The UK Financial Conduct Authority (“FCA”) has released a consultation paper entitled “Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations”1 (the “CP20/3 Consultation Paper”) which proposes to require commercial companies (including sovereign controlled companies) listed on the premium segment of the London Stock Exchange to disclose whether or not they have complied with the disclosure recommendations of the Task Force on Climate-related Financial Disclosures2 (the “TCFD”).
In connection with the release of CP20/3 Consultation Paper, Andrew Bailey, FCA Chief Executive, said:
“Climate change presents a serious and wide-ranging threat to global economic prospects, society more broadly and our natural environment. The changes we propose will help to provide the transparency the market needs to be able to assess how well companies are adjusting to the risks of climate change. Improved disclosures will support better asset pricing and enable investors to make more informed choices about where to allocate their capital – which will ultimately support the transition to a low carbon economy.”3
The TCFD’s recommendations were published in 2017 following 18 months of industry consultation, and provide a framework to companies for disclosing the impact of climate change on their business, with the aim of helping investors to understand which companies are most at risk, which are best prepared, and which are taking action on climate change. The TCFD recommends clear disclosure on the impact of climate change of the following areas of a company’s business:
- Governance: the organization’s governance around climate-related risks and opportunities;
- Strategy: the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning, where such information is material;
- Risk Management: the processes used by the organization to identify, assess, and manage climate-related risks; and
- Metrics and Targets: the metrics and targets used to assess and manage relevant and material climate-related risks and opportunities.
The CP20/3 Consultation Paper proposes that companies subject to the rule will be required to disclose in their annual financial report whether they comply with the TCFD disclosure recommendations, and if they do not comply with the TCFD recommendations, to disclose such non-compliance. However, the FCA proposals do not mandate specific qualitative or quantitative disclosure requirements, given that companies may not yet have data and capabilities to fully comply with the TCFD recommendations – particularly the recommendations regarding scenario analysis and setting climate-related targets. The FCA also states that it does not want to be overly prescriptive at this stage of the process, given the evolving nature of climate-related disclosure frameworks.4
The FCA notes in the CP20/3 Consultation Paper that it believes enhanced disclosure on the impact of climate change on premium-listed issuers will support market integrity by improving the efficiency of asset pricing and capital allocation, and that setting clear expectations as to disclosure requirements will help promote a structured and focused dialogue within companies on matters of governance, strategy and risk, while reducing the cost for companies of addressing ad hoc requests from investors.
In addition to the new disclosure requirements, the FCA also proposes in the CP20/3 Consultation Paper to provide guidance in a forthcoming FCA Technical Note on existing obligations in EU legislation and in the FCA’s existing rules that may already require certain issuers to disclose information on climate-related and other environmental, social and governance (“ESG”) matters. Unlike the FCA’s proposed rule on TCFD disclosure, this guidance will be relevant for all issuers with securities listed on the London Stock Exchange, not just those in the premium-listed segment.
The CP20/3 Consultation Paper further states that the FCA believes its proposals to be consistent with the UK Government’s Green Finance Strategy, and a first step towards adoption of the TCFD’s recommendations more widely within the FCA’s regulatory framework for listed issuers.
The CP20/3 Consultation Paper will be open to feedback until 5 June 2020, and following consideration of feedback received, the FCA intends to publish a Policy Statement later in 2020, along with the finalized rule and Technical Note.