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Expert Insights

25 January 2021

FCA publishes listing rule on enhanced climate-related disclosures and clarifies existing obligations

Background

On 21 December 2020, the FCA published PS 20/17 , its response to its consultation CP20/3 (see our commentary here) and its new LR 9.8.8R that applies to premium listed commercial companies in respect of their annual reports for financial years beginning on or after 1 January 2021. This means that premium listed commercial companies should start addressing now what they need to do to be able to make the required disclosures in sufficient detail;  the objective of LR 9.8.8R being to enable users of financial statements to assess the relevant company’s exposure to climate-related issues and its approach to dealing with these issues.

At the same time, the FCA published its finalised Technical Note Disclosures in relation to ESG matters, including climate change.  The Technical Note is largely in the form upon which it was consulted.  Its key message is that all issuers (including standard listed and investment companies, and AIM companies as regards DTR and MAR) need to consider the impact of climate change to their particular operations as part of compliance with their continuing obligations under the Prospectus Regulation Rules, Listing Rules, Disclosure Guidance and Transparency Rules and the Market Abuse Regulation, depending on the nature and circumstances of the issuer concerned and the type of securities that are listed.  Although the FCA’s press release says that the Technical Note will apply with immediate effect (i.e. from 21 December 2020), it does not yet appear to have been added to the FCA’s Knowledge Base.

New Listing Rule 9.8.8

For accounting periods commencing on or after 1 January 2021, the annual financial report must include a statement setting out whether it includes climate related financial disclosures consistent with the TCFD (Task Force on Climate-related Financial Disclosures) recommendations and recommended disclosures in its final report.

When an issuer has not included climate-related financial disclosures consistent with all of the TCFD recommendations and recommended disclosures in either the financial report or another document, they must state:

  • the recommendations and/or recommended disclosures which have not been included;
  • the reasons for not including them;
  • any steps it is taking, or plans to take, in order to be able to make those disclosures in the future; and
  • the timeframe within which it expects to be able to make the missing disclosures.

The FCA are mandating disclosure in the annual financial report or, failing that, a statement of compliance in the annual financial report, so as to “afford the production of climate related financial disclosures the same level of rigour and governance that is observed today in financial reporting”.  They say the new LR should also help to promote climate related disclosures that are consistent with the financial statements in the annual financial report.  More detailed supplemental climate-related information can be included in separate reports, which may be more tailored to the specific stakeholders they aim to reach. 

The FCA are not requiring third-party assurance of TCFD-aligned climate-related disclosures “at this stage”.  However they say they see significant value in third-party assurance of listed companies’ TCFD-aligned disclosures in the longer term and will work with BEIS, other Government departments and the FRC to co-ordinate an appropriate UK policy response in due course.  Issuers in the meantime may choose to obtain third party verification or assurance on a voluntary basis. 

In order to produce disclosures consistent with the TCFD’s recommendations and describe the resilience of their strategy, companies will have to produce scenario analysis, metrics and targets.  This may be quite challenging for small premium listed commercial companies. The FCA say they ordinarily expect in-scope companies to be able to make climate-related financial disclosures consistent with the TCFD’s recommendations and recommended disclosures, except where a company faces transitional challenges in obtaining relevant date or embedding relevant modelling or analytical capabilities.  The FCA also encourage companies, prior to overcoming any data, modelling or analytical challenges, to make all the TCFD-aligned disclosures they are able to do.  This is clearly sensible, as companies will have to explain why they have not made any TCFD required disclosure and how and when they plan to do so. 

Sponsors

As part of the work required by LR8.2 and LR8.4, a sponsor will need to consider whether companies have established procedures to enable them to comply with the new LR.  The FCA acknowledges that sponsors may need to enhance their knowledge and experience of climate-related financial disclosures to enable them to perform their role alongside the work they carry out with respect to a company’s other continuing obligations.  The FCA is considering whether they can provide further guidance on their expectation of sponsors’ work in this area to complement the existing guidance in Technical Notes 708.3 and 719.1.  While a sponsor may engage third-party experts to assist with their due diligence, they will be required to use their own knowledge, judgement and expertise to review and challenge such experts and to form their own reasonable opinion that the issuer’s systems and controls will enable it to comply with the new LR.

The Wider Context of PS20/17

The FCA helpfully summarise the key global and domestic developments that are relevant to the new LR in chapter 2 of PS20/17.  These include:

  • the TCFD’s recommendations continue to be adopted internationally with over 110 regulators and government organisations being supporters and 60% of the world’s largest public companies. The 26th UN Climate Change Summit 2021 (COP 26) which will be hosted by the UK in Glasgow in November this year also features TCFD implementation as an objective;
  • the FRC’s Thematic Review 2020 (available here) of how climate-related issues are being addressed 
  • the UK roadmap towards mandatory TCFD-aligned disclosures. The Chancellor of the Exchequer announced in November 2020 the UK’s intention to move towards mandatory disclosures across the UK economy by 2025, with most measures to be in place by 2023.
  • the work of the Climate Financial Risk Forum (established by the FCA and the PRA in early 2019), including an industry guide covering disclosure, innovation, risk management and scenario analysis published in June 2020 (available here).
  • the development of a common international standard for sustainability reporting.
  • the IFRS Foundation proposes a Sustainability Standards Board to sit alongside the International Accounting Standards Board.
  • net zero commitments by companies. An increasing number of companies across different sectors are making net zero carbon emissions commitments over the long term, with some providing detailed transition plans that set out actions and targets. To support companies there are various industry initiatives including the science based targets initiative and, for financial sector companies, a white paper from UK Finance with a principles based framework;

On 12 January 2021, the Investor Forum, in its review of 2020 activities, called for the introduction of a mandatory non-binding shareholder vote on TCFD-aligned disclosure obligations - read the full review here.

And although the new LR will not apply to premium listed investment companies, the AIC announced on 25 January 2021 that it will launch individual investment company ESG disclosures on the AIC website in Q2 2021 - read more here.

Next Steps

This is just the first step in the FCA’s proposals to implement TCFD-aligned disclosures in the FCA Handbook.  The FCA plans to issue a follow-up consultation paper in the first half of 2021 on proposals to extend the application of the new LR to a wider scope of listed issuers and to strengthen the compliance basis to become mandatory.  The FCA’s work will be co-ordinated with BEIS, who plan to consult early in 2021 including on TCFD-aligned disclosure obligations in the Companies Act 2006 for certain UK-registered companies, which may include some commercial companies, as well as those with a standard or premium listing.  The FCA will set out further information on their supervisory approach to the new LR in a Primary Market Bulletin in late 2021.

Also in H1 2021, the FCA plan to consult on potential climate focused TCFD-aligned disclosures by UK-authorised asset managers, life insurers and FCA regulation pension providers.  In the medium term, the FCA considers it important to complement the TCFD’s recommendations by introducing an internationally agreed reporting standard.


For more information, please contact Victoria Younghusband. 

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