Climate-related financial disclosures for Large Private Companies and LLPs | Deloitte UK has been saved
On 17 January 2022, the Department for Business, Energy & Industrial Strategy (BEIS) approved mandatory climate-related financial disclosure requirements (link here). The requirements take effect for accounting periods commencing on or after 6 April 2022 and apply to all UK-registered private limited companies and LLPs that have over 500 employees and a turnover greater than £500m.
Also in scope are all UK-registered companies currently required to produce a non-financial information statement, all UK-registered companies with securities admitted to AIM and more than 500 employees and all traded or banking LLPs with more than 500 employees. Parent companies and LLPs should take account of the number of employees and net turnover of all subsidiary companies to assess whether they meet the threshold. Subsidiary undertakings are exempt where the parent company makes the disclosures at group level.
The required disclosures are broadly aligned to the recommendations of the Task Force for Climate-Related Financial Disclosures (“TCFD”) but are not identical. Companies should include eight new climate-related financial disclosures within their Non-Financial Information Statement, which has been renamed by the legislation to become the Non-Financial and Sustainability Information statement (“the NFSI statement”). LLPs must report these disclosures in either their Strategic Report (if prepared) or in their Energy and Carbon Report which forms part of their Annual Report.
The following requirements a) to d) must be disclosed, no exceptions:
a) a description of the governance arrangements of the business in relation to assessing and managing climate-related risks and opportunities.
The persons or committees responsible for identifying, considering and managing climate-related risks and opportunities should be clearly identified. Disclosure should also be made of how frequently these matters are considered.
b) a description of how the business identifies, assesses, and manages climate-related risks and opportunities.
Disclosures should include:
c) a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the overall risk management process in the business.
This description should highlight how climate-related risks and opportunities contribute to decision-making across the business.
d) a description of:
A robust climate risk management system with sufficient oversight at board level should enable the identification of the principal climate-related risks and opportunities in the short-term, medium-term and long-term. Each of these time periods should be clearly defined. Disclosure of each of these risks and opportunities should include any mitigations already in place or that are planned for future implementation.
The remaining requirements e) to h) may be omitted if they are “not necessary for an understanding of the business”. However, a clear and reasoned explanation for any omissions must be provided by the directors in the NFSI statement (or by members in either the Strategic Report or Energy and Carbon Report):
e) a description of the actual and potential impacts of the principal climate-related risks and opportunities on the business model and strategy of the business.
“Principal” climate-related risks are those that have the potential to have a material impact on the strategy of the business. Descriptions should be as granular as is necessary to enable the readers of the accounts to understand the potential impact of that specific risk or opportunity.
f) an analysis of the resilience of the business model and strategy, taking into consideration of different climate-related scenarios.
The analysis should consider a range of different climate change scenario projections. The assessment performed under requirement d) on the nature of the risks and opportunities facing the business should be utilised to determine the most appropriate choice of scenarios. For instance, if the entity’s risk assessment has indicated that the business has high exposure to physical risks such as coastal flooding, then a warmer scenario that includes rises in sea levels might be considered. An extensive use of assumptions and estimates in completing the scenario analysis exercise is expected and disclosure of these assumptions and estimates should be made to enable readers to judge whether they are reasonable and in line with similar entities. Scenario analysis disclosures do not have to include quantitative measures and can currently be performed in qualitative terms. General guidance on best practice for scenario analysis has been provided by the TCFD (link here).
g) a description of the targets used by the business to manage climate-related risks and to realise climate-related opportunities and of performance against those targets.
Businesses may consider incorporating these targets into a comprehensive transition plan mapped onto identified risks and opportunities. Targets should be disclosed with a timeframe of when the business intends to meet those targets and how such progress is monitored and assessed, providing a clear action plan to stakeholders.
h) the key performance indicators used to assess progress against targets to manage climate-related risks and realise climate-related opportunities and a description of the calculations on which those key performance indicators are based.
Annual progress in meeting each of the targets included in disclosure g) should be assessed via climate-related key performance indicators (KPIs).
Climate change poses risks and opportunities to all businesses, including private companies and LLPs, and could have material impacts on their value, both in terms of the physical risks arising from climate change and the transition risks arising in adapting towards a low-carbon economy.
A focus on producing strong disclosures in response to the BEIS requirements can help businesses in a number of ways: businesses can prepare themselves for what the changing climate will mean for them, assess what they need to do to address climate-related impacts, risks, and opportunities applicable to them and their stakeholders, and position themselves at the leading edge of a reporting landscape set to evolve further in the years ahead.
In our experience, preparing high quality climate disclosures takes time, involves collaboration between a number of different internal stakeholders and relies on a wide-range of data sets. We would therefore recommend that businesses act now to ensure they are prepared for the new climate disclosure requirements.
Sarah Law is a chartered accountant and an experienced statutory auditor, having led some of our largest and most demanding financial services audits. She is currently the lead audit partner for several financial services companies, including retail banks and non-bank lenders. Sarah also co-leads the UK’s Environmental, Social and Governance (“ESG”) assurance team providing high-quality assurance on ESG metrics and disclosures. She has significant experience in providing public ISAE3000 assurance over ESG information for several FTSE companies across a wide range of industries. She also takes a leading role in developing Deloitte’s initiatives to support audit teams in considering climate risks and broader ESG risks within the financial statement audit.
James co-leads our Environmental, Social and Governance (ESG) Assurance practice in the UK. He spends much of his time talking to boards and non-execs about the fast-developing landscape of ESG reporting including the changing regulatory, stakeholder and investor requirements. He’s also responsible for developing Deloitte’s ESG assurance propositions in areas including PRI report assurance, ESG-linked finance assurance and ESG reporting assurance. James is a water resources engineer by background and has spent over 20 years in professional services working with companies in all sectors across FTSE 350, large private and PE.
Emily is a Director in our ESG Audit and Assurance Leadership team, specialising in sustainability reporting and assurance. She is a chartered accountant and her clients cover a range of industries including energy and resources, TMT, industrials and retail/consumer. Her experience includes large corporate ISAE 3000 assurance projects for both Annual Reports and sustainability-linked lending and advises clients on ESG reporting under frameworks such as TCFD, ISSB and CSRD. Emily sits on the North West Board of BITC, is a member of the Pro-Manchester Green Economy panel and was listed in North West Business Insider’s 2023 Green Power list. She also volunteers by promoting the Deloitte BrightStart scheme in schools and colleges with a particular focus on improving social mobility.
Jack is an Assistant Manager within Deloitte’s ESG Assurance team and a qualified ICAEW chartered accountant. Jack has an audit background across a range of industries and holds a BSc with Joint Honours in Accounting and Maths from Newcastle University.
Matthew is an assistant manager in our ESG Assurance team. He is a Chartered Accountant with three years’ experience delivering audit and assurance engagement projects and has worked with clients across a range of industries.