Society comments on the FCA’s ‘Prospectus’ proposals
The Society raises issues around the materiality timeframe and quantification/ assessment for proposed requirements for prospectuses to include climate-related disclosure, and supports the concept of introducing a safe harbour for forward looking disclosures but calls for further review of the criteria to ensure it would cover forward-looking climate-related and transition reporting.
The Investor Relations Society
Suite 717, 70 Gracechurch Street
London, EC3V 0HR
David Stubbs
Financial Conduct Authority
12 Endeavour Square, London, E20 1JN
By email: cp24-12@fca.org.uk
25th October 2024
Dear David,
Re: CP 24/12 - Consultation on the new Public Offers and Admissions to Trading Regulations regime (POATRs)
Thank you for giving us the opportunity to comment on this consultation on The Value for Money Framework, available here: CP24-12: Consultation on the new Public Trading Offers and Admissions to the Trading Regulations regime (POATRs) (fca.org.uk). This response is made on behalf of the UK’s Investor Relations Society (‘the IR Society’).
The IR Society represents Members working for publicly listed companies and investor relations focused service providers, to assist them in the development of effective two-way communication with the markets. It has approaching 800 Members, drawn mainly from the UK, including the majority of the UK FTSE 100 and many of the FTSE 250 constituents and some from companies listed overseas.
The IR 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. As such, our response has been primarily constructed through the lens of a corporate issuer.
We have not answered all the specific questions, but we set out below some general comments and answers to the questions relating to the aspects of most relevance to our members, which deal with scope/threshold, ‘Protected forward looking statements’ (PFLS) and sustainability-related disclosure.
Scope/threshold
General comments
We support the proposal to raise the mandatory prospectus threshold from 20% of existing share capital, to facilitate further issuances and reduce the associated costs, although the proposed increase to 75% seems very high and out of line with other jurisdictions. In our view, a more appropriate threshold level for further issuances would be between a third and a half of existing share capital.
Answers to specific questions
Question 22: Do you agree with our proposal to raise the threshold for triggering the requirement to publish a prospectus for further issuances of securities already admitted to trading on a regulated market to 75% of existing share capital? Y/N. Please give your reasons.
No, whilst we support the proposal to raise the mandatory prospectus threshold, the proposed increase to 75% seems very high, and out of line with other jurisdictions.
Question 23: Do you agree with our proposal to retain the requirement to use a simplified or full prospectus for further issuances of securities already admitted to trading on a regulated market, where not exempt or if issuers wish to produce a voluntary prospectus? Y/N. Please give your reasons.
Yes, we support the FCA’s proposed flexibility of continuing to permit (simplified or full) voluntary prospectuses below the threshold, which would still be FCA approved, as this may be useful when offering securities into US markets.
‘Protected forward looking statements’ (PFLS)
General comments
We note that the FCA proposes that issuer liability for forward-looking information in a prospectus (for example, profit forecasts and some sustainability-related disclosures related to climate risks/opportunities and transition plans) will only be incurred when those involved knew, or were reckless as to whether, the statement was false or misleading, or if they knowingly omitted a material fact. We support the concept of introducing such a safe harbour for forward looking statements, as this should improve profit forecasting in prospectuses and thus better inform valuation and pricing. We also strongly agree that it should cover forward-looking sustainability-disclosures such as climate-related reporting (please see below our comments on the proposals for climate, transition plan and wider sustainability disclosure).
However, in our view, the proposed criteria will need greater review and consultation. In particular, in our view, the safe harbour should cover all forward-looking sustainability-related disclosures that have been reported in the Annual Report and Accounts (ARA) and that are subsequently included within a prospectus, to avoid the consequences of having a negligence standard apply to such disclosures in a prospectus but a reckless/fraudulent/dishonest standard applying to such disclosures in the ARA. We also query the blanket exclusion of climate-related disclosure relating to governance and risk management (proposed in paragraph 6.18), given these can also be forward-looking.
Answer to specific question
Question 44: Do you agree with our overall approach to specifying the kinds of statements that can be protected forward-looking statements? Y/N. Please give your reasons.
No. As explained above, whilst we support the concept of introducing a PFLS safe harbour, and strongly agree that it should cover forward-looking climate-related and transition reporting, we consider that the FCA’s proposed criteria would exclude other sustainability-related disclosures that in our view should benefit from the safe harbour, and therefore the criteria require further review.
Climate-related and transition plan disclosure
We note the FCA proposes that, if an issuer has identified material climate-related risks or opportunities, minimum information must be provided to allow investors to make an informed assessment of that risk or opportunity. The draft rules are then not prescriptive regarding what supporting information must be disclosed, with the FCA stating that it expects this will follow the four pillars of TCFD and ISSB (ie governance, strategy, risk management and metrics and targets).
The FCA describes the proposed materiality trigger as where the issuer has identified climate-related risks as risk factors to disclose in the prospectus, or where climate-related opportunities are material to their prospects (para 6.16). If so, the issuer must disclose sufficient supporting climate-related information to allow investors to make an informed assessment of that risk or opportunity. Para 6.17 then mentions the ‘necessary information test’ should be used by issuers to determine the correct information to include in their prospectus.
The FCA also proposes that, if an issuer has published a transition plan and where the contents are financially material, the prospectus should include a summary of key information about this transition plan and where it can be found.
