FCA: Proposals to Enhance Climate-Related Disclosures by Listed Issuers

The IR Society response to the FCA on their consultation paper CP20/3: Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations

Federico Cellurale
Financial Conduct Authority

12 Endeavour Square London
E20 1JN

23rd September 2020

 

Dear Mr Cellurale,

Thank you for giving us the opportunity to comment on the FCA’s Consultation Paper (CP20/3): Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations.

The Investor Relations Society’s mission is to promote best practice in investor relations; to support the professional development of its members; to represent their views to regulatory bodies, the investment community and government; and to act as a forum for issuers and the investment community. The Investor Relations Society represents members working for public companies and consultancies to assist them in the development of effective two-way communication with the markets and to create a level playing field for all investors. It has approximately 800 members drawn both from the UK and overseas, including the majority of the FTSE 100 and much of the FTSE 250.

We have set out responses to the questions from your consultation in our submission and summarised the key points below:

  • The IR Society recognises the growing importance of climate change to both issuers and investors, and the need for transparency and consistency in disclosures across sectors and companies.
  • The TCFD recommendations have been gaining widespread recognition and a number of our members, typically in the FTSE 100, already have or are taking steps to adopt the framework on a voluntary basis.
  • The TCFD recommendations are also consistent with, and build upon, the requirements of the Companies Act 2006, and related 2013 and 2018 regulations, and the UK Corporate Governance Code 2018.
  • Overall, the proposed new rule is supported by the IR Society.
  • We are, however, aware of the considerable time and resource required by
  • companies to establish ownership and working practices within an organisation, develop reporting practices and model the scenarios required to fully comply with the TCFD recommendations.
  • As such, we believe that it is appropriate to introduce this new rule for premium listed companies, which are typically larger and better resourced, initially and welcome the principle of ‘comply or explain’.
  • We also encourage the FCA to allow for sufficient time to implement this new rule given the time and resource requirements, and in light of the unprecedented market conditions resulting from the COVID-19 crisis.

We hope you find these comments useful and please do not hesitate to contact me if you have any further questions.

Yours sincerely,

Emma Burdett
Chair of the Investor Relations Society’s Policy Committee

+44 207 379 5151 / eburdett@maitland.co.uk

 

Q1: Do you agree that our new rule should apply only to commercial companies with a premium listing, at least initially? If not, what alternative scope would you consider to be appropriate, and why?

We agree. We are aware of the considerable time and resource required by companies to establish ownership and working practices within an organisation, develop reporting practices and model the scenarios required to fully comply with the TCFD recommendations. As such, we believe that it is appropriate to introduce this new rule for premium listed companies, which are typically larger and better resourced, initially.

We understand that the FCA may consider expanding the scope to a wider range of issuers in the future and will be conducting further work to establish how best to enhance climate- related disclosures by regulated firms. We would also like to see the FCA set out a roadmap for the suggested potential extension of this new rule beyond premium listed companies.

Q2: Do you agree that sovereign-controlled commercial companies with a premium listing should also be in scope? If not, why should these companies not be included?

We agree. We believe that sovereign-controlled commercial companies with a premium listing should adopt the new rule in the same manner as private sector premium listed companies would be required to do so.

Q3: Do you agree with our approach?

In our view, investment managers with a premium listing should also fall within the scope of the new rule and we therefore agree with the FCA’s approach for these firms to prepare enterprise-level disclosures as issuers. We believe that this information is both important to the shareholders of the investment manager and its clients. It is also consistent with the ethos of the revised Stewardship Code 2020, which places ESG and climate change at the heart of effective stewardship and should therefore also be reflected in the investment manager’s own business strategy and operations.

We will await further clarification from the FCA on its approach to enhanced climate-related disclosures for asset managers as FCA-regulated firms, as noted in the consultation document. We believe that encouraging voluntary disclosure in line with the TCFD framework for asset managers would benefit their clients.

Q4: Do you agree that our rule should reference the 4 recommendations and 11 supporting recommended disclosures included in the TCFD’s June 2017 final report? If not, what alternative approach would you prefer, and why?

We agree that the rule should reference each of the four recommendations: governance, strategy and risk management are interlinked and each are important considerations for issuers in addressing their impact on the environment and climate change, whilst metrics and targets are necessary to quantify and support each of these areas and to provide meaningful comparisons across time periods and between companies. We also agree that the rule should reference the 11 supporting recommendations that are integral to each of the four areas.

Q5: Do you agree that we should make explicit reference in Handbook guidance to the TCFD’s “guidance for all sectors” as well as the “supplemental guidance for the financial sector” and the “supplemental guidance for non-financial groups” accompanying each recommended disclosure? If not, what alternative approach would you prefer, and why?

We agree and do not have further comments on Q5.

Q6: Do you agree that we should include additional guidance which references the wider set of materials that have been published both within and alongside the TCFD’s final report, as useful sources of guidance and interpretation when complying with our proposed rule?

We agree and do not have further comments on Q6.

Q7: Do you agree that we should introduce the new rule on a ‘comply or explain’ basis? If not, what alternative approach would you prefer, and why?

We believe that the ‘comply or explain’ principle is fundamental at this stage, and that mandatory reporting would create an unnecessary burden on corporates with more limited resources and budgets that are still developing their ESG strategies. We fully support ‘comply or explain’ and welcome the opportunity this provides for corporates to focus on their climate-related responsibilities and work towards complying with the TCFD recommendations, where they are not already doing so on a voluntary basis.

