Late last year, the UK financial regulator (the Financial Conduct Authority or FCA) announced that companies with a premium listing on the London Stock Exchange would be required to report on whether their financial disclosures are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). The move, part of a broader UK response to climate change, highlights the increasing focus on environment and sustainability throughout the investment chain, as well as the importance of TCFD as a common reporting standard.

Now, the FCA is proposing to introduce rules which would extend the TCFD-aligned climate-related financial disclosure regime to UK companies with a standard listing, along with asset managers, life insurers, and regulated pension providers. The FCA anticipates that the regulations will cover 98% of AUM in the UK.

Asset managers, life insurers and regulated pension providers:

The key elements of the proposals are:

  • Entity-level disclosures: Firms would be required to publish, annually, an entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers. These disclosures must be made in a prominent place on the main website for the firm’s business, and would cover the entity-level approach to all assets managed by the UK firm.
  • Product or portfolio-level disclosures: Firms would be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics. Depending on the type of firm and/or product or portfolio, these disclosures would either:
    • Be published in a TCFD product report in a prominent place on the main website for the firm’s business, while also being included, or cross-referenced and hyperlinked, in an appropriate client communication, or
    • Be made upon request to certain eligible institutional clients.

The FCA hopes that these new rules will achieve the following:

  • Deeper consideration of climate-related risks and opportunities by in-scope firms;
  • Coordinated information flow along the investment chain; and
  • Better outcomes for clients and consumers

Acknowledging the global reach of firms operating in the UK, and the existence of complementary and, in some cases, partially overlapping requirements under existing climate-related disclosure rules, the FCA has designed the proposals with international consistency in mind. For this reason, the proposed regime is explicitly aligned with the Task Force on Climate-Related Financial Disclosures (TCFD), the pre-eminent global framework for the disclosure of climate-related risks and opportunities. It is intended that the proposed rules will directly reference the TCFD’s recommendations.

Standard listed companies:

It is proposed to extend the application of the climate-related disclosure requirements for commercial companies with a premium listing, to those with a standard listing, excluding investment entities and shell companies. These requirements also reference the TCFD recommendations. Issuers would be required to include a statement in their reporting setting out:

  • Whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures;
  • 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; and
  • Where in their annual financial report (or other relevant document) the various disclosures can be found.

In this regard, the FCA are targeting the following main outcomes:

  • Clear regulatory requirements support high-quality disclosures;
  • Better disclosures support more informed business, risk and investment decisions;
  • Design of products can more reliably meet consumers’ needs; and
  • Improved allocation of capital.

Timeline

  • For Asset managers, life insurers and regulated pension providers , the rules for the larger (>50 billion) firms will take effect from January 1, 2022, with first disclosures to be made from June 30, 2023. Rules applying to smaller firms will take effect from January 1, 2023, with first disclosures to be made from June 30, 2024.
  • Comments on the consultation papers must be submitted by 10 September 2021.

If the proposed regulations are adopted, the UK would likely become the first jurisdiction to mandate TCFD reporting. The UK is leading a swell of activity in this area, with contemplated mandatory climate-related disclosures coming into effect in the EU under the proposed revisions to the Corporate Sustainability Reporting Directive. In contrast to the EU approach, the FCA’s proposals do not explicitly address the concept of “double materiality”, which is being pursued in Brussels. Nevertheless, a speech by Chancellor Rishi Sunak only days after the launch of the FCA consultation clarified that a separate Sustainability Disclosure Requirements regime being drawn up by government in parallel would be likely to require a “double materiality” approach to assess the impact of financial services on climate and the environment. With multiple regulators across multiple markets taking action, the ultimate success of initiatives to mandate climate reporting — with or without a “double materiality” lens — may hinge on the adoption of unified global reporting standards.

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