UK TCFD-aligned Disclosures Explained

Financial reporting is changing.  In this article we will look at the Task Force on Climate-related Financial Disclosures (TCFD) -aligned reporting required to be made by some UK entities.  In further articles, we will look at the TCFD itself and the new face of reporting, the Taskforce on Nature-related Financial Disclosures (TNFD).

Who is in scope?1:

Under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022, the following types of entities need to make mandatory TCFD-aligned disclosures as part of their Non-Financial and Sustainability Information Statement in the Strategic Report for accounting periods starting on or after 1 April 2022 (let’s call these the UK TCFD Regulations):

The UK TCFD Regulations also introduce requirements for listed companies, banking companies, authorised insurance companies, companies carrying on insurance activities, AIM companies and high turnover companies² to include information relating to environment matters, employees, social matters, human rights, anti-corruption and anti-bribery in their Non-Financial and Sustainability Information Statement, in addition to the TCFD-aligned disclosures.

In addition, commercial companies with a UK premium or standard listing are required to make disclosures against the TCFD recommendations on a ‘comply or explain’ basis under the rules set out in the FCA Handbook (the Listing Rules).  Where entities are subject to the Listing Rules and also required to report in accordance with the UK TCFD Regulations, entities should report in line with the recommendations issued by TCFD as “it is normally likely to meet the requirements of these regulations”¹.

There are also TCFD-aligned disclosure rules for asset managers and certain asset owners which came into force on 1 January 2022 and for smaller firms on 1 January 2023.  The disclosures under these rules are directed at clients and are separate to the listing rules.  They can be found in the FCA’s ESG Sourcebook.

What do in scope companies need to do?

The UK TCFD Regulations for climate-related financial disclosure are based on the recommendations issued by TCFD but they do not directly mirror them, they have been adapted for inclusion in UK legislation.

The UK TCFD Regulations require in-scope entities to disclose:

1. 1. a description of the governance arrangements of the entity in relation to assessing and managing climate-related risks and opportunities;
   2. a description of how the entity 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 overall risk management process at the entity;
   4. a description of:
      1. the principal climate-related risks and opportunities arising in connection with the operations of the entity, 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 business model and strategy of the entity;
   6. an analysis of the resilience of the business model and strategy of the entity taking into consideration of different climate-related scenarios;
   7. a description of the targets used by the entity to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
   8. the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and a description of the calculations on which those key performance indicators are based.

Directors continue to be responsible for all information in the Annual Report and climate-related financial disclosures is no exception.  Auditors have the same responsibility for the climate disclosures as all other statements in the Strategic Report, where there are uncorrected material misstatements, this should be recorded in the auditor’s report.

How much detail is required?

Enough detail is required to enable the reader of the annual report to understand the effect of climate-related financial risks and opportunities on the business without referring to other sources and should not omit information which, if disclosed, would influence the decisions of investors.  There is some discretion for directors to omit  some or all of certain requirements where these are not necessary for the understanding of the business but directors must provide a clear and reasoned explanation why it is appropriate to omit such information.

It is possible to cross-refer to other parts of the Annual Report and Accounts to avoid repetition of required information.

As a last aside, we would note that the regulations for climate-related financial disclosures complement and do not replace the regulatory regime set out in the Streamlined Energy and Carbon Report (SECR).

Next steps

In the UK, 2023 is the first mandatory reporting year for most organisations, so we expect to see variations in reporting as entities develop their reporting and data sources.  Due to the data required for those organisations which are in scope, we would expect to see the scope widened to include smaller entities in the future. 

In addition, the UK Transition Plan Taskforce (TPT) published a consultation on its transition plan disclosure framework, implementation guidance and technical annex in November 2022.  The consultation period closed on 28 February 2023 and we can expect to see a finalised framework by the end of this year.  The FCA requires some listed companies, large asset owners and managers to disclose transition plans on a “comply or explain” basis and, as part of its commitments made under the Green Finance Strategy, the UK Government has committed to consult on the introduction of requirements for the UK’s largest companies to disclose their transition plans.  The direction of travel seems clear.  Read our article on TCFD reporting here and on the Transition Plan Taskforce here.

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area. 

This note is intended to be a general guide and covers questions of law and practice.  It does not constitute legal advice.

Authored by Emily Julier, Julia Cripps, and Rita Hunter.

^{Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.}

References

1 Taken from Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs: Non-binding guidance

2  A high turnover company refers to where the company was not a parent company, a company with turnover for that year of more than £500 million; or where the company was a parent company at any time within that financial year, if in that year, a group headed by the company had an aggregate turnover of more than £500 million net.