firms’ capabilities to manage these risks effectively, and its consideration of what further policy action may be necessary.
The PRA issued the world’s first supervisory expectations for the management of climate-related financial risks in April 2019, and in July 2020 set a deadline for them to be embedded as far as possible by the end of 2021. The PRA’s report concludes that firms have made tangible progress against these expectations. However, some firms are materially more advanced than others, and there is still much further to go. In 2022, the PRA will actively supervise to ensure firms meet expectations, with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis. In the report the PRA highlights that it will consider the use of its full supervisory and regulatory toolkit to provide the necessary assurance or remediation where appropriate.
The report also sets out the PRA’s latest thinking on the relationship between climate change and the regulatory capital framework. Whilst the PRA observes that capital is not the right tool to address the underlying causes of climate change (greenhouse gas emissions), it should help provide resilience against its consequences (financial risks). The PRA already expects firms to hold capital against material climate-related financial risks, but in light of the report’s findings, the PRA will be undertaking further work. This work will help determine whether changes to the design, use or calibration of the regulatory capital framework may also be needed to ensure resilience against these risks. The PRA will provide an update on its approach in 2022 following a call for further research and a conference on climate change and capital requirements.
TPR’s Climate Change Adaptation Report
TPR notes in the TPR report that it will publish guidance clarifying what TPR will look for from schemes as they assess, manage and prepare to report on climate-related risk and opportunities. TPR will continue work with its regulated community to ensure its guidance is clear and easily adopted. To support trustees in meeting their duties, TPR’s proposed new code of practice will include several climate change modules. The draft proposals include a requirement that they assess climate-related risks and opportunities as part of their system of internal controls. TPR will work with the Department for Work and Pensions to share best practice in climate risk reporting.
FRC’s Climate Change Adaptation Report
This will be published in 2022.
(FCA: Joint statement by the FCA, PRA, TPR and FRC on the publication of Climate Change Adaptation Reports, 28.10.2021)