The Rule will apply to accounting periods beginning on or after 1 January 2021. The first annual financial reports under the new rule will be published in the spring of 2022. This means that companies will need to assess if their approach to managing climate-related risks is consistent with the TCFD and, if not, develop a programme for achieving compliance. This may include having to adjust or establish board-level governance and risk management structures and processes for effectively managing and disclosing climate-related risks to TCFD standards (such as through the creation of a bespoke committee, below board level, comprising representatives of the management of business divisions or teams who can assist the board in making its decisions about climate-related strategy and/or the appointment of a director with specialist experience).
At the same time, the FCA has reminded listed issuers of shares that existing rules may already require disclosures in respect of climate change and other environmental, social and governance (ESG) matters, by publishing a new Technical Note entitled “Disclosures in relation to ESG matters, including climate change”. It has applied since 21 December 2020.
The FCA intends to extend similar regulatory requirements to UK standard listed issuers of shares and asset managers, among others, and is expected to consult in these areas later in 2021.
The disclosure standard under the TCFD recommendations
The TCFD was established by the Financial Stability Board to develop common principles for how companies and other organisations provide information on the risks and opportunities associated with climate change to investors, lenders, insurers and other stakeholders.
The TCFD’s final recommendations, published in 2017, relate to four core organisational elements:
- Governance: How governance around climate-related risks and opportunity operates.
- Strategy: The actual and potential impacts of climate-related risks and opportunities on business strategy and financial planning.
- Risk management: How the organisation identifies, assesses and manages climate-related risks.
- Metrics and targets: How metrics and targets are used to assess and manage relevant climate-related risks and opportunities.
In relation to each of these themes, the TCFD has recommended that organisations make specific disclosures (the Recommendations). The Recommendations are supported by additional guidance, including sector-specific guidance for the financial sector (banks, insurance companies, asset owners and asset managers) and for certain non-financial sectors with greater exposure to climate change (energy, transportation, materials and buildings, and agriculture, food and forest products).
Disclosures consistent with the TCFD’s governance and risk management Recommendations should be made irrespective of a materiality assessment. In light of the absence of a materiality threshold to these two Recommendations, companies should prioritise putting in place a risk assessment and governance structure.
The Recommendations themselves are not binding, but are increasingly becoming the conceptual foundation for policy and regulation in climate disclosure around the world. In PS 20/17, the FCA also notes that other TCFD requirements may provide a model for other elements of ESG regulation and disclosure.
The new Listing Rule 9.8.6(8)
The new Listing Rule applies only to UK and non-UK premium listed commercial companies, including sovereign-controlled commercial companies. It will require a “comply or explain” approach of these issuers, although this is expected to be upgraded to “comply”, in the future.
Each such company must include a statement in their annual report and accounts setting out:
- whether it has made disclosures consistent with the Recommendations in its annual financial report;
- where in its annual financial report (or other relevant document) the various disclosures can be found. If some or all of these disclosures are not in its annual report, the company will need to specify what disclosures are contained in other documents, where such document(s) can be found and the reason for disclosing outside the annual financial report; and
- where it has not made disclosures consistent with all of the Recommendations, an explanation of which Recommendations it has excluded and why. The issuer must also disclose any steps it is taking, or plans to take, to be able to make those disclosures in the future, and the timeframe in which it expects to be able to do so. In order for a company to determine if its disclosure is consistent with the Recommendations, the FCA expects it to undertake a detailed assessment of relevant disclosures against certain of the annexes, supplements and guidance published by the TCFD.
Companies will be required to carry out assessments on whether their disclosure is sufficiently detailed to allow users to assess their exposure and approach to climate-related issues. This needs to take into account the level of exposure to climate-related risks and opportunities, and scope and objectives of their climate-related strategy.
The FCA has made it clear that it expects companies to be able to make TCFD-aligned disclosures except where they face transitional challenges on obtaining the relevant data or embedding relevant modelling or analytical capabilities.
Next steps for premium listed commercial companies
The new FCA Listing Rules are the first step in a broader ambition of enhancing climate disclosure in the UK. Initial requirements are focusing on the “comply or explain” approach, but as availability of data widens and tools and models improve, climate disclosure requirements are destined to become more stringent.
“The UK will become the first country in the world to make Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures fully mandatory across the economy by 2025, going beyond the ‘comply or explain’ approach.”
The Rt Hon Rishi Sunak MP, Chancellor
What actions should premium listed commercial companies take?
Premium listed companies, or those that intend to apply for such a listing, will need to assess whether their approach to disclosure is aligned with the TCFD Recommendations, and what the strategic implications are of not doing so. This work should start now.
Companies that have yet to engage with the TCFD will need to:
- consider more broadly how they are approaching climate risk and opportunity in their governance, strategy and risk management;
- undertake gap analysis against the Recommendations and related guidance;
- plan their reporting strategy, including content development and report creation; and
- prepare the necessary reporting statements and disclosures.
Companies that already produce TCFD reports will need to consider whether their current reporting is adequate, both in terms of content and where the reports are located. While stopping short of specifying the standard of compliance with the TCFD in the Handbook, in their policy statement on the new Listing Rules, the FCA has noted that a recent report by the Financial Reporting Council found that there was “considerable room for improvement” in TCFD reporting.
More than ever, what companies say, or do not say, about climate will be subject to greater levels of scrutiny and care needs to be taken over the substance and consistency of all disclosures in this area.
Wider developments
A new FCA Technical Note applies to all categories of listed issuers of shares. The key message of this formal FCA guidance is that these issuers need to consider the impact of climate change upon their particular operations as part of compliance with their continuing obligations under the UK Market Abuse Regulation, the Disclosure Guidance and Transparency Rules, the Listing Rules (including the Listing Principles) and the UK Prospectus Regulation, by reference to the circumstances of the issuer and its business. The FCA also considers that these issuers need to have systems in place to identify how they are affected by climate change or ESG matters. The Technical Note is set out in FCA Policy Statement PS 20/17.
The Technical Note explores how ESG matters are covered in the rules that apply to listed issuers of shares including the obligation to report in relation to the Corporate Governance Code, annual and half-yearly reporting under the transparency rules, the Prospectus Regulation, the Market Abuse Regulation and the FCA Listing Principles.
The Listing Principles underpin the detailed listing rule requirements and are enforceable as rules. In particular, Listing Principle 1 requires all listed companies to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their obligations as listed companies, which will include ESG risks. The FCA also draws attention to Premium Listing Principle 6 which requires premium listed commercial companies to communicate information to actual and potential shareholders in such a way as to avoid the creation or continuation of a false market in the shares.
While LR9.8.6(8) will apply on a “comply or explain” basis, the existing rules that are the subject of the new FCA guidance are already mandatory so sanctions, such as fines, may apply for failure to comply with them. It is therefore advisable that all listed issuers of shares review their procedures, systems and controls to confirm they are complying with the requirements.