In our view, these proposals raise issues relating to materiality and, in particular, timeframes, along with challenges on the disclosure of risk level for transition planning, and quantification/ assessment.
Materiality timeline guidance
There is currently a lack of guidance released by ISSB in establishing what is material leaving flexibility in interpretation, especially when compared to ESRS reporting under the CSRD (where there is a comprehensive recommended process and guidance to determine what is material including recommendations on timeframes).
Quantification/assessment
Following on from the materiality issue, it is challenging to project / quantify risk in future time horizons. It is more straightforward to provide robust quantification for near-term risks, but often the long-term time horizon is managed by an emerging risks team or similar. Climate-related risks and opportunities, particularly those projected decades into the future, will be based on layered assumptions that are difficult to predict with accuracy. Factors like changing government policies, subsidies, sector-specific allowances, and support for achieving UK climate goals are fluid and uncertain. Moreover, the potential for disruptive policies or regulations in the future means that many current risks could be downplayed or misjudged, creating a false sense of security. If low/medium/high qualitative scoring is to be used, there would need to be some form of guidance on evaluation to support consistent statements.
Linkage to transition planning
Depending on the specific sector, there may be challenges to having a robust transition plan in place. Even if there is a transition plan in place that downgrades risk level, that may be hinged on assumptions or voluntary targets which in any case are uncertain. In industries where transition plans are still nascent or incomplete, there could be a temptation to downplay the associated risks. This poses a challenge for accurate risk disclosure—particularly when risk mitigation strategies are speculative or dependent on variables that are not yet fully developed. Therefore, the level of risk reported may not reflect the true vulnerability of a company to climate-related issues.
Answers to specific questions
Question 31: Do you agree with the proposed climate disclosure rule to prompt relevant and financially material information to be included in prospectuses? Y/N. Please give your reasons. If not, what should be done differently?
No, due to the ‘materiality timeframe’ and ‘quantification/assessment’ issues outlined above. It is not clear whether climate risks/opportunities should be disclosed in line with the “necessary information” materiality test, with its shorter-term outlook, or in line with the longer term TCFD/ISSB timeframes. If longer term disclosures are brought in, there is an absence of clear guidance around materiality timeframes under TCFD/IFRS S2, and the concept of materiality therefore remains open to interpretation, which could lead to inconsistencies in disclosures across sectors. This ambiguity may result in underreporting or overreporting certain risks, as issuers may struggle to identify which climate risks or opportunities are significant enough to disclose. Until this materiality guidance is fully articulated, issuers will face challenges in consistently determining what needs to be reported, which ultimately undermines the comparability and reliability of disclosures.
Question 32: How do you consider our proposed requirements on sustainability-related disclosures could affect the cost of producing a prospectus?
Especially if materiality is linked to the longer term TCFD/ISSB timeframes, we fear there would be significant and disproportionate practicalities and cost implications of increased due diligence to obtain legal/sponsor/auditor sign off, especially where there is uncertainty, for example, where disclosures rely on technology that is not yet available.
Although still wrapped up in legal challenges, the US SEC proposed rule document benchmarking of costs could provide useful reference material on likely costs – see pages 817 et seq here: Final rule: The Enhancement and Standardization of Climate-Related Disclosures for Investors (sec.gov).
Question 36: Do you agree with our proposed approach to transition plans? Y/N. Please give your reasons. If your reasons relate to cost or other concerns, please provide further detail.
The ‘materiality timeframe’ issues outlined above could also apply to transition plans, along with the challenges for accurate risk disclosure—particularly when risk mitigation strategies are speculative or dependent on variables that are not yet fully developed.
Sustainability-related disclosure (beyond climate)
General comments
We support the FCA’s proposed stance regarding wider sustainability disclosure (for instance, biodiversity/social risks), with no specific additional disclosure requirements at this stage, until the UK standards have been adopted and the FCA concludes its wider consultation during 2025.
However, we also note the FCA anticipates ‘material’ sustainability disclosures could be required by the (generic) ‘necessary information’ test (para 6.41), and that the FCA proposes to amend the Technical Note to refer to the ISSB materials as “useful source material to which issuers may wish to refer when identifying the types of sustainability-related risks and opportunities their organisation may face and which disclosures it is appropriate to provide to investors”. Therefore the ‘materiality timeframe’ issues mentioned above (in relation to climate) also arise here because there is a lack of guidance on the materiality thresholds and timescales for disclosures under IFRS S1, and these will not necessarily be consistent with the ‘necessary information test’.
Answer to specific question
Question 38: Do you agree with our proposed approach to addressing sustainability-related information beyond climate through the Technical Note?
We agree that any specific disclosure requirements should await the adoption of UK and FCA sustainability-reporting standards. However, we have concerns around the statement that the FCA proposal to amend the Technical Note to refer to the ISSB materials, because the ‘materiality timeframe’ and ‘quantification/assessment’ issues outlined above in respect of climate would also need to be addressed before issuers can determine whether wider sustainability-related disclosures should be included.
We hope you find these comments useful. Please do not hesitate to make contact if you have any questions.
Your sincerely,
Liz Cole
Head of Policy and Communications
Investor Relations Society
(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)
Laura Hayter
Chief Executive Officer of the Investor Relations Society
(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)
Ross Hawley
Chair of the Investor Relations Society’s Policy Committee
(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)
Published 25 October, 2024