The largest companies in the UK will be adopting mandatory climate disclosures in the coming months as the result of new legal requirements imposed by the UK government.
In November 2021 at the COP 26 international climate change conference, the UK government announced its ambition to require mandatory climate disclosures for the largest companies. The resulting Climate-related Financial Disclosure (CFD) regulations were enshrined in UK law on 17 January 2022. These changes require organisations to disclose climate-related financial information and ensure they consider the risks and opportunities they face as a result of climate change.
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 are amendments of Sections 414C, 414CA, and 414CB of the Companies Act 2006. They require organisations to disclose climate-related financial information. The definition of "climate-related financial disclosures" in the regulations includes:
(a) a description of the company's governance arrangements in relation to assessing and managing climate-related risks and opportunities;
(b) a description of how the company identifies, assesses, and manages climate-related risks and opportunities;
(c) a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company's overall risk management process;
(d) a description of —
(i) the principal climate-related risks and opportunities arising in connection with the company's operations, and
(ii) the time periods by reference to which those risks and opportunities are assessed;
(e) a description of the actual and potential impacts of the principal climate-related risks and opportunities on the company's business model and strategy;
(f) an analysis of the resilience of the company's business model and strategy, taking into consideration different climate-related scenarios;
(g) a description of the targets used by the company to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and
(h) 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 change in the CFD regulations was made on 17 January 2022. They are enforceable from 6 April 2022 and will be applied to any financial year of a company that starts from this date.
The CFD regulations are part of the UK's efforts to make climate-related financial disclosure mandatory across the economy by 2025. These requirements are designed to help investors and businesses to better understand the financial impacts of their exposure to climate change, and price climate-related risks more accurately.
The CFD regulations will impact over 1,300 of the largest UK-registered companies and financial institutions. These include many of the UK's largest traded companies, banks, and insurers, as well as private companies with over 500 employees and £500 million in turnover.
The Department for Business, Energy and Industrial Strategy (BEIS) is due to publish Q&A style guidance in Quarter 1 2022.
The CFD regulations are broadly in line with the four pillars of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. These are governance, strategy, risk management, and metrics and targets. While awaiting further guidance from the UK government, it is worth familiarising yourself with the TCFD recommendations.
For a summary of the TCFD recommendations, download a copy of AICPA & CIMA's report: Sustainability Frameworks and Standards: Task Force on Climate-related Financial Disclosures (TCFD).
— Martin Farrar, Ph.D., is associate technical director of AICPA & CIMA. To comment on this article or to suggest an idea for another article, contact Ken Tysiac at Kenneth.Tysiac@aicpa-cima.com.