Proposals to enhance climate-related disclosures include promoting the use of the TCFD recommendations.

By Paul A. Davies, Nicola Higgs, Chris Horton, James Inness, and Michael D. Green

On 6 March 2020, the UK’s Financial Conduct Authority (FCA) launched a consultation primarily focused on enhancing requirements on certain listed companies to make climate-related disclosures (the Consultation). In particular, it is proposed under the Consultation that such listed companies will be required to state that they have reported in line with the recommendations made by the Taskforce on Climate-related Financial Disclosures (TCFD) or explain why they have not complied with such step. This demonstrates further momentum behind the increasingly widespread adoption of the TCFD recommendations in the public markets (as well as the private markets).

The TCFD was set up in 2015 by the Financial Stability Board (FSB) to develop climate-related financial risk disclosures for companies, banks, and investors to provide information to stakeholders. The TCFD finalised its recommendations in 2017. These recommendations establish guidance for all sectors on climate-related disclosures under the headings governance, strategy, risk management, and metrics and targets. Further, sector-specific guidance is provided to parts of the financial industry (banks, insurance companies, asset owners, and asset managers) and parts of the non-financial industry (energy, transportation, materials and building and agriculture, food and forest products).

The TCFD recommendations have proved to be popular in terms of aligning climate-related disclosures. Notably, the TCFD’s 2019 status report on the adoption of the recommendations noted that those recommendations were supported by 785 companies with a combined market capitalisation of US$9.3 trillion. Further, the UN Principles for Responsible Investment stated that reporting in line with TCFD recommendations would be mandatory for its 2,085 signatories starting in 2020.

The UK government endorsed the TCFD recommendations in 2017 and its Green Finance Strategy, launched in 2019, specifically stated that it expected “all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022”. As such, the approach set out in the Consultation is not surprising.

The key aspects of the Consultation are as follows:

  • The proposed requirements will apply to commercial companies that have (or will be seeking) a UK premium listing and will not apply to listed investment trusts.
  • It is intended that a new climate-related disclosure rule will be introduced into the Listing Rules. This rule will require companies with a UK premium listing to:
    • Set out if they have made disclosures in their annual financial report that are consistent with the TCFD recommendations.
    • If the above does not apply, explain why they have not made any disclosures in their annual financial report that are consistent with the TCFD recommendations or explain if such disclosures are included in a document other than the annual financial report.
    • Set out where in the annual financial report (or other document) the disclosures consistent with the TCFD recommendations can be found.
  • Sponsors will have to consider a listed company’s procedures to comply with the new rule as part of their sponsor declarations in relation to directors’ understanding of the Listing Rules and the listed company’s established procedures (on an IPO and a significant transaction).

The Consultation also notes that the FCA will issue a Technical Note intended to clarify companies’ existing obligations to make environmental, social, and governance (ESG) and climate-related disclosures.

The FCA specifically states in the Consultation that it does not wish to make TCFD-related disclosures mandatory at this stage, because some companies may not have the necessary data or capabilities to meet the TCFD recommendations. Nonetheless, the “comply or explain” approach is likely to put considerable pressure on those companies that do not report in line with the TCFD recommendations. We would expect stakeholders to focus their resources on targeting such companies.

While these proposals are still at consultation stage, the direction of regulatory travel and UK government support would suggest that such proposals are likely to be adopted in their current form. It marks a further step in the tightening regulatory focus on climate-related issues and broader ESG-related issues.

The consultation closes on 5 June 2020, with the new rule expected to apply to financial reporting periods from 1 January 2021.

Latham & Watkins will continue to monitor developments.