FCA announces proposals to improve climate-related disclosures by listed companies and seeks feedback on clarification of existing climate- and other sustainability-related disclosure obligations

On 6 March 2020, the Financial Conduct Authority (“FCA”) launched a consultation paper¹ outlining new climate-related disclosure requirements for premium listed issuers and consulting on guidance on existing obligations set out in EU legislation (“CP”).

What is the FCA proposing?

The FCA is proposing to introduce a new listing rule (“LR”) for commercial companies with a UK premium listing², requiring them to state whether they comply with the recommendations of the Taskforce on Climate-related Financial Disclosures (“TCFD”)³ and to explain any non-compliance. The FCA is also consulting on guidance on existing obligations set out in EU legislation and in the FCA Handbook that may already require issuers to disclose information on climate-related and wider environmental, social and governance (“ESG”) matters under certain circumstances.

Over time, as further industry guidance on compliance with TCFD’s recommendations is finalised, the FCA expects to consult on expanding the issuer scope of the proposals. The FCA is considering how best to enhance climate-related disclosures by regulated firms including asset managers and life insurers to ensure a coordinated approach. The FCA is working closely with the Government and other regulators, including through a taskforce established by the Treasury under the Government’s Green Finance Strategy.

To whom does the proposal apply?

While the proposed new rules will directly affect financial services firms with a UK premium listing (in their capacity as issuers rather than regulated firms), the Technical Note (set out in Appendix 2 to the CP) on which the FCA is also consulting, impacts a wider scope of issuers, including:

• Listed issuers;
   
• Issuers with securities admitted to trading on regulated markets; and
   
• Other entities in scope of requirements under the Market Abuse Regulation (“MAR”) and the Prospectus Regulation (“PR”).

The proposals in the CP do not affect open-ended or close-ended investment companies.

Why is the proposal being made now?

There is growing recognition that climate change threatens to have a significant and complex impact on most, if not all, listed companies. Increasingly investors want to commit their money to companies and projects that will support the transition to a low-carbon economy. This CP was first anticipated in FS 19/6⁴ published in October 2019, when the FCA committed to consult on new rules for certain listed issuers to make climate related disclosures consistent with the TCFD. The proposals in the CP are consistent with the general direction of travel of the UK Government’s Green Finance Strategy, which set the expectation that all listed issuers and large asset owners would be disclosing in accordance with TCFD recommendations by 2022.

What are the key elements of the FCA’s proposals? 

The key elements are:

• A new climate-related disclosure rule in the Listing Rules (new LR 9.8.6R(8)) which will require commercial companies with a premium listing (including sovereign-controlled commercial companies) to include a statement in their annual financial report setting out:
   
• Whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures⁵ in their annual financial report;
   
• Where they have not made disclosures consistent with some or all of those recommendations and/or recommended disclosures, or have included disclosures in a document other than the annual financial report, an explanation of why; and
   
• Where in the annual financial report (or other relevant document) the various disclosures can be found.
   
• A new LR 9.8.6BG providing that, in determining whether the disclosures are consistent with the recommendations and the recommended disclosures set out in the TCFD Final Report, companies should have regard to the TCFD’s guidance for all sectors, supplemental guidance for the financial sector and supplemental guidance for non-financial groups as set out in the TCFD Annex implementing the recommendations of the TCFD [j1] ⁶.
   
• A new LR 9.8.6CG setting out that the FCA considers those provisions of the TCFD Final Report and TCFD Annex (to the extent not already referred to in LR 9.8.6R(8) and LR 9.8.6BG) and the TCFD Technical Supplement⁷, as being relevant to a listed company’s determination as to whether their climate related financial disclosures are consistent with the recommendations set out in the TCFD Final Report.
   
• A Technical Note, entitled “Disclosures in relation to ESG matters including climate change,” clarifying existing disclosure obligations. The FCA recognises that issuers (not just issuers with a premium listing) are already subject to a range of disclosure requirements, including disclosures on climate related change and other ESG related matters – in the FCA’s Listing Rules, the PR, the Disclosure Guidance and Transparency Rules and the MAR. The Technical Note discusses specific requirements set out in the UK and EU regulatory framework (that is in the FCA’s Handbook and under existing EU regulations⁸) and how they apply in respect of ESG related issues, including providing a non-exhaustive list of examples of the relevant provisions.

When would the rule apply?

The FCA is proposing that the new rules would take effect for accounting periods beginning on or after January 2021, meaning that the first reports which will need to be issued in compliance with the proposed rule would be published in 2022.

What next?

The consultation period closes on 5 June 2020.
Firms can either respond directly to the FCA or you can reach out to your usual Dechert contacts who will be happy to help you prepare your response.
 

Footnotes

1) Consultation Paper CP 20/3 “Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations”. Click here to access CP 20/3. Click here to read the FCA’s press release accompanying the CP 20/3.

2) The Glossary to the FCA Handbook defines “premium listing”. Click here to access the relevant section of the Handbook.

3) Click here for the TCFD final report setting out recommendations for helping businesses disclose climate-related financial information (the “Final Report”). In the letter to the Chair of the Financial Stability Board that accompanies the Final Report, the TCFD states that the report “establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Their widespread adoption will ensure that the effects of climate change become routinely considered in business and investment decisions. Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy”.

4) Feedback Statement FS 19/6 “Climate Change and Green Finance: Summary of responses and next steps”. Click here to access FS 19/6.

5) Set out in Section C of the Final Report.

6) The guidance is set out it in Section C of the TCFD Annex entitled “Guidance for All Sectors”, Section D of the TCFD Annex entitled “Supplemental Guidance for the Financial Sector” and Section E of the TCFD Annex entitled “Supplemental Guidance for Non-Financial Groups”. Click here to access the TCFD Annex.

7) Click here to access the TCFD Technical Supplement.

8) For example the Listing Rules, the Disclosure Guidance and Transparency Rules, the PR, the MAR. Chapter 5 of the CP provides a summary of existing legislation and FCA handbook that may require or relate to ESG-related disclosures.