FCA guidance on TCFD disclosure requirements for listed companies

On 15 November 2021, the FCA set out its disclosure expectations and supervisory strategy for the Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosure requirements for listed companies (see Primary Market Bulletin 36 (PMB 36)).

PMB 36 is aimed at different stakeholders including listed companies, their directors and advisers (including external auditors), investors and asset owners more broadly.

Background

In December 2020, the FCA 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). 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 TCFD’s final report or provide an explanation if they have not done so. (See Hot news: More climate-related disclosures for listed companies for more information.)

The introduction of specific TCFD aligned climate-related disclosure requirements for listed companies is an important new development both for the FCA and the companies it regulates. The FCA’s new ESG Strategy was released at COP 26 with transparency remaining a key theme of the FCA’s work on climate change and sustainability. Comprehensive, high-quality and consistent climate-related disclosures will lead to greater transparency on how listed companies are managing climate-related risks and opportunities. This will help investors to make more informed investment decisions.

The FCA is also proposing to extend the application of these TCFD-aligned disclosure requirements to issuers with standard listed equity shares under LR 14. (See Proposals to extend climate-related disclosures to standard issuers for more information.) The FCA notes in PMB 36 that it aims to finalise the rules for standard listed companies in time for them to apply for financial years beginning on or after 1 January 2022.

Proposed new technical note

To assist listed companies, their directors and advisers, the FCA is consulting on a new technical note giving further guidance on its disclosure expectations (Primary Market Technical Note: TCFD aligned climate-related disclosure requirements for listed companies).

This is aimed at both premium and standard listed companies.

The FCA’s expectations are that:

• when explaining why a company has not included some of the required disclosures, it must provide full, clear and meaningful explanations for not including them. Those explanations must be written in plain language that is easy to understand and leave no room for ambiguity;

• if the company provides details of any steps it is taking or plans to take to be able to make those disclosures in the future, and the timeframe within which it expects to be able to make those disclosures, it should provide sufficient level of detail so that investors can fully understand the nature of the proposed action;

• any TCFD compliant disclosures should be in line with the Fundamental Principles for Effective Disclosure (in section F of the TCFD Annex) and include sufficient, company-specific information to support decision-making by investors; and

• whilst companies can consult third parties when compiling the disclosures, ultimately the company must ensure compliance with the new rules.

The guidance note also reminds companies again about their other potential ESG disclosure obligations under other provisions of the Listing Rules, DTRs, Market Abuse Regulation and Prospectus Regulation.

Supervisory strategy

The FCA emphasises that while it will be responsible for monitoring and, where necessary, enforcing compliance with LR 9.8.6R(8) and proposed LR 14.3.27R and for determining an appropriate supervisory strategy, the FRC will also play a significant role in discharging the strategy. (under the Companies (Audit, Investigations and Community Enterprise) Act 2004, the FRC is responsible for keeping these “accounting requirement” disclosures under the respective Listing Rules under review.)

From 2022, the review of TCFD-aligned disclosures will be embedded into the FRC’s routine reviews of premium listed company annual financial reports and, it is proposed, from 2023, would be embedded into routine reviews of relevant standard listed company annual financial reports.

Thematic work

Because many listed companies will be applying the requirements for the first time, the FCA and FRC intend to collaborate on targeted 'deep dive' thematic work, which will be designed to assess how companies have complied with the requirements, identify areas of concern and disseminate examples of best practice.

Regulatory intervention

The supervisory strategy extends to identifying cases where regulatory intervention may be required to ensure listed companies comply with the Listing Rules and improve the quality of their disclosures. If disclosures do not meet the required standards, it is likely that the FRC will contact the company to take corrective or clarifying action (e.g. an undertaking to make better disclosures in future).

In addition, the FRC will refer matters to the FCA which are identified as containing potentially false or misleading information, including the omission of material facts, likely to cause investor harm or which may breach other relevant FCA rules for environmental, social and governance (ESG) matters (see Technical Note TN 801.1).

PMB 36 emphasises that where a listed company fails to make the required climate-related disclosure in its annual report, the FCA will request the TCFD statement be published via an RIS as soon as possible. Any non-compliance will be viewed seriously by the FCA and lead to the FCA using the full suite of its powers, as well as sanctions, where appropriate.

Future strategy

The FCA sees the implementation of TCFD-aligned disclosures as its first step in its journey to implement an international sustainability standard (or standards) that covers more than just climate change. The FCA considers the announcement by the IFRS Foundation to establish the common International Sustainability Standards Board (ISSB) at COP26 in November 2021 as a catalyst for change in the area of sustainability disclosures and is working with the Department for Business, Energy and Industrial Strategy to endorse and implement the future ISSB ‘climate first’ standard in the UK.

The FCA’s rules sit alongside, and overlap with, the UK government’s proposals for making climate-related financial disclosures mandatory for publicly quoted companies, large private companies and limited liability partnerships. (See Climate-related disclosures to be mandatory for large companies for more information.)