FCA climate reporting requirements in the UK

FCA climate reporting requirements in the UK

COP26 has created global momentum to tackle the climate crisis and the business world is acutely aware that it must prepare to meet the challenges and realise the opportunities presented by climate change. Executives and board members know that investors, lenders, and rating agencies expect greater visibility on climate risks in particular.

A recent development in this area has been the introduction of rules by the Financial Conduct Authority (FCA) to promote climate and wider sustainability-related financial disclosures. This article will provide insight into how and why climate-related disclosures have been established, and the importance for all businesses in the future.

Background to the TCFD’s final recommendations

The Task Force on Climate-Related Financial Disclosures (TCFD) published its final recommendations in the 2017 TCFD Final Report. A global framework was established for companies and other organisations to develop effective climate-related financial disclosures in their existing reporting processes, demonstrating that climate-related risks have been considered and actions have been taken to mitigate them where necessary.

As a result, governments have proposed or introduced laws and regulations requiring disclosures to be aligned with the TCFD’s recommendations. In November 2021, the TCFD reported that disclosures increased 9% from 2019-2020 (up from 4% in 2018-2019). But only one in three companies on average had climate-related disclosures that aligned with the TCFD’s recommendations.

The UK has enshrined in law mandatory TCFD-aligned requirements for Britain’s largest companies and financial institutions. From 6 April 2022, over 1,300 of the largest UK-registered companies and financial institutions must disclose climate-related financial information. UK companies will need to adopt practices of assessing how a changing climate may affect their business model and strategy, and contribute to the UK’s transition to net zero. For more information on the pathway to mandatory disclosure, please read our “Lessons in climate risk reporting on the path to mandatory disclosure: A marathon, not a sprint” article.

The new FCA disclosure obligation

In December 2020, the FCA introduced a climate-related disclosure rule for premium-listed companies. This was extended in November 2021, after the publication of the TCFD’s 2021 Status Report, to specifically refer to the TCFD.

The rule is part of a coordinated approach with the government to incrementally introduce TCFD-aligned disclosures across the economy by 2025, as part of the UK’s wider net zero commitment.

The new rule, Listing Rule 9.8.6(8), applies to accounting periods beginning on or after 1 January 2021 and requires premium-listed companies to state in their annual financial report:

• whether the company has included, in its annual financial report, disclosures consistent with the TCFD recommendations;
• if disclosures are inconsistent with some or all of the recommended disclosures, or disclosures are included in documents other than the annual financial report, an explanation of why; and
• where in their annual financial report (or other relevant document) the disclosures can be found.

In December 2021, the FCA published its Policy Statement extending the new disclosure requirements beyond premium-listed companies to most standard-listed public companies, and asset managers, life insurers and pension providers, from 1 January 2022.

The emphasis of the new rules is on compliance, rather than imposing a mandatory disclosure obligation. Companies should consider whether choosing to explain non-compliance is appropriate.

This approach is similar to that of the Corporate Governance Code (CGC), which also adopts a “comply or explain” approach for premium-listed companies. The CGC offers flexibility for companies to develop suitable governance processes and practices, and companies are often hesitant to explain any departures from the CGC.

Similarly, the approach in Listing Rule 9.8.6(8) acknowledges that climate-related financial disclosure is a developing area in which firms are adapting and expanding their capabilities. The disclosure requirement aims to enable businesses to identify, evaluate and address actual and potential climate change-related risks. This should lead to better investment decisions, protected assets, greater business continuity, improved reputation among stakeholders, and potentially increased profits.

Supervisory strategy

The FCA will share responsibility for monitoring and enforcing compliance with Listing Rule 9.8.6(8) with the Financial Reporting Council (FRC).

As of January 2022, the FRC will routinely review TCFD-aligned disclosures during its reviews of premium-listed company annual financial reports. From 2023, it will also do so in reviews of relevant standard-listed company annual financial reports.

The FRC’s supervisory role extends to situations where minimum standards are not being met and regulatory intervention is required to ensure compliance with the Listing Rule 9.8.6(8). Where the FRC identifies non-compliance, it will likely first contact the company to take corrective action. If necessary, the FRC may then make a referral to the FCA where it is concerned a company is making disclosures with potentially false or misleading information that is likely to cause investor harm.

Impact on sponsors

Sponsors may also be appointed by the FCA where it appears there is, or may be, a breach of Listing Rule 9.8.6(8), so that they can advise on how to enforce it. Financial services firms acting as a sponsor of premium-listed companies will also need to consider whether companies they are providing services to have established procedures to enable them to comply with Listing Rule 9.8.6(8).

Sponsors, through their role of guiding companies through initial public offerings and significant transactions, will be required to provide assurances to the FCA that the company understands its responsibilities and obligations under the Listing Rule 9.8.6(8).

Sponsors will need to understand the TCFD’s framework, provide guidance, and be able to analyse whether the company has the necessary procedures in place to comply with Listing Rule 9.8.6(8) and other ongoing disclosure obligations.

Climate-related reporting in the future

The developments above have been enhanced by the IFRS Foundation’s announcement, at COP26, to establish the common International Sustainability Standards Board (ISSB).

The ISSB is working alongside the Department for Business, Energy and Industrial Strategy to establish the first ISSB “climate first” standard in the UK, which will raise the bar internationally for climate-related disclosures.

(For analysis and commentary on the Glasgow Climate Pact, please read out “The Glasgow Climate Pact: What does it mean for Business?”) article).

With the effects of climate change becoming increasingly pronounced, climate-related disclosures are critical and here to stay, and the requirements on businesses will only increase. Businesses must consider climate-related risks affecting their operations and strategies and make appropriate disclosures.

In preparation for mandatory climate-related reporting, companies should consider the following:

• Supplementary climate-related documents: where a company has included some or all of its climate-related disclosures in a document other than its annual financial report, it must explain why. The approach does not, however, preclude companies including more detailed supplemental climate-related information in separate reports that may be more tailored to the specific stakeholders they aim to reach.
• Reporting cycle: ahead of preparing the annual financial statement, companies should start to transparently address their progress on meeting the TCFD’s recommendations and what actions are required to close the gap. This will help evidence commitment to TCFD and signal accountability to its clients and consumers.
• Sector guidance: businesses must ensure they provide investors with disclosures that are useful for their decisions, and this should be provided in the context of the strategy and management of the entire business. The Investment Association recommends the use of the Sustainability Accounting Standards Board’s sector-specific guidance to determine what information is useful for the company’s investors in decision-making.