FCA reminds companies of TCFD-aligned climate disclosure rules and sets out next steps in Primary Market Bulletin 42

The FCA has published its Primary Market Bulletin 42. This sets out (among other things) a useful reminder and clarification of the rules and guidance on TCFD-aligned climate reporting for UK listed companies and next steps. This blog post does not deal with the other (non-climate related) aspects of the FCA’s Bulletin.

The FCA highlights that climate change can have a significant and complex impact on most if not all listed companies. It believes more structured disclosures and greater transparency by listed companies should lead to better informed decisions as well as more accurate asset pricing, which in turn should support better capital allocation in the transition to a net zero economy. The FCA points out that climate change presents foreseeable risks, together with opportunities, in every sector of the economy - including but not limited to high-emitting firms.

In particular:

• The FCA’s first review of TCFD-aligned disclosures by premium listed commercial companies this year and the Financial Reporting Council’s (FRC) complementary analysis highlighted some common reporting gaps and areas for improvement (see our client briefing).
• So the FCA is reminding companies of the rules, guidance and expectations, including by:
  • reiterating the importance of building capabilities now to make relevant disclosures, including improving internal processes and familiarity with the TCFD recommendations, and engaging with investors to understand their disclosure expectations (see FCA’s ‘Getting ready for TCFD-aligned climate-related disclosures’);
  • reminding companies to assess their disclosures against the TCFD’s Guidance for All Sectors and (where relevant) the Supplemental Guidance for the Financial Sector and for Non-Financial Groups;
  • identifying areas for improvement in listed companies’ disclosure of forward-looking information;
  • encouraging better consideration of climate-related risks and opportunities in financial statements, and better connectivity between non-financial and financial disclosures;
  • encouraging listed companies, especially those making net zero commitments, to use the TCFD’s Guidance on Metrics, Targets and Transition Plans, and to consider the UK Transition Plan Taskforce (TPT) Disclosure Framework and Implementation Guidance on credible and robust transition plans (see our blog post).
• The FCA also highlights that the steps on getting ready for TCFD-aligned disclosures may also be of interest to prospective issuers in considering how climate-related risks and opportunities should be reflected in their prospectus.
• The FCA has reiterated its encouragement in PS21/23 for companies to consider Sustainability Accounting Standards Board (SASB) metrics for their sector when making disclosures against the TCFD recommendations (and when making wider sustainability-related disclosures). Use of SASB metrics will also help companies prepare to disclose effectively against the International Sustainability Standards Board’s (ISSB) future standards, given that those standards will include industry-based metrics (see our blog posts here and here).
• Since the FCA’s review of the first TCFD-aligned disclosures under the Listing Rules, the FCA have noted that companies in some sectors (energy, transportation, materials and buildings, and agriculture, food, and forest products) had either not identified climate change to be an applicable or material risk to their business, or had identified climate change to be a principal risk but had not made disclosures under the Strategy or Metrics and Targets pillars of the TCFD framework that were consistent with the TCFD’s Supplemental Guidance for Non-Financial Groups. The FCA therefore reminds companies of the expectation in Technical Note 802.1 that a company “include sufficient, company-specific information to support decision-making by investors”, and that it should use its “knowledge of the company’s actual and expected activities, operating environment and exposure to physical and transition risks” to ensure it complies with the Listing Rule requirements.
• For companies subject to existing IFRS requirements, the FCA notes that the IFRS Foundation’s educational material clarifies that although climate matters are not referenced explicitly within the IFRS financial reporting standards, they must be considered “when the effect of those matters is material in the context of the financial statements taken as a whole”. So, the FCA is reminding companies that, where climate-related matters represent material risks and opportunities for the business, they should consider those matters in financial statements and disclose material information, such as the assumptions which have been made. The FCA is also encouraging companies to show clear connectivity between the climate disclosures in the front half of their annual financial report and their financial statement disclosures.
• The FCA’s review of TCFD-aligned disclosures found that while most companies were making net zero commitments, the content of some of those commitments were often not clear and in some cases they risked being misleading as a result. The FCA is therefore reminding companies to consider the TCFD’s Guidance on Metrics, Targets and Transition Plans for future reporting. In addition, when making transition plan disclosures, the FCA is encouraging companies to consider the TPT’s recommendations on credible and robust transition plans (see our blog post). The FCA encourages early engagement with the TPT’s recommendations.

In terms of next steps:

• The FCA will continue to monitor listed companies’ climate-related financial disclosures under the Listing Rules and will take action as appropriate in line with its supervisory approach (see PMB 36 and Technical Note 802.1).
• The FCA and FRC envisage using multi-firm or thematic reviews again next year to consider TCFD-aligned disclosures made by all in-scope listed companies.
• The FCA has committed to consulting on adapting the existing climate-related financial disclosure rules to reference the ISSB’s sustainability disclosure standards once those are finalised.
• The FCA will also consult (at the same time) on moving from disclosures on a ‘comply or explain’ basis to mandatory disclosures.
• The FCA intends to consult on disclosure expectations for transition plans once the TPT’s work is finalised. 

For more information on climate and wider sustainability disclosure requirements, see the following Linklaters materials:

• UK listed companies: Climate & Sustainability Reporting Overview;
• Non-listed UK companies & LLPs: Climate & Sustainability Reporting Overview; and
• ESG Summer School 2022 on disclosure regimes.

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