LR, DTR, Prospectus Regulation and MAR: FCA Consultation on Climate-Related and Other ESG Disclosures
Climate change is clearly something which is at the forefront of the minds of communities and governments. Increasingly, climate change and its impacts are being considered by companies and investors alike, as they become more aware of the potential impact – both directly and indirectly – that climate change may have on the value of assets and prospective profits. In the US for instance, the Sustainability Accounting Standards Board has assessed that climate change is material for companies in 72 out of 79 industries, which equals 93% of the US equity market.
Equally, as the UK seeks to turn to a low-carbon economy, investors are becoming increasingly interested in committing their money to companies and projects that will support this transition.
As a result, on 6 March 2020 the Financial Conduct Authority (“FCA”) took what seems to be a public policy decision and launched a consultation process (“Consultation”), whereby it is proposed to introduce a new rule for companies with a UK premium listing (though not investment companies), requiring them to state whether they comply with the Taskforce on Climate-related Financial Disclosures (“TCFD”) climate related disclosure recommendations and if they do not, explain the reasons for such non-compliance. This, the FCA states, will provide greater transparency to the market that allows investors to make more informed choices as to their investments and also help further underpin London as a leading venue for high-quality listings, while not imposing too great a requirement on issuers.
The TCFD was set up in 2015 by the Financial Stability Board, with the aim to develop climate-related risk disclosures for companies, banks and investors, to provide information to stakeholders. The TCFD’s recommendations were finalised in June 2017 and seek to establish guidance for all sectors in respect of climate change and fall under the following headings:
Governance: the specific organisation’s governance around climate-related risk and opportunities;
Strategy: the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning;
Risk management: the process used by the organisation to identify, assess and manage climate-related risks; and
Metrics and targets: the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
A number of other disclosure initiatives have already aligned with the TCFD’s recommendations and more than 1,000 organisations globally have formally declared their support for such framework – Australia and Japan are already encouraging the adoption of the framework, with New Zealand considering the feedback from their own consultation process. Therefore, seeking to bring climate-related disclosure requirements for premium listed companies in line with those of the TCFD’s seems like a logical step for the FCA.
The Consultation proposes that the new disclosure rule would apply to accounting periods beginning on or after 1 January 2021 and would require companies to include a statement in their annual financial report, setting out:
whether they have made disclosures consistent with those recommended by the TCFD;
where companies have:
not made disclosures consistent with some or all of the TCFD’s recommendations and/or recommended disclosures; or
included some or all of the disclosures in a document other than their annual financial report,
then companies need to provide an explanation as to why this is; and
where in the annual financial report (or other such document) such disclosures can be found.
The FCA recognises there are challenges as this is still a relatively nascent area and therefore proposes a proportionate ‘comply or explain’ approach, that seeks to provide certainty to issuers and investors, while allowing a degree of flexibility – as companies may not yet have the data and capabilities to fully comply with the TCFD’s recommendations.
In addition to the Consultation, the FCA is also proposing a technical note, to provide guidance on existing obligations under EU legislation and other environmental, social and governance matters that are already required by the FCA to be disclosed. This technical note will be relevant for all issuers with securities listed on the London Stock Exchange.
The FCA seeks comments on the proposals within the Consultation by 5 June 2020.
Authored by Harry Hobson