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Disclosure of climate-related information by listed companies: examining the new rules published by the FCA

  • United Kingdom
  • Corporate


As outlined in our December briefing, as anticipated, for financial years beginning on or after 1 January 2021, premium listed commercial companies will have to make climate-related disclosures in their annual reports based on the Framework established by the Task Force on Climate-related Financial Disclosures (TCFD). Initially, disclosures will not be mandatory, but if a company does not include the relevant disclosures, they will have to explain why. We will see the first annual reports containing disclosures under this new rule in early 2022.

Initially, the new requirements will not apply to premium segment investment companies, or to any standard segment companies. However the Financial Conduct Authority (FCA) intends to consult in the first half of 2021 as to whether the new rule should be extended to these types of issuer. This consultation will also consider whether the TCFD disclosures should be made mandatory – ie companies will have to comply and will not be able to explain why a disclosure has not been made.

Given that the timing coincided with the Christmas break and the end of the Brexit transition period approaching (the FCA policy statement was published on 21 December 2020), some listed companies may have missed this development. This is our second briefing on the new rules, which considers the requirements in more detail, and considers some of the issues facing companies and directors.

What are the TCFD recommendations?

The TCFD was established in December 2015 by the Financial Stability Board to develop a set of voluntary climate-related disclosure standards for companies across all sectors. The Recommendations of the Task Force on Climate-related Financial Disclosures were published in the final report in 2017 to help businesses disclose climate change risks. The recommendations constitute climate-related financial risk disclosures for use by companies in providing information to investors, lenders and insurance underwriters about the financial risks companies face from climate change. The core elements of climate change disclosures recommended by the TCFD are structured around four high level areas as set out below: governance, strategy, risk management and metrics and targets, with 11 more specific recommended disclosures that sit under each of the four pillars. These are collectively referred to as the “TCFD Recommended Disclosures”.

Governance Strategy Risk Management Metrics and Targets
Disclose the organization’s governance around climate-related risks and opportunities.

Disclose 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.

Disclose how the organization identifies, assesses, and manages climate-related risks. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.
Recommended Disclosures Recommended Disclosures Recommended Disclosures Recommended Disclosures
a) Describe the board’s oversight of climate-related risks and opportunities. a) Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term. a) Describe the organization’s processes for identifying and assessing climate-related risks. a) Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.
b) Describe management’s role in assessing and managing climate-related risks and opportunities. b) Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning. b) Describe the organization’s processes for managing climate-related risks. b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.
c) Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management. c) Describe the targets used by the organization to manage climate-related risks and opportunities and performance against targets.

Source: Final Report, Recommendations of the Taskforce on Climate-related Financial Disclosures, June 2017.

In addition to the TCFD Final Report, there is also extensive accompanying guidance and technical supplements which have ben published by the TCFD to assist companies in making appropriate disclosures, which is available on the TCFD website.

The UK government has made the TCFD Recommended Disclosures a key pillar of its Green Finance Strategy, and intends to make reporting in line with the TCFD framework mandatory in the UK within the next five years, with the majority of the measures to be introduced by 2023.

What disclosures will listed companies need to make?

As set out in our December briefing, a new Listing Rule (9.8.6(8)) introduced on 21 December 2020 requires listed companies in scope to include a new statement in their annual report which will set out:

  • whether they have made disclosures consistent with the TCFD Recommended Disclosures in their annual financial report;
  • where they have not made disclosures consistent with the TCFD Recommended Disclosures, an explanation of why and a description of any steps they are taking or plan to take to make consistent disclosures in the future, including relevant timeframes for being able to make those disclosures;
  • where some or all of their disclosures are in a document other than the annual financial report (such as a separate sustainability report), an explanation of why; and
  • an explanation of where in the annual report (or other relevant document) the various disclosures can be found.

In order to determine whether its disclosures are consistent with the TCFD Recommended Disclosures, listed companies should undertake a detailed assessment of those disclosures which takes into account the Guidance for all Sectors published by the TCFD; and, where applicable, the Supplemental Guidance for the Financial Sector, or the Supplemental Guidance for Non-Financial Groups. The new Listing Rule also sets out additional TCFD publications that the FCA considers to be “relevant” to disclosures.

