Co-authored by Oliver Haynes, Trainee Solicitor (not admitted to practice)
Ahead of The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (the "Regulations") taking effect on April 6, 2022, the U.K. Department for Business, Energy & Industrial Strategy (BEIS) issued a set of nonbinding guidance notes (the "Guidance Notes") to help companies and limited liability partnerships (LLPs) understand the scope of the Regulations, the contents of the required disclosures, and the relationship between the Regulations and other pieces of legislation. The Guidance Notes are intended as a "helpful resource" and are to be used alongside existing resources in determining compliance (as listed in our previous Client Alert). While the Guidance Notes are not definitive, they do address questions raised in the consultation response to the draft legislation released October 28, 2021.
The Guidance Notes affirm the original proposals for which companies and LLPs fell in-scope of the Regulations and clarified some ambiguities for groups spread across multiple jurisdictions.
Prior to April 6, 2022, U.K. companies that have more than 500 employees and have either transferable securities admitted to trading on a U.K. regulated market or undertake banking insurance activities (Relevant Public Interest Entities (PIEs)) were required to produce a nonfinancial information statement.
The Regulations enlarge the content requirements of those nonfinancial information statements and extend these expanded obligations to further include the following entities in respect of financial years beginning on or after April 6, 2022:
- U.K. registered companies with securities admitted to AIM with more than 500 employees.
- U.K. registered companies not included in the categories above that have more than 500 employees and a turnover of more than £500 million.
- Large LLPs that are not traded or banking LLPs and have more than 500 employees and a turnover of more than £500 million.
- Traded LLPs or banking LLPs that have more than 500 employees.
In-scope subsidiaries were confirmed to be exempt from individually making such reports if their U.K.-based parent company provided consolidated accounts on behalf of the group. Where the parent providing consolidated accounts is a non-U.K. incorporated company, the U.K.-based subsidiary must separately comply with the Regulations. Subsidiaries of parents who do not produce consolidated accounts must comply with climate-related financial disclosures in their individual accounts, and their U.K.-based parents should determine their scope eligibility with reference to the aggregated turnover and employee figures of the group they head.
A chief concern raised during the consultation process was whether the disclosure requirements would actually provide investors, regulators and other stakeholders with sufficient information to assess climate-related risks. The Guidance Notes have responded to these concerns—providing more in-depth guidance as to the content of the required disclosures (see our "Table of Content Guidelines for Climate-Related Financial Disclosures") and incorporating elements from across the more granular 11 Task Force on Climate-related Financial Disclosures (TCFD) recommendations that many respondents thought ought to be included. Such content guidance also addressed questions regarding the need for "scenario analysis" and materiality thresholds. For the former, the Guidance Notes seem to clarify that although scenario-analysis is not strictly mandatory, the main recommendation for complying with the obligation to assess a business's "climate resilience" was to conduct qualitative scenario analyses in relevant sectors. For the latter, the Guidance Notes reiterate the government's position that directors have the right to omit certain disclosure requirements from their report provided proper justification is given.
More broadly, the Guidance Notes affirm that (i) disclosures must be consistent with relevant accounting standards; (ii) there are no prescriptive formatting requirements; and (iii) where relevant information is not included in the annual report and accounts of a company, a specific cross-reference to where the information might be found ought to be included.
Liability and Ramifications
Given the discretion afforded to directors in omitting or including relevant information, the Guidance Notes confirm that responsibility for the disclosures ultimately lies with the directors, even where third party information is relied upon to help generate the report.
Where the disclosures are found to be inadequate, the U.K. Financial Reporting Council can apply to the court for a declaration that the strategic report, directors' report, or annual report and accounts of a company do not comply with the requirements of the U.K. Companies Act 2006. The court may then order the preparation of revised accounts/reports and other such matters the court thinks fit.
Interaction With Other Legislation
Overlap between the Regulations and other pieces of legislation has been acknowledged by the BEIS. The Guidance Notes clarify that those companies which also fall under the scope of the climate-related U.K. Listing Rules ("Listing Rules") and the Streamlined Energy and Carbon Report regime (SECR) will still need to comply with both sets of regimes where applicable. Although the Guidance Notes state that the Listing Rules and SECR will likely involve use of similar information, it should be noted that the Listing Rules directly reference the TCFD's recommendations, recommended disclosures and specified TCFD-published guidance materials, whereas the Regulations only comprise requirements that are aligned with the TCFD's recommendations. Similarly, the Guidance Notes confirmed that the Regulations complement, and do not duplicate, existing SECR requirements for quoted companies to report on their global energy use and for large businesses to report their U.K. annual energy use and greenhouse gas emissions. For those companies falling within the Listing Rules and SECR, the exact requirements of those regimes should be factored in alongside the Regulations.
The Guidance Notes further confirm that the Regulations are expected to be consistent with the forthcoming International Financial Reporting Standards Foundation disclosure standards and, as such, will be consistent with the broader international standard.
In concert with this post, the authors created a "Table of Content Guidelines for Climate-Related Financial Disclosures." Please view this content and reach out to any of the lawyers listed on this post and/or your Akin Gump relationship partner if you have any questions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.