Q8: Do you agree that the recommended disclosures under the “governance” and “risk management” recommendations should not be subject to a materiality assessment? If not, what alternative approach would you prefer, and why?

We agree. We believe that it is important for issuers to share with their shareholders and other stakeholders how they assess climate-related risks and opportunities from a governance and risk perspective. Issuers should already be well-equipped to provide this information as a result of the existing requirements of the Companies Act 2006 (and related 2013 and 2018 regulations) and Corporate Governance Code 2018.

Q9: Do you agree that issuers should ordinarily be able to make the recommended disclosures under the “governance” and “risk management” recommendations?

As above, see Q8.

Q10: Do you agree that no explicit guidance is needed to clarify that it would be acceptable for an issuer to explain non-disclosure of these recommended disclosures only on an exceptional basis?

Although we agree with the points in Q8 and Q9, we believe that it would be helpful to issuers for the FCA to provide a brief explanation of the rationale for why non-disclosure would only occur on an exceptional basis, given the overall ‘comply or explain’ approach.

Q11: Do you agree that the statement of compliance and the proposed disclosures should be made within an issuer's annual financial report? If not, what alternative approach would you prefer and why?

We agree that the statement of compliance and the proposed disclosures should be included in the annual report. This is consistent with the wider environmental, social and governance disclosure requirements of the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, and its inclusion would aid consistency and usability.

We recognise that some companies may wish to have the additional flexibility to expand upon this information in a separate Corporate Social Responsibility report and should therefore include a reference to that effect in the compliance statement in their annual report.

Q12: Do you agree that an issuer should be required to include within the statement of compliance a description of where in its annual financial report (or other relevant document) its TCFD-aligned disclosures can be found? If not, what alternative approach would you prefer and why?

We agree. Also see Q11 above.

Q13: Do you agree that the FCA should not require third- party assurance of issuers’ climate-related disclosures at this time? More generally, we welcome views on the role of assurance for climate-related disclosures.

Presently, there is no requirement for issuers’ ESG disclosures to be audited or verified by a third party. Some companies seek external advice and assurance for their ESG disclosures on a voluntary basis and, as these continue to grow in importance, we anticipate that more companies will do so. However, at this stage, it is our view that third-party assurance should not be a requirement whilst many issuers are still developing their ESG practices and given the costs that may be involved.

We therefore agree that the FCA should not make the requirement for third-party assurance of issuers’ climate-related disclosures mandatory at this time.

Q14: Do you have any feedback on the interactions between our proposed rule and the role of sponsors in assisting premium listed issuers?

We do not have any further feedback on Q14.

Q15: Do you have any other feedback related to the interaction between our proposed rule and existing legislative and regulatory requirements and industry standards and practice?

The TCFD recommendations are consistent with, and build upon, the requirements of the Companies Act 2006, and related 2013 and 2018 regulations, and the UK Corporate Governance Code 2018.

More broadly, the importance of ESG issues and climate change to both issuers and investors, and the need for transparency and consistency in disclosures across sectors and companies is continuing to grow. This new rule is consistent with the wider appetite across a range of issuers, investors, stakeholders and society more broadly for companies to consider the impact and implications of climate change.

Q16: Do you consider that our proposals adequately address the challenges, risks and unintended consequences described above? If not, what additional measures would you suggest?

We believe that the ‘comply or explain’ approach should address the challenges, risks and unintended consequences described in the consultation paper. Additionally, as noted in Q17 below, it is important to allow issuers sufficient time to implement the new rule.

Q17: Do you agree that our new rule should take effect for accounting periods beginning on or after 1 January 2021? If you consider that we should set a different timeframe, please explain why?

We are aware of the considerable time and resource required by companies to develop reporting practices and model scenarios necessary to comply with the TCFD recommendations and we encourage the FCA to allow for sufficient time to implement this new rule. This is particularly important given the significant and ongoing disruption for many issuers caused by the current COVID-19 crisis.

Our preference would be for in scope issuers to be prepared to issue reports in compliance with the new rule towards the end of 2022, at the earliest. As previously noted, a number of issuers are already adopting the TCFD recommendations on a voluntary basis, and we would expect more to do so in advance of the new rule being implemented.

Q18: Do you agree with the conclusion and analysis set out in our cost benefit analysis (Annex 2)?

Although we agree with the FCA’s conclusion that the overall cost of implementing the new rule is likely to be small relative to the total market capitalisation of UK premium-listed issuers, we emphasise the point made in Q1 about the considerable time and resources often required by individual issuers to adopt the TCFD recommendations. The IR Society believes that the overall longer-term benefits are likely to outweigh the costs but feels that this is an important consideration in the near-term, in particular in light of the unprecedented market environment resulting from the COVID-19 crisis.

The IR Society has no further comments on the FCA’s cost benefit analysis.

Q19: Do you agree with the guidance provided in the draft Technical Note set out in Appendix 2? Are there any changes that you would suggest? If so, please describe.

On the basis that the Technical Note’s purpose is to clarify existing obligations rather than introducing new ones, the IR Society has no further comments on the Technical Note set out in Appendix 2.

Published 23 September, 2020

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