The FCA has recently published proposals for the introduction of a new listing rule that will require all commercial companies with a premium listing to either make climate related disclosures consistent with the approach set out by the Taskforce on Climate-related Financial Disclosures (TCFD), or explain why they have not done so. This would be effective for periods beginning on or after 1 January 2021.
This consultation follows earlier consultations by the FCA on climate change issues and is consistent with the UK Government’s announcement in its July 2019 Green Finance Strategy in that it expects listed companies and large asset owners to disclose in line with the TCFD Framework recommendations by 2022.
The FCA is also seeking feedback on clarifications to how existing requirements applicable to all listed companies already require climate and other sustainability-related disclosure.
Why is the FCA consulting?
The impact of climate change on most, if not all, listed companies is expected to be significant and complex. It may affect the value of companies’ assets and prospective profits, directly or indirectly, because of changes in how their businesses are operated.
Increasingly, investors want to commit their money to companies and projects that will support the transition to a low-carbon economy. Therefore, they seek greater transparency about how issuers of listed securities may be affected by climate-related risks and opportunities.
The FCA considers that climate-related risks and opportunities are relevant to all companies, and are likely to be material for most so the consultation paper proposes measures to increase transparency.
The TCFD recommendations
The TCFD’s recommendations were published in 2017 to help businesses disclose risks and opportunities arising from climate change. Their aim is for businesses to provide sufficient disclosure to help investors understand which companies are most at risk, which ones are best prepared, and which are taking action.
The recommendations provide a globally recognised framework of four core elements of recommended climate-related financial disclosures:
- Governance - The organisation’s governance around climate-related risks 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 processes used by the organisation to identify, assess, and manage climate-related risks.
- Metrics and targets - The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
As explained in October 2019, the Financial Reporting Council’s (FRC) Financial Reporting Lab has published a Report on Climate-related Corporate Reporting, which includes explanations of the TCFD recommendations and examples of developing reporting practice following the framework.
What does the FCA want to change?
The proposals build upon the recommendations of the TCFD. The FCA recognises that standards for disclosure and companies’ understanding of the financial effects of climate change are evolving. For this reason, where companies are not yet able to make full disclosures, they should provide an explanation of the reasons why.
The key elements of the FCA’s proposals are:
- A new climate-related disclosure rule to be included in the Listing Rules to promote adoption of the TCFD’s recommendations and recommended disclosures. The proposed rule will require commercial companies with a UK premium listing (including sovereign-controlled commercial companies) to include a statement in their annual report setting out:
- Whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures in their annual report
- Where they have not made such disclosures or have included them in a document other than their annual report, an explanation of why
- Where in their annual financial report (or other relevant document) the various disclosures can be found.
- A Technical Note clarifying existing disclosure obligations issuers may already be required to make under existing EU legislation and rules in various parts of the FCA’s Handbook.
Who does this apply to?
Currently, the proposed new rule will affect commercial companies (including sovereign controlled ones) with a premium listing on the London Stock Exchange. However, the FCA will consider a further consultation on extending this rule to a wider scope of issuers.
The Technical Note (included within the consultation paper) will affect 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 and Prospect Regulation.
Interested stakeholders are invited to provide feedback on the FCA’s proposals by 1 October 2020.
The aim is for a Policy Statement, along with the finalised rules and Technical Note to be published later in 2020, effective for periods beginning on or after 1 January 2021.
Read the FCA proposals
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