The FCA is consulting on extending its rules to standard listed issuers.

By Paul A. Davies, Chris Horton, James Inness, Anna Ngo, and Charlotte Collins

On 22 June 2021, the FCA published a Consultation Paper (CP21/18) on extending the application of the existing climate-related disclosure requirements for commercial companies with a UK premium listing to a wider scope of listed issuers, so that all commercial companies that issue listed equity shares would be captured by the requirements. The FCA had previously announced that it was going to consult on this extension, so standard listed issuers were forewarned. The FCA plans to apply the requirements for accounting periods beginning on or after 1 January 2022.

The New Disclosure Rule

The current disclosure rule (LR 9.8.6R(8)) applies to companies with a UK premium listing, in respect of accounting periods beginning on or after 1 January 2021. The FCA is looking to introduce a new disclosure rule (LR 14.3.27R) that mirrors the existing rule for premium listed companies. Therefore, affected companies would need to include a statement in their annual financial report setting out:

  • Whether they have made disclosures consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and recommended disclosures in their annual financial report
  • Where they have not made disclosures consistent with some or all of the TCFD’s recommendations and/or recommended disclosures, an explanation of why, and a description of any steps they are taking or plan to take to be able to make consistent disclosures in the future, and the timeframe within which they expect to be able to make those disclosures
  • Where they have included some, or all, of their disclosures against the TCFD’s recommendations and/or recommended disclosures in a document other than their annual financial report, an explanation of why
  • Where in their annual financial report (or other relevant document) the various disclosures can be found

As for premium listed issuers, the FCA plans to publish guidance to assist companies in navigating the requirements, including on the level of detail required in the relevant disclosures, ensuring consistency with the TCFD recommendations, and the circumstances in which companies might be justified in explaining rather than making a disclosure.

The FCA considers that it is appropriate to use a “comply or explain” basis for now, retaining some flexibility while companies get used to the requirements and while data quality improves. The FCA thinks that the appropriate time to consult on moving to a mandatory compliance basis is likely to be when the international reporting standard currently under development is established in the UK. If work on the international standard is materially delayed, however, the FCA would expect to consult on moving to a mandatory compliance basis by the target date of 2025 (as announced in the UK government’s Roadmap towards mandatory climate-related disclosures last year).

Scope

The FCA’s proposals capture issuers of standard listed equity shares, excluding standard listed investment entities and shell companies (the FCA intends that the former will be captured by its separate proposals for disclosures by asset managers). The FCA estimates that this will bring a further 148 companies into scope. The rule will apply equally to all companies in scope, regardless of whether they are headquartered in the UK or overseas. The FCA is also seeking views on whether and how it might extend the requirements to issuers of standard listed shares other than equity shares, issuers of standard listed debt (and debt-like) securities, and issuers of standard listed global depositary receipts.

Wider Context

The FCA’s proposals come in the midst of various other initiatives to introduce TCFD-aligned disclosures by commercial companies, both domestically and at an international level. In particular, the Government Department for Business, Energy and Industrial Strategy (BEIS) recently conducted a consultation on climate-related disclosure provisions in the Companies Act 2006 and the Limited Liability Partnerships Act 2000. The scope of the provisions overlaps with the FCA’s rules, meaning that some companies will need to disclose under both regimes. The FCA states that it has considered the interaction of BEIS’s Companies Act 2006 proposals with its rules and is confident that, in their current form, the provisions can work effectively together. However, affected companies will be concerned that the overlapping rules, which are not entirely aligned, could lead to additional complexity.

Further, the TCFD framework (upon which the FCA’s disclosure regime is based) differs from the EU Non-financial Reporting Directive and proposed Corporate Sustainability Reporting Directive, both in terms of reporting materiality thresholds and the substance of the disclosures. The EU legislation requires reporting on external impacts in addition to financial materiality, and across environmental, social, and governance metrics (not solely climate). This divergence potentially gives rise to conflicting rules for some companies operating across multiple jurisdictions.

The FCA notes that the International Financial Reporting Standards (IFRS) Foundation is planning to create an International Sustainability Standards Board (ISSB) to sit alongside the International Accounting Standards Board. The ISSB would work to introduce a climate-related corporate reporting standard, thereby creating an international reporting standard. The FCA would look to adopt this standard in due course. The US Securities and Exchange Commission (SEC) is also looking closely at this work and may align any future US disclosure regime with this standard. Therefore, companies should note that an internationally consistent approach is likely to emerge over time.

Notably, at the June 2021 G7 summit, ministers committed to support moving towards mandatory climate-related disclosures based on the TCFD framework, which shows increasing prominence of the framework on a global stage.

Next Steps

Comments are requested by 10 September 2021, and the FCA plans to publish a Policy Statement with final rules by the end of the year. The new disclosure rule (and accompanying guidance) would take effect for accounting periods beginning on or after 1 January 2022.

The FCA is also seeking feedback on certain ESG-related topics in capital markets, and plans to publish a Feedback Statement on this discussion separately in the first half of 2022. The FCA’s discussion focuses on issues relating to green, social, or sustainable-labelled debt instruments, and ESG data and rating providers. The FCA also asks respondents to comment on what other ESG topics it should be prioritising.