FCA Adopts New Listing Rule Mandating Climate-related Disclosure in Annual Reports

The Financial Conduct Authority (“FCA”) has issued a policy statement (available here) adopting a new rule within Listing Rule 9.8 that requires commercial companies with a premium listing on the London Stock Exchange to provide, on a modified comply or explain basis, disclosures on how they are managing climate-related risks and opportunities. Specifically, premium listed companies will be required to disclose in their annual reports whether they have made disclosures consistent with the Taskforce on Climate-related Financial Disclosures (“TCFD”) recommendations and supporting recommended disclosures, alternatively such companies will need to explain why they haven’t made the disclosures. At the same time, the FCA issued additional guidance to help premium listed companies determine whether their disclosures are consistent with TCFD recommendations and supporting recommended disclosures, as well as a Technical Note (Disclosures in relation to ESG matters, including climate change).

The adoption of the new listing rule represents the most significant development to date in the area of public company climate-related disclosure. The new listing rule also marks the first concrete step towards fulfillment of the commitments outlined in the Roadmap recently published by the UK government that sets forth a timeline for the adoption of regulatory and legislative measures to implement mandatory TCFD-aligned disclosure requirements over the next five years.^[1] To date, the TCFD’s pioneering climate change recommendations, which were first published in 2017, have received the support of over 1,500 companies and 110 regulators and government organizations. The TCFD continuously develops guidance to assist companies in more effective and comprehensive implementation of its recommended disclosures (e.g., more informative disclosure of the impact of climate change on a company’s business and strategy).^[2] However, as noted in the FCA statement, the TCFD recommendations are not a corporate reporting standard; to ensure consistency and drive organizational change in sustainability reporting, they eventually need to be complemented by a reporting standard that represents a common international standard.

Summary of the New Rule

• Scope – the new listing rule applies to premium listed commercial companies (both UK and overseas), including sovereign-controlled commercial companies.
• Disclosure requirement – the new listing rule requires a statement in the annual report setting forth:
  • whether the listed company has made climate-related financial disclosures consistent with the TCFD recommendations and recommended disclosures (being the four recommendations and the 11 recommended disclosures set out in Figure 4 of Section C of the TCFD Final Report (available here)) in the annual report;
  • if the listed company has not made disclosures consistent with some or all of the TCFD recommendations and/or recommended disclosures, the recommendations and recommended disclosures for which it has not included the disclosures, an explanation of why and a description of any steps it is taking or plans to take to be able to make consistent disclosures in the future (including relevant timeframes for being able to make those disclosures);
  • if the listed company has included some, or all, of the disclosures in a document other than the annual report, the recommendations and recommended disclosures for which it has provided disclosures in another document, a description of that document and where it can be found, and an explanation of why some disclosures are included in another document and not the annual report; and
  • where in the annual report (or other relevant document) the various disclosures can be found.
• Compliance basis – the new listing rule applies on a “comply or explain” basis. However, in contrast to the customary “explanation,” as noted above, a listed company that does not include climate-related financial disclosures consistent with some or all of the TCFD’s recommendations and recommended disclosures must disclose the steps it is taking, or plans to take, to be able to make such disclosures in the future, and the timeframe therefor. Listed companies may provide a statement of compliance that confirms that disclosures have been made consistent with some recommended disclosures, while providing an explanation for nondisclosure in relation to others. The FCA notes that it will consider, in the first half of 2021, consulting on a proposal to potentially strengthen the compliance basis.
• Consistency with global standards – FCA guidance clarifies that in determining whether climate-related financial disclosures are consistent with the TCFD’s recommendations and recommended disclosures, the listed company should consider whether those disclosures provide sufficient detail to enable users to assess its exposure and approach to addressing climate-related issues. The FCA encourages listed companies to assess the appropriate level of detail to be included in their climate-related financial disclosures. They should take into account factors such as the level of their exposure to climate-related risks and opportunities, and the scope and objectives of their climate-related strategy. These factors may relate to the nature, size and complexity of the listed company’s business.

To further assist companies in determining whether climate-related financial disclosures are consistent with the TCFD’s recommendations and recommended disclosures, the FCA recommends that listed companies conduct a detailed assessment of those disclosures, taking into account specified TCFD guidance materials. Companies are also encouraged to consult a wider breadth of guidance materials where relevant, including those produced by the Climate Financial Risk Forum. However, the FCA declined to refer explicitly to materials that have not been quality-assured under the TCFD’s processes.

• Materiality assessment – disclosures relating to the TCFD’s governance and risk management recommendation are to be made irrespective of a materiality assessment. Additional guidance provides that listed companies should ordinarily be able to make climate-related financial disclosures consistent with the TCFD's recommendations and recommended disclosures, except where they face transitional challenges in obtaining relevant data or embedding relevant modelling or analytical capabilities. Listed companies should be able to make disclosures consistent with the recommendations and recommended disclosures on governance and risk management, and should also be able to make disclosures consistent with recommended disclosures on strategy, to the extent that they do not face the transitional challenges referred to above.
• Location of disclosures – a statement of compliance is to be included in annual reports. Listed companies are required to explain if any of their TCFD-aligned disclosures are included in another document and are permitted to include more detailed, supplemental climate-related disclosures in separate reports.
• Third-party assurance – there is no requirement for third-party assurance of TCFD-aligned climate-related disclosures, although listed companies may voluntarily choose to obtain third-party verification or assurance. The FCA will work with the Department of Business, Energy & Industrial Strategy (BEIS) and others to develop any future UK policy in this respect.
• Duties of sponsors – sponsors, as part of their customary role, under the Listing Rules, in advising listed companies, will be required to perform due diligence on the procedures that listed companies may have in place relating to climate change disclosures.
• Timing – the new listing rule comes into force on January 1, 2021, with the first annual reports subject to the rule being published in spring 2022.

