The UK’s climate-related financial disclosure requirements are now in effect.
By this time next year, more than 1,300 of the country’s largest companies and financial institutions will be obligated to publish detailed information about the impact of climate change on their business, in line with the recommendations published by the Task Force on Climate-Related Financial Disclosures (TCFD). By 2025, these regulations will be fully mandatory across the UK economy.
To help businesses navigate these new regulations, this article will explore the information companies will be required to disclose, which businesses are affected by the requirements, and the potential pitfalls forms may face when working towards compliance.
For much more information on navigating the UK’s disclosure requirements, check out Cervest’s free and comprehensive ebook.
What information are companies required to disclose?
Under the UK’s framework, eligible companies in England, Wales, Scotland and Northern Ireland will need to describe:
The company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities
How the company identifies, assesses, and manages climate-related risks and opportunities
How processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process
The principal climate-related risks and opportunities arising in connection with the company’s operations
The time periods by reference to which those risks and opportunities are assessed
The actual and potential impacts of the principal climate-related risks and opportunities on the company’s business model and strategy
An analysis of the resilience of the company’s business model and strategy, taking into consideration different climate-related scenarios
The targets used by the company to manage climate-related risks and to realize climate-related opportunities and performance against those targets
The key performance indicators used to assess progress against targets used to manage climate-related risks and realize climate-related opportunities and of the calculations on which those key performance indicators are based
Which businesses are affected by UK climate-related financial disclosure requirements?
Companies and LLPs will be required to make climate-related financial disclosures if they are one of the following:
A UK company that is currently required to produce a non-financial information statement. This means they are a UK company that has 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))
A UK registered company with securities admitted to AIM with more than 500 employees
A UK registered company that is not included in the categories above, but which has more than 500 employees and a turnover of more than £500m
A large LLP, which is not traded or banking LLPs, and has more than 500 employees and a turnover of more than £500m
A traded or banking LLP which has more than 500 employees
Affected companies will need to make their first disclosures at the end of the first financial year starting on or after 6 April 2022.
Potential pitfalls complying with climate-related disclosures
The UK’s disclosure framework will encourage companies to take a detailed look at climate-related risks and opportunities. However, these regulations also pose a number of technical and compliance challenges businesses may struggle with in the years ahead.
Analyzing climate risk
Organizations historically struggled to discover and analyze climate risk because of the cost and complexity of high-resolution climate data and the lack of in-house expertise. According to Cervest’s climate-related financial disclosure report, this has created a range of barriers to companies’ ability to quantify climate risk for the purpose of reporting.
The disclosure regulations require companies to publish an analysis of their business model’s resilience to climate change, taking into account multiple climate-related scenarios.
While they are essential to understanding long-term risk, climate-related scenarios are generally developed for macroscopic assessments. This means they do not “always provide the ideal level of transparency, range of data outputs, and functionality of tools that would facilitate their use in a business or investment context”, according to the TCFD. In addition, many companies lack the data needed to understand the impact of different scenarios over multiple regions.
The government’s guidance says that businesses “should consider all relevant time horizons”. It also says that, wherever possible, businesses should categorize risks and opportunities in the short-, medium- and long-term.
Without understanding the specific combinations of risks their business is facing, and how those risks will evolve as climate change accelerates, many businesses will struggle to identify what time frames will be relevant.
Navigate climate-related financial disclosure requirements with our free ebook
The UK’s disclosure requirements are expected to create administrative and technical burdens for many businesses, especially when it comes to reporting on asset risk. To help companies come to terms with these requirements, and analyze asset-level climate risks for compliance purposes, Cervest has published a free ebook covering:
Understanding UK regulations from an asset perspective
Analyzing climate-related asset risks across different climate-related scenarios
The benefits of financial disclosures beyond compliance
How to incorporate Climate Intelligence (CI) insights into workflows beyond disclosure reporting
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