On 17 December 2021, the FCA announced that climate-related financial disclosure obligations are being extended to issuers of standard listed shares (on a comply or explain basis) for accounting periods beginning on or after 1 January 2022 under a new Listing Rule, LR 14.3.27R. Issuers of premium listed shares are already subject to equivalent obligations under Listing Rule LR 9.8.6R(8).

The FCA explains in its policy statement (PS21/23) that such changes are required for listed companies because “the current quantity and quality of climate‑related financial disclosures does not yet meet investors’ needs” and it is noted that the new rule will bring an additional 200 listed companies within the ambit of the disclosure obligation.

This is one of the milestones for 2022 set out in the Interim Report and Roadmap of the UK’s Joint Government-Regulator TCFD Taskforce, published by HM Treasury in November 2020 (another is the extension of such disclosure obligations to large private companies and LLPs, which BEIS has announced will come into force on 6 April 2022).

The FCA’s consultation for this rule change commenced in June 2021 and there were a number of interesting points for respondents to consider, including the following:

1. Compliance Basis

The FCA’s proposal was to adopt the same “comply or explain” approach required of premium listed companies, rather than a mandatory approach - on the basis that issuers should not be forced into making disclosures they cannot confidently support.

Some respondents felt there was an urgent need for these disclosures to be mandatory, particularly asset managers who now require more detailed climate risk information in order to support capital allocation decisions.

The FCA’s final decision was to retain the comply or explain approach. It is noted that the IFRS Foundation launched its International Sustainability Standards Board (ISSB) at COP26, so mandatory disclosures will be reconsidered when the ISSB standards are introduced in the UK (expected to be in late 2022).

2. Third Party Assurance

Given data gaps on climate related risks and the lack of a clear set of reporting standards, the FCA’s proposal was that, in the short term, third party audit and assurance should only be voluntary in respect of such disclosures. This was also consistent with the approach taken for premium listed companies.

Certain respondents felt that there should be a requirement for “limited” assurance as this is the approach being taken in other jurisdictions, including the EU. It was also noted that, in parallel, BEIS was undertaking work on audit reform.

It was decided that the voluntary approach should be retained, but the FCA will be working with various international assurance bodies with a view to making this a mandatory requirement in future.

3. Other Voluntary Reporting Frameworks

The industry-specific reporting standards developed by the Sustainability Accounting Standards Board (SASB) (now maintained by the Value Reporting Foundation) are considered by the FCA (and the FRC) to be complementary to the TCFD recommendations and so issuers are encouraged to adopt these on a voluntary basis.

Some respondents felt that the FCA should support the use of other voluntary reporting frameworks (e.g. GRI, CDSB, CDP etc.).

The FCA notes that the SASB metrics cover a broader range of ESG topics, beyond just climate change, and are expected to be incorporated (along with the TCFD recommendations) into the ISSB’s reporting standards, which, in turn, are to be incorporated into the UK Government’s proposed Sustainability Disclosure Requirements (SDR) framework. On that basis, the FCA’s view is that the SASB Standards should be recommended specifically, in order to provide issuers with a helpful framework for making wider sustainability disclosures.

How can we help?

If you would like to discuss corporate ESG reporting, please speak to your usual contact at Burges Salmon or Pete Dunn.