New climate change disclosure rules for UK listed companies proposed

Out-Law News | 18 Oct 2019 | 2:36 pm | 3 min. read

The Financial Conduct Authority (FCA) will consult next year on new 'comply or explain' climate change disclosure rules for certain UK listed companies, amongst other things, it has announced.

It has proposed that certain firms be required to state whether or not they have followed the recommendations of the global Task Force on Climate-related Financial Disclosures (TCFD) when issuing securities for trading on a regulated market. It also intends to produce new guidance for regulated firms, clarifying their existing obligations to report on the impact of climate change on their business where this is material to the company's prospects.

The FCA announced the consultation as part of its feedback to last year's consultation on improving climate change disclosures by issuers and information to consumers on green financial products and services. The feedback statement also confirms that pension scheme independent governance committees (IGCs) will be required to consider and report on firms' environmental, social and governance (ESG) and stewardship policies; as well as warning firms against 'greenwashing' financial products.

Crowley Oliver

Oliver Crowley

Senior Associate

Care should be taken that the rules not overlap with other disclosure obligations, as this could cause confusion and undue administrative burden on issuers.

FCA chief executive Andrew Bailey said: "We have an important role to play in creating an environment where firms can manage the risks from moving to a greener economy and capture the opportunities to benefit consumers. This feedback statement is the next step in our drive to provide clarity for firms and consumers about how our work will help support the response to the climate challenge and the development of the green finance market".

The FCA will consult next year on the new disclosure requirements, at which point it will presumably clarify to which issuers they will apply.

The TCFD, which is chaired by Mark Carney of the Bank of England, has developed a set of climate-related financial disclosures on governance, strategy, risk management and metrics and targets, which firms can adopt on a voluntary basis. The UK government expects listed companies and large asset owners to disclose in line with the TCFD's recommendations by 2022, but the FCA's statement indicates that it would require affected issuers to do so earlier. It also suggests that the rules could ultimately become mandatory.

Adopting the TCFD's recommendations would, in the FCA's view, address some of the challenges around consistency and comparability of reporting identified by respondents to last year's consultation. The FCA may consider disclosure requirements on other sustainability factors, beyond climate change, as suitable frameworks emerge.

The FCA will also use the consultation to clarify its view that existing disclosure obligations already require the implications of climate change on a business to be reported where these are financially material to the company's prospects.

The FCA said it was generally supportive of common definitions, standards and metrics for 'green' or 'sustainable' products. However, it said that there were often legitimate reasons for different approaches and definitions, including sectoral and regional variations. Firms should, however, ensure that any claims about the environmental, social or other non-financial characteristics of products are fair, clear and not misleading, in line with existing regulatory requirements.

So-called 'greenwashing', in which firms make misleading claims about the positive environmental impact of their products, activities or policies, is an "active area of focus" for the FCA, according to the policy statement. It also intends to carry out further work on the need for additional actions, guidance or rules around the design and delivery of sustainable financial products and services.

The FCA will finalise rules requiring pension IGCs to oversee and report on firms' ESG and stewardship policies, as well as separate rule changes to facilitate investment in patient capital opportunities, by the end of this year, according to the document. It will also shortly publish a feedback statement setting out actions to address the most significant barriers to effective stewardship, in response to its joint discussion paper with the Financial Reporting Council (FRC) on stewardship.

Investment funds and asset management expert Oliver Crowley of Pinsent Masons, the law firm behind Out-Law, said that the proposals for increased disclosure requirements would be welcomed by many in the industry, despite being on a comply or explain basis.

"However, as has been noted by respondents, care should be taken that the rules not overlap with other disclosure obligations, as this could cause confusion and undue administrative burden on issuers," he said.

"Affected companies holding themselves out as green should also follow carefully the developments on proposals guarding against 'greenwashing' to ensure that they comply," he said.