The financial services sector plays a vital role in the fight against climate change. It has long been recognised that regular and accurate disclosure of information on climate-related risks and opportunities can help investors, lenders, and other market participants better understand how their investment decisions can impact the global climate crisis. In recent years, the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC), two of the UK's key financial regulators, have taken significant steps to make environmental, social and governance (ESG) a priority, and they continue to promote the need for companies to make climate-related financial disclosures.
On 22 June 2021, the FCA launched public consultations on climate-related disclosures for listed companies and certain regulated firms, specifically: (1) on its proposals to widen the application of climate-related disclosure requirements to issuers of standard listed equity shares, and (2) on its proposals to introduce climate-related financial disclosure rules and guidance for asset managers, life insurers, and FCA-regulated pension providers. Both consultations will close on 10 September 2021. On 7 July 2021, the FRC published a statement of intent on ESG challenges (FRC ESG Statement) which outlines issues relating to reporting ESG information.
Background
Since its inception in 2015, the Taskforce on Climate-related Financial Disclosures (TCFD) has become a key international driver on increasing the reporting of climate-related information to help identify information needed by stakeholders to appropriately assess climate-related risks and opportunities. The formal recommendations of the TCFD have become an accepted international standard against which companies should be reporting, and national governments and regulators often refer to such recommendations when considering and introducing ESG-related legislation. In November 2020, the UK Government published a Roadmap towards mandatory climate-related disclosures across the UK economy by 2025 that align with the TCFD's recommendations (the Roadmap).
FCA public consultations
In December 2020, the FCA implemented its first climate-related disclosure policy that requires commercial companies with a UK premium listing to include a compliance statement in their annual financial report detailing whether they have made disclosures aligning with the TCFD recommendations, and to provide an explanation if they have not done so.
Consistent with the Roadmap (and no surprise to interested parties), one of the FCA's recently launched public consultations (CP21/18) is on proposals to extend the application of these disclosure requirements to include issuers of standard listed equity shares. After the consultation closes on 10 September 2021, the FCA will aim to publish its final policy on climate-related disclosures before the end of 2021. In addition to these proposals, the FCA are seeking views on other ESG topics including issues relating to ESG data and rating providers and green and sustainable debt instruments, which are well-established products in other jurisdictions. The FCA intends to publish a feedback statement in the first half of 2022 based on the responses received.
The other current FCA public consultation (CP21/17) relates to a proposed TCFD-aligned disclosure regime for asset managers, life insurers, and FCA-regulated pension providers. The desired outcome of the regime is three-fold: (1) to enable consumers to make informed investment decisions; (2) to increase transparency and competition in the interest of consumers; and (3) to coordinate information flow along investment chains. In particular, the FCA's proposal consists of two key elements:
- Entity-level disclosures that would require firms to publish an entity-level TCFD report annually on how climate-related risks and opportunities are taken into account in managing and administering investments on behalf of clients. These disclosures should be made in a prominent place on the firm's website.
- Product or portfolio-level disclosures that would require firms on an annual basis to produce a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.
The consultation paper also notes that the FCA is introducing a new 'Environmental, Social and Governance (ESG) Sourcebook' in the FCA Handbook to outline its proposed rules and guidance, with a view to expand to include not only published climate-related material, but also wider ESG topics.
FRC ESG Statement
The FRC ESG Statement identifies key issues relating to ESG information in a number of areas, the aim of which is to create a more efficient system of ESG information reporting. The areas include:
- Production, to ensure better internal information to lead to better decisions and better insight for stakeholders,
- Audit and assurance, to ensure reported information is robust and reliable,
- Distribution, so that information is made accessible to all interested parties,
- Consumption, to provide useful information that will lead to better decision-making by stakeholders,
- Supervision, so that information and activity is appropriately monitored and requirements are enforced, and
- Regulation, to improve efficiency through coordinated and coherent regulation on both a domestic and international level.
The FRC ESG Statement follows the FRC's publication of its thematic review of climate-related considerations by boards, companies, auditors, professional bodies, and investors in December 2020. For more information, please see to our client alert.
The FRC also published a snapshot of UK market practice against the Sustainability Accounting Standards Board (SASB) standards that are internationally recognised ESG issues likely to materially impact the financial performance of a typical company in a given sector. It is promising that the FRC reports a 200+% increase in voluntary SASB reporting from 2020 to 2021; however, it notes that more can be done to improve the uptake and quality of reporting.
Concluding Remarks
Since the end of the Brexit transition period, the UK has had full autonomy over how progress is made in meeting the UK's ambitious target of reaching net zero by 2050. Although there has been pressure from stakeholders on companies to make climate-related financial disclosures, the adoption of TCFD recommendations remain voluntary and has led to incomplete and varying quality of disclosures. Therefore, regulatory intervention would be an effective solution to improve the quality and quantity of such disclosures.
The FCA and FRC continue to build and develop effective disclosure regimes for the financial industry, and recognise many companies subject to UK rules also must comply with other jurisdictional rules, and therefore take into account international standards, such as TCFD recommendations, SASB standards, and the EU Sustainable Financial Disclosure Regulation (EU SFDR), when designing such regimes. There will no doubt be further statements and policies released by the FCA, FRC and other UK regulators with respect to ESG reporting and climate-related financial disclosures. Despite the gradual introduction of such disclosure requirements and the recent announcement that the application of the second phase under the EU SFDR will be delayed by six months to 1 July 2022, companies may still want to consider further ESG reporting and disclosures, even if they are technically not required to do so yet.
Stephanie Pong, London Trainee Solicitor, contributed to the drafting of this alert.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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