Hot news: More climate-related disclosures for listed companies

The FCA has introduced new climate-related disclosures for premium listed  companies that apply on a 'comply or explain' basis to financial years beginning on or after 1 January 2021 (Policy Statement 20/17, published on 21 December 2020). So, the first reports that must comply with the new rule will be published in spring 2022

Companies in scope must state to what extent they have made disclosures consistent with the four recommendations and the 11 recommended disclosures in the final report of the Task Force on Climate-related Financial Disclosures (TCFD) or provide an explanation if they have not done so.

The FCA state that improving climate-related disclosures along the investment chain has been central to its sustainable finance strategy. These measures also form part of a wider strategy by the UK government and regulators to address climate risk and are just a first step to much greater climate-related disclosure by all companies.

The FCA has also published a new Technical Note, currently available as Appendix 2 of the Policy Statement, clarifying existing disclosure obligations for a wider scope of issuers. This applies with immediate effect.

Our view

The new rules will apply to some 460 listed companies. Internationally over 1,500 organisations and 110 regulators and government organisations are TCFD supporters. As the Technical Note identifies, climate-related risks and opportunities, as well as other ESG risks and opportunities, are likely to be financially material for listed companies and their sponsors. This means that disclosure of ESG matters (including climate-related risks) is much broader than this new rule and increases the focus on accounting and other disclosures of ESG matters (for example as climate-related risks affect asset valuations/impairments). These other disclosures could include the update on principal risks for the remainder of the financial year required to be disclosed in interim accounts.

Nor is the sponsor's role limited to climate change disclosures. Existing disclosure requirements already require issues to have procedures in place to make ESG disclosures. Sponsors already need to diligence those procedures or, where engaging a third party, use their own knowledge, judgement and expertise to review and challenge the third-party information. And, sponsors will need to be alert about general disclosure standards applicable to ESG statements to guard against the risk of 'greenwashing' and over-promises on ESG matters.

See our client insight for more information about the broader implications of ESG for UK directors.

Which companies do the new rules and Technical Note apply to?

The new rules and guidance in the Listing Rules apply to all commercial companies with a premium listing, wherever they are incorporated, including sovereign-controlled companies and open-ended investment companies.

They do not apply to issuers with securities admitted to the standard listing segment or closed-end investment funds with a premium listing.

The Technical Note provides guidance to all issuers required to comply with the Listing Rules, the Disclosure Guidance and Transparency Rules (DTRs), the Prospectus Regulation (PR) and the Market Abuse Regulation (MAR) (as those regulations have been 'onshored' at the end of the Brexit transition period). This includes companies with securities admitted to the standard listing segment, AIM and the Specialist Fund Segment.

What are the new disclosure requirements in the Listing Rules?

Companies in scope must state, in their annual financial report:

• whether they have made climate-related financial disclosures consistent with the TCFD recommendations and recommended disclosures;

• where they have not made disclosures consistent with all of the TCFD recommendations and recommended disclosures, an explanation of which have not been included and why and any steps they are taking/plan to take to make those disclosures in the future and the timeframe within which they expect to be able to make those disclosures;

• where some or all of their disclosures are in a document other than the annual financial report, an explanation of which ones those are, which other document they are in and where it can be found and why they are in that document and not in the annual financial report; and

• an explanation of where in the annual financial report (or other relevant document) the various disclosures can be found (LR 9.8.6R(8)).

The FCA notes that this does not, however, prevent companies from including more detailed, supplemental climate-related information in separate reports that may be tailored to specific stakeholders.

What are the TCFD recommendations and recommended disclosures?

The TCFD final report was published in June 2017 and sets out four recommendations with 11 recommended disclosures under them "for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change". The four recommendations relate to governance, strategy, risk management; and metrics and targets.

An Annex to that report ("Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures") provides general and sector-specific guidance on implementing the Task Force's disclosure recommendations.

What guidance is given on the new rules?

The Listing Rules include guidance to help companies determine whether their disclosures are consistent with the TCFD's recommendations and recommended disclosures.

When determining whether its climate-related financial disclosures are consistent, a listed company:

• is expected to undertake a detailed assessment of those disclosures, taking into account various TCFD guidance materials set out in the Listing Rules;

• must consider whether those disclosures provide sufficient detail to enable users to assess the listed company's exposure and approach to addressing climate-related issues; and

• should carry out its own assessment to ascertain the appropriate level of detail to be included in its climate-related financial disclosures, taking into account factors such as (1) the level of its exposure to climate-related risks and opportunities; and (2) the scope and objectives of its climate-related strategy (depending on the nature, size and complexity of the listed company's business).

(LR9.8.6G(B), LR9.8.6G(C) and LR9.8.6G(D)).

How much disclosure should listed companies be able to make?

A majority of consultation responses thought that listed companies should ordinarily be able to make the TCFD recommended disclosures on governance and risk management.

