The UK government is currently consulting on the introduction of mandatory reporting on climate-related financial disclosures. The scope of the consultation broadly reflects the Government's interest, as previously stated in the Green Finance Strategy, in introducing mandatory reporting along the lines of the disclosure framework proposed by the Task Force on Climate Related Financial Disclosures (TCFD).
The intention behind the TCFD disclosures is to provide greater visibility to investors and other stakeholders of a company's exposure to climate-related financial risk, both physical risks (connected with the direct impact of climate change through, e.g., a greater frequency of extreme weather events) and transition risks (exposure to the extensive policy, legal, regulatory, technological and market changes inherent in transition to a low-carbon economy).
To that end, the TCFD have built a framework of voluntary disclosure on four pillars, Governance, Strategy, Risk Management, and Metrics and Targets, each with associated disclosure requirements.
The UK Government proposes wholesale adoption of these four pillars into the company reporting regime on a mandatory basis, specifically as part of the non-financial information statement forming part of a company's strategic report (relevant LLPs would also be required to report in similar fashion).
The consultation envisages this reporting requirement being applied to all UK companies currently required to produce a non-financial information statement (including all listed companies with more than 500 employees), as well as other companies, and LLPs, with more than 500 employees and a turnover of more than £500million.
The aim is to bring enacting regulations into force on 6 April 2022, with reporting requirements applying to accounting periods starting on or after that date. No new enforcement mechanism would be introduced, with regulation via the existing company reporting regime.
The consultation touches on two other related points.
Firstly, the UK's existing Streamlined Energy and Carbon Reporting Regime (SECR) imposes energy usage and efficiency reporting requirements on both listed companies and unlisted companies, albeit to differing levels. This consultation poses the question of whether SECR reporting should be standardised - i.e. whether all companies within the scope of SECR should be required to disclose information to the same degree (the Government's position being that this will bring consistency to disclosures and could simplify reporting procedures).
Secondly, while not a subject of the consultation, it is interesting to note that there is reference to the development of a green taxonomy ("a common framework for determining which economic activities can be defined as environmentally sustainable"). Building on previous Government statements, this consultation indicates that a UK Green Technical Advisory Group will be launched in 2021 to review criteria for this taxonomy and to advise Government. This follows on from the development of an equivalent taxonomy in the EU, and it will be instructive to see differences, and similarities, between the two.
The consultation closes on 5 May 2021.
This consultation seeks views on proposals to mandate climate-related financial disclosures by publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs).