This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Freshfields Sustainability

| 5 minutes read

A further step towards mandatory TCFD-aligned climate-related financial disclosures in the UK

On 24 March 2021, the Department for Business, Energy & Industrial Strategy (BEIS) launched its consultation seeking views on its proposals to require large companies and Limited Liability Partnerships (LLPs) to disclose climate-related financial information in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations.

The proposals are intended to position the UK as the first G20 nation to make TCFD-aligned disclosures compulsory across the economy.

It is proposed that the following entities be required to make TCFD-aligned disclosures:

  • All UK companies that are currently required to produce a non-financial information statement, i.e. companies that have more than 500 employees and have transferable securities admitted to trading on a UK regulated market, banking companies or insurance companies;
  • UK registered companies with securities admitted to AIM with more than 500 employees;
  • UK registered companies which are not included in the categories above, which have more than 500 employees and a turnover of more than £500m; and
  • LLPs which have more than 500 employees and a turnover of more than £500m.

The consultation proposes that companies will be required to report climate-related financial information in the non-financial information statement which forms part of the Strategic Report, while LLPs will be required to report in either the non-financial information statement which forms part of their Strategic Report or the Energy and Carbon Report which forms part of their Annual Report.

The proposals include a requirement to “comply or explain”: if the required climate-related financial disclosures are not made, a clear and reasoned explanation for the omission must be provided. The company or LLP must state why climate change is not expected to affect materially the company’s business model or strategy and provide a reasoned explanation of the basis on which it has come to this position.


There are nearly 400 mandatory and voluntary frameworks for sustainability disclosure worldwide.  Outside of climate, better non-financial narrative disclosure is a theme more generally – from the Market Abuse Regulation to the Companies Act 2006, these generally already require very material climate risks to be reported.

Carbon accounting requirements are not new either – the UK has had compulsory regimes in place for nearly a decade.  The Carbon Reduction Commitment (CRC), the Energy Saving Opportunity Scheme (ESOS), and now the Streamlined Energy and Carbon Reporting initiative (SECR), as well as international voluntary regimes such as the Carbon Disclosure Project, have been very widely adopted – but they are narrow.

TCFD is a game-changing approach, pivoted toward recognising climate change as a business-shaping risk, and to mitigate its potential to cause financial shock.  Mark Carney, the former Governor of the Bank of England and UN Climate Special Envoy, is the driving force behind TCFD and has advocated strongly for its recommendations to become law, and it is being seen increasingly as the global standard in corporate climate-change related disclosures. 

The TCFD recommends disclosure in four areas:

  • Governance: the extent of the board and management’s oversight of climate-related risks and opportunities, including the process and frequency by which board committees are kept informed and how climate change issues are considered when reviewing the company’s performance, strategy and business plans. 
  • Strategy: the climate-related risks and opportunities companies are exposed to and how these will impact them (e.g. by affecting demand for their products and services or their supply chains). Companies are also asked to conduct forward-looking scenarios on how their businesses will perform in a world where global warming is limited to 2°C.
  • Risk management: disclosing how the management of climate-related risks is integrated into existing risk management frameworks.
  • Metrics and targets: setting targets and disclosing metrics aligned with the material risks and opportunities for the business. The TCFD also specifically asks for companies to disclose their Scope 1 and 2 greenhouse gas emissions and, if appropriate, Scope 3 as well.

BEIS’ action in this space is part of a coordinated effort to move towards mandatory TCFD-aligned disclosures across major segments of the UK economy by 2025, in line with the Government’s 2019 Green Finance Strategy and the 2020 Roadmap and Interim Report.  There are a number of actions that have already been taken which interact with BEIS’ proposals.

In particular, premium listed companies are already subject to a TCFD regime on a comply or explain basis with effect from financial years commencing 1 January 2021. In December 2020, the FCA introduced a new listing rule (LR 9.8.6R) requiring that commercial companies with a UK premium listing (including sovereign-controlled commercial companies) include a statement in their annual financial report setting out whether they have made disclosures consistent with the recommendations and recommended disclosures of the TCFD in their annual report and if so, where they can be found. If a company has not made disclosures consistent with some or all of the recommendations or recommended disclosures, or has done so but not in its annual report, the annual report must explain why. The annual report must also describe any steps the company is taking or plans to take to be able to make consistent disclosures in future (including timeframes).  As such, TCFD disclosures will need to be made in 2022 annual reports of premium listed companies.

Financial services firms regulated by the PRA are also already obliged to engage with the disclosure of climate-related risks in line with TCFD (see our earlier blog posts here and here).

It is worth noting that BEIS’ proposals are complementary but less onerous than what is required by the new listing rule.  BEIS does not intend to require the disclosure of climate-related financial information in line with the 11 more detailed TCFD recommendations (as the listing rule does), but instead only by reference to the four pillars set out above.

Why mandate TCFD disclosures?

Recognising that voluntary disclosure has been happening for some time, what is the new disclosure regime trying to do that is different?

There are three themes:

  • First, market stability: getting companies to include climate-related financial risks and opportunities in strategic decision-making, rather than leaving it in an ethical side room, and ensuring that market participants can adequately understand these risks and opportunities.
  • Second, making it broader: going beyond single issues such as net zero targets, investment governance, or carbon accounting, to help companies address climate change risks and opportunities in a more holistic way for their organisation, operations and people.
  • Third, and arguably most importantly, standardisation: if there are standard rules, companies will know where to target their efforts and how to measure, analyse and track progress, without the fear of getting it wrong. Consistent, standardised rules also drive better expertise and capacity amongst climate auditors and consultants. The number of frameworks and standards that exist currently can make it difficult for investors and those looking to aggregate data across corporates to compare.

Next steps

The consultation is open until 5 May 2021 and the consultation document can be accessed here.

It is intended that regulations will be made by the end of 2021 and will come into force on 6 April 2022, so that they are applicable for accounting periods starting on or after that date.

BEIS’ proposals reflect an increasing worldwide focus and reliance on climate and ESG-related reporting.  Earlier this month, the US Securities and Exchange Commission announced the creation of a climate and ESG task force to develop initiatives to identify any material gaps or misstatements in issuers’ disclosure of climate risks and to identify disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies. Similarly, the IFRS Foundation has taken further steps towards a global convergence, with the announcement on 22 March of a working group to undertake technical preparation for a potential international sustainability reporting standards board, and publication in December 2020 of a TCFD reporting prototype.

The EU is also developing a range of sustainability disclosure requirements, as detailed here.


sustainability, financial services, sustainable finance, corporate governance