When considering how much detail to provide, Companies will need to consider whether their disclosures provide sufficient detail to enable users of the annual report to assess the company’s exposure to and approach to addressing climate-related issues. Companies will need to take into account (i) the level of their exposure to climate-related risks and opportunities and (ii) the scope and objectives of their climate related strategy.

Comply or explain

As noted, the new rule is introduced, at least initially, on a “comply or explain” basis. However, the rule does set out the FCA’s expectation that it would expect listed companies to be able to make TCFD compliant disclosures “except where it faces transitional challenges in obtaining relevant data or embedding relevant modelling or analytical capabilities”. In particular, the FCA expects companies will be able to make disclosures consistent with the TCFD Recommended Disclosures relating to (1) governance; (ii) risk management; and, in relation to strategy, recommended disclosures (a) and (b) in the table above.

What listed companies need to do now

Companies with 31 December year ends will need to make the required disclosures (or at least explain why they are not doing so) in their annual reports for the year ending 31 December 2021. Companies may therefore need to develop their existing processes and resources on climate-related issues. In particular, they will need to familiarise themselves with the detailed guidance in the TCFD documents noted above.

Companies may be concerned about potential legal liability for misleading statements and omissions in their annual reports, in particular for forward looking statements, eg if they fail to identify and disclose sufficiently the risks posed by climate change. Some protection is given to directors by section 463 of the Companies Act 2006, which provides that a director will be liable in relation to disclosures made in one of the reports to which the section applies only if they knew the statement to be untrue of misleading, or was reckless as to whether it was untrue or misleading; or they knew the omission to be dishonest concealment of a material fact. This issue is acknowledged by the FCA in the Policy Statement, as it is not clear whether the protection granted by section 463 would extend to disclosures that are not requirements of the Companies Act. In addition, the company and the directors could face fines for breach of the Listing Rules, for example the obligation to ensure that misleading information is not published.

The FCA has acknowledged the challenges of making forward looking disclosures. They state that they will continue to monitor developments, and work with industry, other regulators and government to provide additional guidance as appropriate. 

In practice, companies can approach this in the same way that they currently approach disclosures around business planning and targets. This will include ensuring that disclosures are clear, unambiguous, prepared with due care, are supported by appropriate evidence and based on reasonable assumptions. Companies should also review the standard disclaimers on their annual reports about forward-looking information.

Initially, the disclosures are not required to be audited, although the FCA does see significant value in third party assurance of TCFD aligned disclosures in the longer term, and notes that companies may choose to obtain third party verification or assurance on a voluntary basis in the meantime. Whilst this would give additional comfort to the directors, it would also incur additional costs. It therefore remains to be seen how the audit market will react to this.

New FCA Technical Note

As noted in our December briefing, the FCA has also published a new Technical Note clarifying existing environmental, social and governance (ESG) disclosure obligations under the Listing Rules, Disclosure Guidance and Transparency Rules, the Market Abuse Regulation, prospectus regime and the UK Corporate Governance Code. This applies with immediate effect.

What else is on the horizon in climate-change reporting?

The TCFD Recommended Disclosures are not a corporate reporting standard. In a step towards and establishing a common international reporting standard, the Trustees of the International Financial Reporting Standard Foundation published a consultation paper in September 2020. This paper seeks feedback on a proposal to establish a Sustainability Standards Board to sit alongside the International Accounting Standards Board.

In November 2020, HM Treasury published Policy Paper: UK joint regulator and government TCFD Taskforce – Interim Report and Roadmap, which sets out the UK’s approach to introducing mandatory climate-related financial disclosure requirements aligned to the TCFD Recommended Disclosures by 2025. For UK registered companies, including very large private companies, BEIS expects to consult in early 2021 on proposals which will introduce a requirement into the Companies Act 2006 for such companies to make TCFD-aligned disclosures in the strategic report of their annual report and accounts. Subject to Parliamentary time, it is anticipated that the relevant law will come into force in 2022. A much wider range of UK companies are therefore likely to find themselves having to get to grips with the TCFD Recommended Disclosures and all the supporting guidance that accompanies them.

Useful Links

FCA Policy Statement PS20/17