More companies will soon be required to make climate-related disclosures

Published on
5 min read

AIM companies, large private companies and LLPs will soon be required to make climate-related disclosures in their annual report and accounts, under new regulations currently going through Parliament. In this note, Emma Plaxton, a principal associate in our corporate team, explains how these regulations may impact on your company, and what actions you need to take to make sure you can comply with the new disclosure requirements.

Why is the Government doing this?

The proposals are designed to help facilitate the Government’s Net Zero Strategy – its roadmap outlining measures to transition to a greener and more sustainable future. The Government’s view is that businesses and private finance will play a vital role in the transition to net zero. This includes a focus on ensuring that every financial decision maker has the information needed to take climate and the environment into account. Introducing clear and consistent climate-related disclosures in financial reporting will be an important part of this.

Premium listed companies have been subject to similar rules since 1 January 2022. These new regulations extend the disclosure requirements to many other larger businesses i.e. those businesses which are likely to have a material impact on the environment or exposure to environmental risks. 

When will the new rules start to apply?

They will apply to any financial year beginning after 5 April 2022.

Who will the new rules 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 either:
    • have transferable securities admitted to trading on a UK regulated market, or
    • are banking companies or insurance companies.
  • 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.

These turnover requirements and the requirement for more than 500 employees are applied on a group-wide basis. The number of employees means the average number of persons employed by the company in the year (calculated according to a set formula). An employee is any person employed under a contract of service (there is no discrimination between part-time and full-time employees).  

What will you have to disclose?

Each company affected by the new rules will have to disclose:

  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 it 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 its overall risk management process.
  4. A description of the principal climate-related risks and opportunities arising in connection with its operations, and 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 its business model and strategy.
  6. An analysis of the resilience of the business model and strategy, taking into consideration different climate-related scenarios.
  7. A description of the targets used to manage climate-related risks and to realise climate-related opportunities and of performance against those targets.
  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.

The Government have promised to publish non-binding guidance, in the form of Q&A, to help companies understand how to comply with these disclosure requirements. However, we have not yet seen that guidance.

Will non-disclosure be permitted?

The proposals provide for a company’s directors to have some 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 carve out will apply to disclosures made under e), f), g) and h) above, where directors reasonably believe these disclosures are not necessary for the understanding of the business.

If disclosures are omitted, the directors must offer a clear and reasoned explanation of why they are doing this. 

Where will the disclosures be made?

For companies which are currently required to prepare a non-financial statement in their Strategic Report (covering environment matters, employees, social matters, human rights, anti-corruption and anti-bribery), the new climate-related disclosures will need to be included in this statement. 

For companies not currently required to prepare a non-financial information statement, only the new climate-related disclosures will need to be reported in a new non-financial statement in their Strategic Report.

As the non-financial information statement forms part of the Strategic Report, it will be reviewed by the auditor. 

LLPs to be required to report this information in either a non-financial information statement which forms part of their Strategic Report or, if no Strategic Report is prepared, the Energy and Carbon Report which forms part of their Annual Report.

Conclusion

Listed companies have been required to prepare climate-related disclosures for some time. However, these new proposals represent a significant widening of the net to include large AIM companies and large private companies and LLPs with a significant turnover. Some of these entities will be new to climate-related disclosures and the policies and processes which need to be put in place to comply with them. Businesses should consider whether this new regime will apply to them and, if so, start putting in place (in preparation for financial years commencing after 5 April 2022) the procedures required to enable them to meet their reporting obligations. Our Capital Markets team can help clients understand the new reporting requirements and what they can be doing now to get ready.   

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