It’s 2021 and regulatory requirements for climate-related financial disclosures are a reality in the United Kingdom for a large number of companies. The UK is one of the first jurisdictions to codify the requirements that are already being pushed by investors and standard-setters globally, all aligning around the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
In late December 2020, the UK’s Financial Conduct Authority (FCA) released an important policy statement for publicly traded companies. It concerned the issue of climate disclosure: how companies report on the ways they identify, assess and manage the impacts of climate change. Starting in the accounting year 2021, as part of listing rule 9.8, the FCA will require premium-listed companies in the UK to include a statement in their annual financial report on how they have reported in line with the TCFD, the emerging global standard for corporate reporting on climate change.
The FCA’s announcement is in line with broader efforts in the UK to increase climate disclosure. In November 2020, the UK Chancellor of the Exchequer announced the UK’s intention to move towards mandatory TCFD-aligned disclosures across the UK economy by 2025, with most measures to be in place by 2023.
What is the TCFD?
The TCFD makes recommendations across four themes: governance, risk management, strategy, and metrics and targets, with 11 guiding questions for companies to use when disclosing how climate change impacts them. The objective of TCFD is to provide a consistent framework for companies to use when reporting on climate change, and to provide decision-useful information that is relevant for investors. To date, more than 1,500 organizations world-wide have committed to TCFD reporting.
Coming just days before the holiday season in the midst of the Covid-19 pandemic, the FCA’s statement flew under the media radar. However, it has a significant impact on the 460 premium-listed companies in the UK, and potential impacts on the more than 1,000 companies listed on the Main Market of the London Stock Exchange (LSE).
How Does the FCA Policy on Climate Disclosure Apply?
The FCA’s policy statement follows several months of consultation in 2020 by the FCA on how UK companies could enhance their climate change disclosures. Companies listed in the UK and traded on the LSE should be aware of these four points about the FCA’s policy statement on climate disclosure:
- Applies to premium-listed companies, but will likely expand: the new rules apply directly to the UK’s 460 premium-listed companies on the FCA Official List. However, the FCA is planning to issue another consultation paper in the first half of 2021 on extending the TCFD reporting requirement to a broader range of listed issuers, as well as UK-authorised asset managers, life insurers and FCA-regulated pension providers.
- Disclosures should be aligned with the TCFD: the policy statement requires premium-listed companies to publish a statement in their annual financial report on whether they’ve included climate-related financial disclosures consistent with the TCFD in their annual financial report. If a company has published a disclosure consistent with the TCFD but not included it in its annual financial report, the statement needs to include what the disclosures were, where they were published, and why they were not included in the financial report.
- Comply or explain: the FCA fully expects that a premium-listed company is able to disclose in alignment with the TCFD. If parts of the disclosure are not in alignment, a company needs to explain what aspects of TCFD they did not report in alignment with, why they are not aligned, what steps they plan to take to bring their disclosure into alignment with TCFD, and provide a timeline for doing so.
- Starts with the 2021 accounting period: the new rule applies to accounting periods beginning on or after January 1st 2021, meaning the first annual financial reports subject to the TCFD disclosure rules will be published in spring 2022.
TCFD Reporting is a Business Opportunity
By bringing these rules into effect, the UK will become a global leader in requiring climate disclosure from publicly listed companies. New Zealand has already announced a requirement for banks and insurers to report in alignment with TCFD, and other jurisdictions, like Canada and the United States, are moving towards bringing in TCFD-reporting requirements for listed companies. UK companies have an opportunity to lead the market and set the global standard for smart climate-related disclosure–reporting that shows business and financial relevance to investors.
Wondering what the rules mean for your business and don’t know where to start? Already on your way and interested in improving your disclosure and your business approach to climate risk and opportunity? We at Manifest Climate regularly work with publicly listed companies in a variety of sectors. We help companies understand what climate means for business, assess TCFD maturity and guide them on their journey to deliver credible climate reporting that meets the needs of regulators and investors. Contact us today.