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Climate risk disclosures by premium listed issuers

Rashim Arora Rashim Arora

The FCA recently published its final policy statement on climate risk disclosures by listed issuers. Rashim Arora reviews the regulator’s expectations and how to achieve compliance.

Following a consultation in March 2020, the Financial Conduct Authority (FCA) has finalised its new rule for climate risk disclosures by premium listed UK companies. Policy Statement 20/17 reviews stakeholder feedback and outlines the ‘disclose or explain’ approach to these obligations. The policy statement applies to reporting periods from 1 January 2021, for inclusion in financial reports in Spring 2022.

The move is part of the first wave of the government’s phased roadmap for mandatory climate risk disclosures, due by the end of 2025. It also reflects the UK’s 2019 legislation to achieve net-zero greenhouse gas emissions by 2050. Achieving this will not be easy, and it’s important to note the associated legal risks. The ability to demonstrate how these goals, and key milestones, are achieved will be critical to for all stakeholders, including shareholders and potential employees. Effective disclosures put firms on the front foot and will demonstrate sustainability and climate risk resilience both now, and on an ongoing basis.

New rules for climate risk disclosures

The FCA has endorsed the Taskforce for Climate-related Financial Disclosures (TCFD). This is fast becoming best practice and aims to create greater disclosure consistency across the financial sector. In turn, this empowers investors to make informed decisions and compare climate risk management approaches across multiple organisations.

To achieve this, the FCA introduced a new listing rule (LR 9.8) requiring premium listed firms to include the following in their annual financial reports:

  • A statement to confirm if they have made a TCFD-aligned disclosure

  • If they have not made a TCFD-aligned disclosure, in part or in full, a description of the areas missing, an explanation of why, and planned steps to achieve these disclosures in the future

  • If the firm’s climate disclosure is in the financial report, a description of where to find the information

  • If the firm’s climate disclosure, or part of it, is not in the financial report, an explanation of why and a description of where to find the information

Market participants and other respondents generally approved of the FCA’s proposed changes, so there were few amendments to the final policy statement.

Premium listed companies and asset managers

Recognising varying requirements between different organizational types, the FCA has applied the rule to premium listed companies (including sovereign-controlled commercial companies) and premium listed asset managers (or insurance firms undertaking asset management).

Asset managers essentially have two audiences for disclosure – shareholders and clients. Under this policy statement, the FCA expects asset managers to disclose for their shareholders under their remit as a premium listed company. In the first half of 2021, the FCA will consult more broadly on disclosures for asset managers, life insurers and FCA regulated pension providers. Its proposals will mostly align to TCFD standards, with additional information covering specific portfolios or funds.

'Comply or explain'

Reviewing feedback on the 'comply or explain' aspect of the regulation, the FCA believes many companies are not ready for full TCFD-aligned disclosures. But the pressure to explain and provide details of activities to support full disclosures in future will keep organisations moving in the right direction while maintaining a proportionate approach.

The explain option is partly due to PS20/17 applying for reporting periods from 1 January 2021 (for financial reports in 2022). Introducing full compliance at this stage would push back the first reporting period to 2023, which would not be responsive enough to the current need for climate-related disclosures.

Materiality assessment of climate risk

Areas the FCA would typically expect to see explanations for non-disclosure, as opposed to compliance, are those relying on quantitative metrics or modelling, where the underlying data may not be available as of yet. This ties into the question of a materiality assessment, which would be a deciding factor in what to initially include in a disclosure.

The FCA concluded that most companies would be able to report on governance and risk management without much difficulty. As such, they expect firms to comply, without the need for a materiality assessment. Conversely, areas such as strategy, metrics and targets rely on quantitative elements. Companies will need a materiality assessment to identify if they are priority areas for disclosure. This aligns to TCFD best practice.

In terms of what counts as ‘material’, the FCA does not give a specific definition, but it’s broadly in line with the International Accounting Standard (IAS) definition that “items are material if they could individually or collectively influence the economic decision that users make on the basis of financial statements".

Location of climate risk disclosures/statement of compliance

To make sure the climate disclosure is subject to appropriate governance and oversight, the FCA confirmed the annual report would be the best place to publish it. If any section of the disclosure is published elsewhere, the regulator would expect an explanation for that decision.

Third-party assurance

Most companies are still developing their disclosure approaches, so mandatory third-party assurance would not be beneficial at this point. That said, the FCA may consider it in the future and the proposed Sustainability Standards Board may have an impact on this.


Sponsors may not have the technical specialism needed to confirm if the company is compliant with the new LR 9 (as required under LR 8.3 and LR 8.4). They may benefit from consulting a third party or developing their knowledge base in this area. The FCA also highlights that a sponsor's role is to offer a reasonable opinion that processes are in place, not to confirm their operating effectiveness. The FCA will consider the need for further guidance in the future.

Next steps in climate risk disclosures

As an emerging area of expertise, it will take time to develop the underlying metrics, processes and procedures for climate risk disclosures. With that in mind, firms need to take reasonable steps now to ensure climate risk disclosures are true, fair and not misleading. There is a risk of liability in respect to forward looking statements. Making sure all appropriate controls are in place will give assurance that data obtained is relevant and all assumptions are recorded, reducing legal risks further down the line.

Staying up to date with output from the Climate Financial Risk Forum and TCFD, amongst others, will help stakeholders to develop skillsets and establish a climate risk management framework. Getting the building blocks in place will not only fulfil regulatory expectation around disclosures, but it will gradually help shape industry best practice in the long term.

Contact Rashim Arora for more information on climate risk.

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