Climate-related disclosures for issuers: further steps towards mandatory requirements?

In November 2020, the UK Joint Government Regulator TCFD Taskforce published its “roadmap towards mandatory climate-related disclosures”, which set out a vision for the next five years. As an initial step towards fulfilling that vision, in January 2021, the new Listing Rule 9.8.6(8) (LR) came into force. The LR requires premium-listed issuers, in their periodic reporting, to publish disclosures in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations on a ‘comply or explain’ basis. However, the Financial Conduct Authority (FCA) has recognised that some issuers may need more time to deal with modelling, analytical, metric or data-based challenges.

This flexibility in the new LR’s compliance basis reflects the challenges and evolving experiences with working on data and metrics in the context of climate risk. Key stakeholders should now be redoubling their efforts to meet the challenges and with the promise of further TCFD guidance on data and metrics later this year and the recent launch of a Department for Business, Energy and Industrial Strategy (BEIS) consultation seeking views on proposals to mandate climate-related financial disclosures in line with the TCFD recommendations from 6 April 2022, the step to a mandatory climate-related disclosure regime may be closer than initially envisaged.

In light of the ever-evolving regulatory landscape, it is important issuers continue to monitor the impact of any changes to their disclosure requirements and to consider what, if any, litigation risks may arise (particularly, under s90 FSMA, s90A FSMA, or in common law or equity) in connection with their climate-related disclosures.

The key developments on data and metrics, as well as the key proposals from the BEIS consultation, are examined below. We also consider what these developments and proposals mean for issuers in terms of regulatory reporting requirements.

Climate Financial Risk Forum

Following its fifth quarterly meeting in November 2020, the Climate Financial Risk Forum (CFRF) noted the importance of progress in the development and understanding of climate data and metrics. In light of this, the CFRF announced that all of its working groups will focus on climate data and metrics in the next phase of work. This is a shift from the CFRF’s previous approach of allocating different focus areas to its working groups.

TCFD Financial Metrics Consultation

The TCFD has this month published a summary of the responses to its ‘Forward-looking Financial Metrics’ Consultation, which was conducted between October 2020 and January 2021. The consultation aimed to collect feedback on decision-useful, forward-looking metrics to be disclosed by financial institutions. The TCFD solicited feedback on specific metrics and views on the shift to, and usefulness of, forward-looking metrics more broadly.

46% of the 209 respondents were financial services firms from around the world, and over half of the respondents were EMEA based, with just over a quarter from North America.

These findings will inform the work on metrics and targets which the TCFD plans to tackle in 2021. The TCFD announced that it will publish broader, additional draft guidance for market review and consideration later this year.

BEIS Consultation

BEIS launched a consultation this month on mandating climate-related disclosures by publicly quoted companies, large private companies and LLPs. The consultation proposes that, for financial periods starting on or after 6 April 2022, certain UK companies with more than 500 employees (including premium-listed companies) be required to report climate-related financial disclosures in the non-financial information statement which forms part of the Strategic Report. Such disclosures are required to be in line with the four overarching pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets).

BEIS has stated that the proposed rules are intended to be complementary to the FCA’s requirement that premium-listed companies make disclosures in line with the four pillars and 11 recommended disclosures of the TCFD. BEIS proposes to introduce the new rules via secondary legislation which will amend the Companies Act 2006.

The Financial Reporting Council will be responsible for monitoring and enforcing the proposed rules, while the FCA will supervise and enforce disclosures within the scope of the LR.

The consultation is open until 5 May 2021.

Regulatory reporting requirements

The new TCFD guidance, once published, is likely to feed into the LR requirements. The new LR expressly refers to the TCFD Guidance on Risk Management Integration and Disclosure and the TCFD Guidance on Scenario Analysis for Non-Financial Companies published in October 2020. Additionally, the FCA’s Policy Statement dated December 2020, which accompanied the new LR, stated that the FCA would be considering how best to include references to any further TCFD guidance in the FCA Handbook Guidance. This is likely to be achieved through the use of the FCA Quarterly Consultation Papers.

The new LR is not a mandatory disclosure requirement and the new rules proposed by the BEIS consultation are yet to have legislative force. However, we are getting a clearer picture of the likely disclosure regime in the UK and in particular: the regulatory guidance around the compliance basis; the clear anticipated milestones this year relating to data and metrics guidance and best practice; and the forthcoming Consultation Paper by the FCA on the scope expansion (including compliance basis) of the new LR. That picture suggests the transition to mandatory climate-related disclosure requirements may well be a small step, rather than a giant leap.

We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.