Primary Market Bulletin 36

The introduction of specific TCFD aligned climate-related disclosure requirements for listed companies is an important new development both for the FCA and the companies we regulate. As set out in the FCA’s new ESG Strategy, released at COP 26 by our CEO, Nikhil Rathi, transparency has been and remains a key theme of our work on climate change and sustainability. Comprehensive, high-quality and consistent climate-related disclosures will lead to greater transparency on how listed companies are managing climate-related risks and opportunities. This will help investors to make more informed investment decisions. In PS20/17 and CP21/18 we committed to setting out our supervisory strategy for monitoring compliance with the new premium and proposed standard listing rules. 

This PMB article sets out further information on our disclosure expectations and supervisory strategy. It is aimed at a number of different stakeholders including listed companies, their directors and advisers (including external auditors), investors and asset owners more broadly. 

The listing rule for premium listed commercial companies is set out in LR 9.8.6R(8) and came into force for financial years beginning on or after 1 January 2021. The first annual financial reports including disclosures subject to this rule will be published from January 2022.

To achieve a level of consistency between premium listed issuers and certain standard listed issuers, we consulted (in CP21/18) on extending the application of our TCFD-aligned disclosure requirements and guidance to issuers with standard listed equity shares under LR 14 (other than standard listed investment entities and shell companies). Following the consultation, we aim to finalise these rules in time for them to apply for financial years beginning on or after 1 January 2022. The first annual financial reports including disclosures subject to a standard listing rule would be published from January 2023.
 

To help listed companies, their directors and advisers we propose to publish a technical note giving further guidance on our disclosure expectations on which we are seeking feedback. 

We are responsible for monitoring and enforcing compliance with, among other things, the Listing Rules, the Prospectus Regulation, the Disclosure Guidance and Transparency Rules and the Market Abuse Regulation. 

We are responsible for monitoring and where necessary enforcing compliance with LR 9.8.6R(8) (and would also be responsible for the proposed LR 14.3.27R), which covers TCFD-aligned disclosures, and for determining an appropriate supervisory strategy. However, the Financial Reporting Council (FRC) will play a significant role in discharging this strategy.  

The FRC is appointed to exercise the functions set out in section 14(2) of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (‘the C(AICE) Act’). Those functions are to keep under review periodic accounts and reports that are produced by issuers of transferable securities admitted to trading on a UK regulated market and required to comply with any accounting requirements imposed by FCA rules made under Part 6 of the Financial Services and Markets Act 2000. Where it thinks fit, the FRC informs the FCA of any conclusions it reaches about any such accounts or reports. 

As the disclosures required under LR 9.8.6R(8) and the proposed LR 14.3.27R are deemed to be an ‘accounting requirement’ the FRC is responsible under the C(AICE) Act for keeping these disclosures under review.

The FRC will continue to adopt a risk-based approach to its selection of annual reports and accounts for review. These reviews consider the extent to which companies have complied with the relevant accounting and reporting requirements. From 2022, the review of TCFD-aligned disclosures will be embedded into the FRC’s routine reviews of premium listed company annual financial reports and, it is proposed, from 2023, would be embedded into routine reviews of relevant standard listed company annual financial reports.

We recognise that many listed companies will be applying these requirements for the first time. As part of our work we intend to collaborate with the FRC on targeted ‘deep dive’ thematic work specifically designed to:

• assess how companies have complied with the requirements 
• identify areas of concern and disseminate examples of best practice for companies to refer to 

The supervisory strategy extends to identifying cases where regulatory intervention may be required to ensure listed companies comply with the Listing Rules and, improve the quality of their disclosures so that they are providing sufficient, decision-useful climate related information for investors.

If a listed company’s disclosures do not appear to meet the requirements of the Listing Rules, the FRC is likely, in the first instance, as part of its routine reviews of annual financial reports, to contact the company setting out the issues and asking for further information. Based on this information, the FRC may ask the company to take corrective or clarifying action, such as undertaking to enhance their disclosures in subsequent reports and accounts. We would expect matters to be satisfactorily addressed through this type of engagement without the need for further action regarding the published disclosures. If the FRC is unable to reach a satisfactory conclusion through engagement, the matter will be referred to the FCA to take appropriate action. 

In addition, the FRC will refer matters to the FCA which are identified as containing potentially false or misleading information, including the omission of material facts, likely to cause investor harm or which may breach other relevant FCA rules for environmental, social and governance (ESG) matters (see Technical Note TN 801.1).

If a listed company fails to make a statement in their annual financial report regarding the disclosure of climate-related financial information under the TCFD framework, as required by the Listing Rules, then we will request that a listed company publishes the TCFD statement via a Regulatory Information Service (RIS) in line with the Listing Rules as soon as possible after discovery.  Any non-compliance will be viewed seriously and will lead to action using the full suite of powers, as well as sanctions, where appropriate.

Information we receive about possible breaches of the Listing Rules can make a valuable contribution to our supervisory work. We will work collaboratively with the FRC to review concerns raised against issuers about the quality of TCFD-aligned disclosures and determine what action we should take, if any, and how best to respond. The extent to which we are able to respond to the stakeholder about any actions we take or interventions we make may be limited. For example, we may not share information about any agreed corrective actions taken in subsequent annual reports and accounts until the relevant reports have been published. We will consider both possible breaches of the Listing Rules and possible breaches of other relevant regulations or FCA rules for ESG. The FRC will consider possible breaches of other relevant reporting requirements, including related disclosure requirements under the Companies Act.

As set out in CP21/18, the implementation of TCFD-aligned disclosures is a first step in our journey to implement an international sustainability standard (or standards) that covers more than just climate change. To this end we have been closely involved in the work at the International Organization of Securities Commissions (IOSCO) who have been engaging with the IFRS Foundation to develop a baseline common International Sustainability Standards Board (ISSB) to sit alongside the International Accounting Standards Board (IASB).  We consider the announcement by the IFRS Foundation to establish the ISSB at COP26 in November 2021 as a catalyst for change in the area of sustainability disclosures and are working with BEIS to endorse and implement the future ISSB ‘climate first’ standard in the UK.

Alongside our implementation of TCFD aligned climate-related disclosure requirements for premium and standard listed companies, the Department for Business, Energy and Industrial Strategy (BEIS) intends to introduce similar disclosure requirements into the Companies Act 2006. The proposed scope of these requirements will mean some overlap will exist between the Companies Act and our Listing Rules.

Given the developments in this area, we will continue to evolve our supervisory strategy in the coming years. We will provide more information in further PMBs as appropriate.

We are consulting on the addition of 1 new technical note to our Knowledge Base. Please send responses to this consultation to [email protected] by 13 December 2021.

Category: ESG and Sustainability

Primary Markets/TN/802.1 TCFD aligned disclosure requirements for listed companies.