On 22 June 2021 the Financial Conduct Authority ("FCA") opened two separate consultations (CP21/17 and CP21/18) on enhancing climate-related disclosures to support the target of applying climate-related disclosures across the UK economy by 2025.

These consultations are in response to the Government's publication of their Roadmap towards mandatory climate-related disclosures in November 2020, aligning the UK with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

Asset managers, life insurers and FCA-regulated pension providers

The consultation includes proposals to increase transparency on ESG reporting. The key elements for Asset managers, life insurers and FCA-regulated pension providers are:

  1. Entity-level disclosures – publish annual TCFD entity reports on how they consider climate-related risks and opportunities in relation to client or consumer investments. These should be published on the main website for the firm’s business.
  2. Product or portfolio-level disclosures – produce annually a baseline set of consistent, comparable disclosures in respect of their products and portfolios. This may either be published in a TCFD product report on the website, or provided upon request to eligible clients.

The proposals do not apply to firms with less than £5 billion in assets, but will cover 98% of assets under management in both the UK asset management market and held by UK asset owners.

A key objective for the FCA is to achieve international consistency on ESG reporting, on the basis that many of the companies operating in the UK are global.

Standard listed companies

The proposal will extend the disclosure requirements which currently only apply to companies with a UK premium listing (the FCA's Policy Statement on this was published in December 2020) to standard listings.

The FCA's proposal will require issuers of standard listed equity shares (excluding standard listed investment entities and shell companies) to include a statement in their annual financial report setting out:

  • whether they have made disclosures consistent with the TCFD’s recommendations;
  • if they have not made disclosures consistent with the TCFD’s recommendations:
    • an explanation of why;
    • a description of any steps they 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;
  • if they have made disclosures consistent with the TCFD’s recommendations but 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.

Improved transparency will enable consumers to vote with their feet and better hold companies to account. Increasing FCA intervention in this space will prompt more companies to focus on and invest into ESG initiatives. While this is still "optional" for many UK companies, it is already a reality for EU Financial Market Participants under the Sustainable Finance Disclosure Regulation. As ESG rises higher and higher up the agenda of both UK regulators and investors, wider transparency in reporting is inevitable. The consultations discussed in this blog are evidence of this trajectory, as well as:

  • - A consultation by the Department for Business, Energy and Industrial Strategy (BEIS) on requiring mandatory climate-related financial disclosures by publicly quoted companies, large private companies and Limited Liability Partnerships (LLPs). This closed on 5 May 2021 and the report is awaited; and
  • A Department of Work and Pensions (DWP) consultation requiring trustees of larger occupational pension schemes and authorised schemes to address climate change risks and opportunities. As a result the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021 come into force on 1 October 2021.

If you would like to discuss any of the issues discussed in this blog, please do not hesitate to get in touch with our Corporate Crime & Investigations team or your usual Brodies contact.

Contributor

Paul Marshall

Partner