Climate-related financial disclosures for premium listed commercial companies
We noted the focus on climate change in our insight piece of 21 February 2020. That was before we had any idea of the impact Covid-19 would have on the Western hemisphere and when we were anticipating the UK would host the COP26 UN Climate Change Summit this month. That summit has been postponed to November next year. However, that has not halted work on the UK Government’s Green Finance Strategy, which includes a proposal for listed companies, by 2022, to make disclosures in line with the recommendations of the Task Force for Climate-Related Financial Disclosures (TFCD)’s final report of June 2017 (the TCFD Final Report).
On 6 March 2020, the FCA published CP20/3, its consultation on proposals for a new climate-related disclosure rule for premium listed issuers, and then delayed the close of the consultation from 5 June to 1 October 2020. The FCA has received numerous comments and will publish feedback on responses and issue a policy statement once it has reviewed them. We participated in the response by a joint working group of the Company Law Committees of the City of London Law Society and the Law Society. Click here to read more.
Proposed New Listing Rule
Proposed new Listing Rule 9.8.6 R(8) would require commercial companies with a premium listing (but not, as yet, investment companies) to include in their annual financial report a statement setting out whether it included climate-related financial disclosures consistent with the four recommendations and the 11 recommended disclosures set out in Section C of the TCFD Final Report. Click here to read more.
Where the company has made such consistent climate-related financial disclosures but has included some or all of these in a document other than the annual financial report, it must cross refer to that other document and set out the reasons for including the relevant disclosures in that document and not in the annual financial report. If it has not included climate-related financial disclosures consistent with all of the recommendations and recommended disclosures, either in its annual financial report or other document, it must state those recommendations and/or recommended disclosures for which it has not included disclosure and the reasons for not doing so. It also must state where in its annual financial report or the other document those climate-related financial disclosures can be found.
The FCA says it expects to consult on strengthening the compliance basis in the future, at the right pace. So it may become simply compliance rather than “comply or explain”. They also say that, as capabilities evolve, and subject to ongoing monitoring of how the rule is implemented in practice, they will consider expanding the scope to other listed issuers, including standard-listed issuers.
Proposed Technical Note on Disclosures in relation to ESG Matters
The FCA say their draft technical note is designed to clarify existing disclosure obligations in relation to climate-related and other ESG related risks and opportunities. They point out that disclosure of risk and opportunities may well require the inclusion of information on ESG matters, where they are financially material or in certain other circumstances. The proposed technical note lists the relevant provisions in the Listing Rules, Prospectus Regulation, Disclosure Guidance and Transparency Rules (DTR) and the Market Abuse Regulation (MAR) and suggests that an issuer may need to access data sources for climate-related and other ESG-related matters that, unlike other indicators of organisational performance, may not typically be used for other business purposes. It is not overly helpful in our view to lump together “climate –related and other ESG related matters”. However, the draft Technical Note may serve as a summary of provisions where issuers need to consider whether the impact of climate change is relevant to their compliance.
For example, information on climate change and other ESG related matters may need to be provided as part of the obligation under Article 6 of the Prospectus Regulation to include in a prospectus the necessary information which is material to an investor for making an informed assessment of (among other things) the assets and prospects of the issuer. In the same way, the management report in the annual financial report and the interim management report in the half yearly financial report are required by the DTR to include a description of the principal risks and uncertainties and should include information relating to environmental matters and employee matters, where appropriate. The systems and controls that the Listing Rules require issuers to have should properly identify information, including climate-related, that needs to be disclosed, and which might on occasion be “inside information” for the purposes of MAR.
The FCA proposes that the new rule should take effect for accounting periods beginning on or after 1 January 2021, so that the first reports will be required in 2022. The timing is very tight as issuers with a 31 December year end will need to implement new systems and procedures to take effect from 1 January 2021 and establish any additional information that is required under the TCFD Final Report but not under existing legislation. The “comply or explain” rule will give some respite, but issuers need to be aware that this may only be a temporary measure to allow them to get the required systems and procedures in place. Those issuers who either have dedicated processes and policies on climate-related disclosure already in place, or are working towards implementing them, will be able to identify and manage their climate risks and opportunities.
Covid-19 has affected the timing. When the cut-off date for responses was 6 June, the FCA said its aim was to publish a Policy Statement, along with the finalised rules and Technical Note, later in 2020. That now looks to be very late in 2020.
How relevant is this for non-premium listed issuers?
Quoted companies which are not commercial companies with a premium listing should not think that they can ignore climate-related financial disclosures. As noted in the draft Technical Note, to do so may risk providing misleading information that could amount to market abuse for the purposes of MAR. In any event, the direction of travel is such that specific climate-related disclosure is likely to be required for all listed issuers on whatever market. Insurance companies, banks and asset managers will have separate disclosure obligations under their own regulatory regimes, as will larger occupational pension schemes. Investors, notably BlackRock and very recently Scottish Widows, are already making it clear that they will not invest in companies that do not follow the TCFD principles and recommendations. Helpfully, on 29 June 2020, the Climate Financial Risk Forum (CFRF), a body jointly established by the PRA and the FCA, published a guide to help firms approach and address climate-related financial risks. The guide aims to provide practical recommendations to firms of all sizes on disclosure of climate-related financial risks; effective risk management; scenario analysis, and opportunities for innovation in the interests of consumers.
Relevance for other companies and their advisers
In the Chancellor’s 9 November 2020 statement to the Houses of Parliament on financial services, he announced the Government’s intention to make TCFD aligned disclosures by large companies and financial institutions mandatory by 2025. He also announced the UK will implement a green taxonomy, which will take the scientific metrics in the EU taxonomy Regulation as its basis with a UK Green Technical Advisory Group established to review these metrics to ensure they are right for the UK market (read more).
Also on 9 November 2020, the UK joint regulator and government TCFD Taskforce published its interim report and Roadmap on climate-related financial disclosures. The UK Taskforce’s Roadmap sets out an indicative path over the next 5 years towards mandatory TCFD aligned disclosures.
And the FRC published its Climate Thematic Review on 10 November 2020 and issued a press release headed “Time to raise the bar on climate change reporting”.
The FRC found that boards, companies, auditors, professional bodies and investors could all improve their response and highlighted deficiencies in disclosure in financial statements, while also giving some examples of best practice. Read the full reporting here.
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