Next Steps

The FCA plans:

• a follow-up consultation on extending the application of the new listing rule to likely include all standard listed companies to be issued in the first half of 2021 (excluding listed funds); this is to be closely followed by a BEIS-initiated consultation in early 2021 on proposed disclosure obligations to be included in the Companies Act 2006 for certain UK-registered companies; and
• a new consultation on TCFD-aligned disclosures (that would include disclosure of strategy, policies and processes at the enterprise level, complemented by more targeted disclosure at the fund/portfolio level) by UK-authorized asset managers, life insurers and FCA-regulated pension providers to be issued in the first half of 2021. Note that the new listing rule does apply to asset managers and life insurers to the extent they have premium listings.

Technical Note

Simultaneously with the adoption of the new listing rule, the FCA issued a Technical Note clarifying its views with respect to existing disclosure requirements for a broader range of listed companies, namely those subject to the Listing Rules, the Disclosure Guidance and Transparency Rules (DTRs), the Prospectus Rules and the Market Abuse Regulation (MAR). The Technical Note highlights certain disclosures on climate-related and other ESG-related matters that companies may already be required to make under the foregoing regimes.

In respect of the Listing Rules, the FCA reminds listed companies that climate-related and other ESG-related matters will be relevant to a range of existing obligations. For example, when assessing the adequacy of their internal systems and controls, listed companies 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. Listed companies should also consider whether there is a need to develop specific systems, analytical instruments or organizational arrangements to collate and assess the information required to enable compliance with the Listing Rules. Climate-related and other ESG-related matters could be relevant to premium listed companies’ obligations not to create a “false market” in their securities and more broadly to general obligations under the Corporate Governance Code. These matters could also be relevant to the preparation of shareholder circulars, including obligations to provide information needed to allow shareholders to make properly informed decisions. The FCA also notes that these matters could be relevant to the general disclosure obligation to avoid misleading, false or deceptive statements or omissions that affect the import of information.

Similarly, climate-related and other ESG-related matters could be relevant to the preparation of prospectuses, including simplified prospectuses. The FCA notes, for example, that the UK government target to achieve net-zero carbon emissions by 2050 and to achieve the goals of the Paris Agreement more generally could require many companies to consider “significant changes to their business,” which changes “may be material to an investor’s assessment of the prospects of the company and the risks and opportunities shaping it.” The FCA also reminds listed companies that these matters may well need to be addressed in risk factors, and cites the ESMA Guidelines issued in 2019. It notes as well that these matters may also be relevant to mandated disclosures (by reason of the EU Commission Delegated Prospectus Regulation) regarding the use of fixed assets and the regulatory environment in which listed companies operate.

Ongoing disclosure obligations under the DTRs also need to take account of climate-related and other ESG-related matters. These obligations include descriptions of risks and uncertainties in annual and half-yearly reports, the use of key performance indicators as part of the annual fair review of the business and corporate governance statements in relation to internal control and risk management systems.

Finally, the FCA notes that obligations under MAR to disclose inside information extend to inside information that relates to climate change and other ESG-related matters.

Related Developments

The importance of sustainability reporting was also recently highlighted in a statement (available here) issued by the ESMA Chair, Steven Maijoor, who outlined three key elements of effective ESG reporting on a global scale:

• effective international cooperation in the development of a modular set of international ESG disclosure standards that take into consideration the unique needs of jurisdictions that are in various stages of progress with respect to sustainable reporting;
• robust, proportionate and principles-based requirements, that are sufficiently specific to ensure their consistent application, auditability and enforceability and sufficiently differentiated to take into account the different company sizes and their resource constraints; and
• a standard-setting process centered around the public interest that ensures the adopted standards reflect all relevant ESG areas and take into account views of a variety of stakeholders.

The UK Financial Reporting Council has also conducted a review of climate-related issues and identified the following key areas of good practice:

• companies are being encouraged to provide examples of how their key governance decisions have taken into account climate-related considerations;
• companies with climate-related strategic goals are asked to clarify “how progress towards these goals will be achieved, monitored or assured”; and
• companies need to better clarify the financial implications of climate changes in their financial statements.

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[1]      For more detail on the Roadmap, see our prior alert entitled “In Global First, the United Kingdom Moves Toward Mandatory Climate-related Disclosures by 2025.”

[2]      See TCFD Status Report 2020, TCFD Guidance on Risk Management Integration and Disclosure, and TCFD Guidance on Scenario Analysis for Non-Financial Companies.