The guidance clarifies the limited circumstances in which the FCA expect companies to explain rather than disclose. The FCA ordinarily expects a listed company to be able to make the TCFD recommended disclosures, except where the company "faces transitional challenges in obtaining relevant data or embedding relevant modelling or analytical capabilities" (LR9.8.6G(E)).

The guidance also makes it clear that the FCA is expecting companies to be able to make disclosures consistent with the TCFD's recommendations and recommended disclosures on governance and risk management and, unless there are transitional challenges, certain recommendations on strategy (LR9.8.6G(E)).

Although concerns were raised about the lack of a definition of 'materiality' in assessing what information companies should disclose, the FCA has not included a definition or any guidance on this. Instead it refers to guidance from other regulatory bodies, including that prepared by the International Accounting Standards Board and the Financial Reporting Council.

Do you need third party assurance of these disclosures?

The FCA has decided not to require third party assurance now but will keep the position under review as an international corporate reporting standard for sustainability emerges.

What is expected of sponsors?

Sponsors are expected to consider whether companies have established procedures to enable them to comply with this new rule as part of the work they usually undertake under LR8.2 and LR8.4.

The FCA acknowledge that sponsors may need to enhance their knowledge and experience of climate-related financial disclosures to enable them to perform this role and note their ability to engage third-party experts to assist with their due diligence (as is routinely the case when conducting due diligence on a company's financial position and prospects procedures or working capital position).

The FCA will consider whether they can provide further guidance on their expectations of sponsors in this area.

What does the new Technical Note cover?

The Technical Note ("Disclosures in relation to ESG matters, including climate change") provides guidance to all listed issuers on existing disclosure obligations. The FCA consider that certain provisions of the Listing Rules, DTRs, MAR and PR may already require issuers to disclose information on climate-related and other environmental, social and governance (ESG) matters in certain circumstances. These include:

for companies required to comply with the Listing Rules, as well as the new rule for certain premium listed companies, the FCA consider that, to comply with Listing Principle 1, they should consider whether there is a need to access and draw on specific data sources when disclosing climate-related and other ESG-related risks and opportunities, and develop specific systems, analytical instruments or organisational arrangements to collate and assess the information required to comply with its obligations;

for companies required to comply with the PR, they are required to consider whether information on the impact of climate change and other ESG-related matters on an issuer's business should be disclosed in a prospectus to meet the statutory disclosure standard and whether certain of the requirements in the Annexes to the Delegated Prospectus Regulation, including in connection with the issuer's regulatory environment and risk factors, need to reflect ESG-related regulation and/or risks;

for companies required to comply with the DTRs, they should consider whether there are any ESG-related matters to be included in the description of an issuer's principal risks and uncertainties in its annual and interim reports under DTR 4.1.8R and DTR 4.2.7R respectively, or in the description of an issuer's internal control and risk management systems in its corporate governance statement under DTR 7.2; and

for companies required to comply with MAR, they are reminded that when disclosing climate-related and other ESG-related information, they must not do so in a way (for example by omitting information) that breaches the prohibition of market manipulation under Article 15 of MAR, noting the relevant behaviours defined in Article 12 of MAR that amount to market manipulation. These include, but are not limited to, dissemination of information which is likely to give false or misleading signals as to the supply of, demand for, or price of a financial instrument.

What do companies need to do?

A premium listed company should familiarise itself with the new rule and associated guidance and consider what arrangements it needs to put in place to ensure that it is able to meet the new disclosure requirements.

All companies that are impacted by the relevant provisions of the Listing Rules, DTRs, PR or MAR should review the Technical Note and consider where they may already be required to disclose information on climate-related (and other ESG) matters.

Will the rules be extended to other companies?

The FCA confirms that, in the first half of 2021, it intends to:

• issue a further consultation paper on proposals to extend the application of the new Listing Rule to a wider scope of listed issuers -- likely to include all issuers of standard listed shares (excluding listed funds) and to consider strengthening the compliance basis;

• consult on potential TCFD-aligned disclosures by UK-authorised asset managers, life insurers and FCA-regulated pension providers. The FCA expects its proposals to include disclosure of strategy, policies and processes at the enterprise level, complemented by more targeted disclosures at the fund or portfolio level.; and

• monitor compliance with the new rule and to provide more information on its supervisory approach to the new rule in a Primary Market Bulletin in late 2021.

The FCA notes that it will coordinate its work with other UK regulators and government departments. In particular, the UK government plans to consult early in 2021 on TCFD-aligned disclosure obligations in the Companies Act 2006 for certain UK registered companies. As this may include some commercial companies with a UK premium listing or standard listing, the FCA say they will continue to engage with this work to ensure that their respective requirements and monitoring and enforcement capabilities operate in a coherent and complementary way.