The FCA proposes measures to increase transparency on how issuers of premium-listed securities may be impacted by climate-related risks and opportunities, to help ensure that securities are more accurately priced and that markets work well.
On 6 March 2020, the Financial Conduct Authority (“FCA”) published a consultation paper (“CP20/3”) on proposals aimed at enhancing climate-related disclosures by premium-listed issuers and clarifying existing environmental, social and governance (“ESG”) disclosure obligations.
New Listing Rule and Guidance
In CP20/3, the FCA has proposed introducing a new listing rule (LR 9.8.6R(8)) that would apply to all commercial companies with a UK premium listing, including sovereign-controlled commercial companies as well as several asset management firms and insurance companies with asset management businesses.
The proposed rule would be introduced on a proportionate ‘comply or explain’ compliance basis, which is one of the fundamental principles of the UK’s general approach to corporate governance, introduced back in 1992 when the Cadbury Report was published, which led to the Combined Code (now replaced by the UK Corporate Governance Code). In the context of the proposed rule, it would require such companies to include a statement in their annual financial report setting out whether they have made disclosures in their annual financial report that are consistent with the recommendations and recommended disclosures that the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”) made in its report published in June 2017. The FCA’s proposed new listing rule would also require premium-listed issuers to explain why they may not have made disclosures consistent with some or all of the TCFD’s recommendations and/or recommended disclosures, why they have included disclosures in a document other than the annual financial report, and where the various disclosures can be found in the annual financial report or other relevant documents.
The TCFD recommendations are aimed at helping investors understand which companies are most at risk from, those which are best prepared for and those that are taking action against climate change. The four overarching recommendations made by the TCFD are the following:
- Governance – disclose the organisation’s governance around climate-related risks and opportunities;
- Strategy – disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial-planning where such information is material;
- Risk Management – disclose how the organisation identifies, assesses and manages climate-related risks; and
- Metrics and Targets – disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Some sectors are undoubtedly more affected by climate change and the transition to a lower-carbon economy than others. For example, banks are exposed to climate-related risks and opportunities through their lending activities to fossil fuel producers and consumers. Therefore, asset-specific credit or equity exposure to fossil producers or consumers, could present risks that would justify disclosure in a bank’s financial filings. They could also become subject to litigation related to such financial intermediary activities. In recognition of the issues that certain sectors may face when complying with the TCFD’s disclosure recommendations, the TCFD published supplemental guidance, called ‘Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures’, to highlight important considerations for the financial sector (i.e. banks, insurance companies, asset owners and asset managers) and non-financial companies (for example energy, transportation, materials and buildings, agriculture, food and forest products). For example, the guidance for banks is to describe significant concentrations of credit exposure to carbon-related assets.
Although voluntary adoption of the TCFD’s recommendations is increasing, a status report published in June 2019 by the TCFD suggests that only a third of the companies it surveyed are making climate-related disclosures alighted with its recommended disclosures. Many issuers, including in the UK, are also not making extensive, consistent climate-related disclosures to give markets with the information they require to make informed decisions. Therefore, the FCA believes that regulatory intervention by way of introducing the new rule will “help accelerate good practice”.
To help issuers with their implementation of compliance with the proposed new rule, the FCA has also proposed introducing new guidance (LR 9.8.6BG) in the Listing Rules chapter of its Handbook. The guidance would refer to the TCFD’s “guidance for all sectors” as well as the “supplemental guidance for the financial sector” and the “supplemental guidance for non-financial groups”, to which companies would be expected to have regard.
New Technical Note
The FCA is also proposing to provide guidance, by way of a Technical Note, on existing obligations set out in EU legislation and in the FCA Handbook, such as under the Disclosure and Transparency Requirements chapter, that may already require issuers to disclose information on climate-related matters, other than those relating to ESG, under certain circumstances. This would not introduce any new expectations for issuers, but would instead clarify existing obligations that they should already be meeting. The Technical Note will be relevant to a wider scope of entities, such as all companies with listed securities, not just those that have a premium listing.
The FCA considers this a first step towards adopting the TCFD’s recommendations and will consider consulting on extending the rule to a wider scope of issuers and strengthening their compliance basis. While this may be a cultural and governance shock to many issuers, it is probably long-needed regulatory intervention to ensure that material information is provided to investors in a consistent manner that is comparable across issuers globally, before committing their money to companies and projects that will support the transition to a low-carbon economy.
In the meantime, other nations are also leading the way to implementing the TCFD’s recommendations in their jurisdictions. For example, in the TCFD’s status update report published last year, it noted that in France, where climate reporting is already required under Article 173, the Autorité des Marchés Financiers, is already helping French companies to align their Article 173 reporting with TCFD recommendations. The Japanese Ministry of Economy, Trade and Industry has also published guidance for certain sectors and financial companies to follow TCFD reporting.
Currently, the deadline for interested stakeholders to submit feedback to the FCA on its proposals is 5 June 2020. The FCA is aiming to publish a Policy Statement together with the finalised rules and Technical Note later this year. The new listing rule is expected to apply in relation to accounting periods beginning on or after 1 January 2021. However, the FCA has indicated on its webpage dedicated to the coronavirus situation that the deadline for responses to its consultation paper is likely to be delayed as it turns its attention to more critical matters to protect consumers and market integrity in the short-term, which may in turn impact subsequent deadlines relating to the implementation of this rule.