Out-Law / Your Daily Need-To-Know

FCA extends mandatory climate disclosure requirements

Out-Law News | 21 Dec 2021 | 2:20 pm | 3 min. read

The UK’s Financial Conduct Authority (FCA) has extended climate-related disclosure requirements to most standard listed public companies as well as asset managers, life insurers and pension providers it regulates.

The new disclosure requirements are aligned with global standards set by the Task Force on Climate-related Financial Disclosures (TCFD), which are voluntarily subscribed to by thousands of organisations. The move is the latest step on the roadmap towards mandatory climate-related disclosures outlined by the UK government, in partnership with the FCA and the Pensions Regulator, in November 2020, and builds on rules that already apply commercial companies with a 'premium listing' on a UK stock exchange.

The mandatory climate disclosure rules will apply to accounting periods beginning on or after 1 January 2022 for most of the businesses that have been brought within the scope of the rules, meaning the first disclosures subject to the new regime will need to be published in 2023. For smaller asset managers managing assets worth less than £5 billion in total, the rules take effect from 1 January 2023 (76-page / 845KB PDF).

Oliver Crowley

Oliver Crowley

Partner

The FCA has opted for a comply or explain approach to the extent data is not available and also requires the disclosure of the steps firms will take to improve the quality and completeness of the disclosures

The FCA said: “Better corporate disclosures will help inform market pricing and support business, risk and capital allocation decisions. And improved disclosures to clients and consumers will help them make more informed financial decisions. This, in turn, will strengthen competition in the interests of consumers, protecting them from buying unsuitable products and driving investment towards greener projects and activities.”

The new rules for standard listed issuers (58-page / 800KB PDF) do not apply to issuers of standard listed debt and debt-like securities, though the FCA has said it will further explore the introduction of “a proportionate and effective regime” on climate-related disclosures for those businesses at a later date.

Oliver Crowley of Pinsent Masons, an expert in the regulation of investment funds, said: “In scope asset managers and financial market participants will need to consider carefully their disclosure obligations under the new rules and how these will be presented. The FCA has acknowledged that there is a balance to be struck on achieving perfect methodologies and disclosures and ‘getting started’.”

“Given the limited data that may be available initially to asset managers in certain contexts and asset classes, the FCA has opted for a comply or explain approach to the extent data is not available and also requires the disclosure of the steps firms will take to improve the quality and completeness of the disclosures. The initially proposed best efforts disclosure obligation has been softened to be ‘as far as reasonably practicable’ taking into account ‘time, costs, resources and practicalities’, but what this means in practice will not be without its challenges until market practice settles,” he said.

In addition to announcing the new rules, the FCA has updated its own guidance in a bid to increase transparency over businesses’ ‘net zero’ transition plans.

Garbett Tom Sept_2019

Tom Proverbs-Garbett

Senior Associate

Transition will inevitably inform some element of strategy for all companies, subject to sector specific variations, and boards will be well advised to focus on the process sooner rather than later

The FCA said: “Where making disclosures on transition plans as part of its strategy disclosures under the TCFD’s recommendations and recommended disclosures, a listed company that is headquartered in, or operates in, a country that has made a commitment to a net zero economy (such as the UK’s commitment under the Climate Change Act 2008 (Order 2019)) is encouraged to assess the extent to which it has considered that commitment in developing and disclosing its transition plan. Where it has not done so, it is encouraged to explain why.”

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons said: “In advance of COP26 and to align with its public commitment to net zero, the government has made clear its intention not only that large companies will in future need to publish their transition route to a low carbon economy, but that publication will form part of the UK’s sustainability disclosure requirements – the government's in-progress proposal to bring together existing sustainability-related disclosure requirements under one integrated framework. Such ‘transition plans’ will be informed by the work of the Transition Plan Taskforce – a combined industry and academic body – currently working to produce a science-based ‘gold standard’.”

“The TCFD has already published guidance on how transition plans could be used as a fundamental part of a company's strategic disclosures and the FCA has incorporated this directly into its guidance for both premium and standard listed issuers. It remains to be seen how many in-scope companies are in a position to provide a detailed report on the immediate or short-term impact of its operations in line with the TCFD disclosures, let alone have a plan to transition. Nevertheless, transition will inevitably inform some element of strategy for all companies, subject to sector specific variations, and boards will be well advised to focus on the process sooner rather than later,” he said.