Proposals to extend climate-related disclosures to standard issuers

In December 2020, the FCA introduced new rules which require premium listed companies to make climate-related disclosures by reference to the TCFD recommendations on a 'comply or explain' basis. The FCA is now consulting on extending those rules to issuers of standard listed equity shares (other than standard listed investment entities and shell companies). See Hot news: More climate-related disclosures for listed companies for the rules for premium listed companies.

The FCA are not proposing to make the rules mandatory at this stage as they think it is better to wait until there is a common international reporting standard before doing so. The establishment of an international reporting standard is already being taken forward by the IFRS Foundation.

The rules are being introduced as issuers are not voluntarily making sufficient climate-related disclosures to provide markets with the information they need to make informed business, risk and investment decisions.

The consultation also includes a discussion section where they are seeking views on issues related to green, social or sustainability labelled debt instruments and ESG data and rating providers.

Background

These proposals follow the Government's Roadmap towards mandatory TCFD-aligned disclosure obligations across the UK economy over the next five years (published in November 2020).

As well as the FCA's measures, the Government is consulting on climate-related disclosures for companies and limited liability partnerships and the Department for Work and Pensions has published draft regulations for trustees of occupational pension schemes. See Mandatory climate-related financial disclosures proposed for more information.

The FCA is also consulting on new climate-related disclosure requirements for asset managers, life insurers, and FCA-regulated pension providers which would align with the TCFD's recommendations. See FCA proposals for climate-related disclosures by asset managers for an overview of the proposed new rules for asset managers. 

Which companies would be in scope?

The new rules would apply to all issuers of standard listed equity shares (as included in LR 14), other than standard listed investment entities and shell companies, regardless of where they are domiciled. The FCA are not expecting there to be any conflict with overseas companies' home market rules, as the TCFD's recommendations are an internationally accepted framework.

The FCA notes that whilst standard listed investment entities will not fall within these rules, some of them will fall within the scope of the proposed new rules for asset managers.

Shell companies are excluded given their simple balance sheets and as they typically do not have established governance, strategy and risk management arrangements.

The FCA is consulting on whether the rules should also be extended to:

• issuers of standard listed GDRs

• standard listed issuers of shares other than equity shares, and

• debt and debt-like securities - in this case, the FCA want to know what climate-related information market participants want from these issuers so that it can decide whether the TCFD aligned disclosure rules are appropriate.

What would the new disclosure requirements be?

Companies in scope would have to state, in their annual financial report:

• whether they have made disclosures consistent with the TCFD recommendations and recommended disclosures;

• where they have not made disclosures consistent with some or all of the TCFD recommendations and/or recommended disclosures, an explanation of why and any steps they are taking/plan to take to make those disclosures in the future and the timeframe within which they expect to be able to make those disclosures;

• where some or all of their disclosures are in a document other than the annual financial report, an explanation of why; and

• an explanation of where in the annual financial report (or other relevant document) the various disclosures can be found.

The new rule (and associated guidance) would directly mirror the structure and wording of the rules and guidance for premium listed companies in LR 9.8.6.

The FCA have considered the interaction of the Government's Companies Act proposals with their rules and state that they are confident that, in their current form, the Government's proposals and their proposed provisions can work effectively together.

What are the TCFD recommendations?

The Financial Stability Board established the TCFD to develop recommendations for more effective climate-related disclosures that could promote more informed investment decisions.

The TCFD recommendations on climate-related financial disclosures (the Recommendations) were published in 2017. The Recommendations are intended by the TCFD to be adoptable and applicable to organizations across different sectors and jurisdictions. The TCFD states that the Recommendations will solicit decision-useful, forward-looking information that can be included in financial filings.

There are eleven Recommendations, structured around four themes:

(i)         governance

(ii)        strategy

(iii)       risk management

(iv)       metrics and targets

What guidance would be given?

As noted above, the same guidance would be given as for premium listed companies to help companies determine whether their disclosures are consistent with the TCFD's recommendations and recommended disclosures.

When determining whether its climate-related financial disclosures are consistent, a company in scope would:

• be expected to undertake a detailed assessment of those disclosures, taking into account various TCFD guidance materials which will be set out in the Listing Rules;

• need to consider whether those disclosures provide sufficient detail to enable users to assess the listed company's exposure and approach to addressing climate-related issues; and

• have to carry out its own assessment to ascertain the appropriate level of detail to be included in its climate-related financial disclosures, taking into account factors such as (1) the level of its exposure to climate-related risks and opportunities; and (2) the scope and objectives of its climate-related strategy (depending on the nature, size and complexity of the listed company's business).

The guidance would also clarify the limited circumstances in which the FCA expect a listed company to explain, rather than make disclosures. The FCA would ordinarily expect an in-scope listed company to be able to make climate-related financial disclosures consistent with the TCFD recommendations, except where it faces transitional challenges in obtaining relevant data or embedding relevant modelling or analytical capabilities.

The FCA is not going to refer to the Sustainability Accounting Standards Board (SASB) Standards, but in the same way as the FRC is encouraging UK public interest entities to report against the TCFD recommendations using the SSAB metrics, the FCA encourage relevant listed companies to consider the SASB metrics for their sector when making their disclosures against the TCFD's recommended disclosures.

What are the TCFD guidance materials?

The Listing Rules will list the TCFD guidance materials that need to be considered in connection with the TCFD recommendations. The TCFD is currently consulting on changes to some of its documents and, assuming that the TCFD's updates remain broadly consistent with the FCA's proposals, the new rule will refer to those amended documents. The current rule for premium listed companies will also be amended to refer to the updated documents:

The TCFD changes are:

• updates to the TCFD's existing all-sector guidance (in the TCFD Final Report and TCFD Annex to that report), and to the supplementary guidance for both non-financial and financial sectors (in the TCFD Annex);

• new guidance in a standalone document on metrics targets, and transition planning; and

• a new technical supplement on measuring portfolio alignment.

Will third party assurance be needed?

The FCA has decided not to require third party assurance now but will continue to keep the position under review and this is more likely once there is an international corporate reporting standard in place.

Technical Note

When the FCA published its rules for  premium listed issuers, it also published a Technical Note ("Disclosures in relation to ESG matters, including climate change") that provides guidance to all listed issuers on existing disclosure obligations.

The FCA are proposing to update this Technical Note to reflect the proposed new rule and associated guidance but are not proposing any other changes.

Timing

The consultation closes on 10 September 2021 and the FCA expects to publish final rules for listed issuers by the end of 2021. These will apply to accounting periods beginning on or after 1 January 2022, so the first reports would be published in 2023.