CDSB warns a comply or explain approach is not sufficient in reaction to UK FCA’s Proposals to enhance climate-related disclosure by listed issuers and clarification of existing disclosure obligations

CDSB welcomes the UK Financial Conduct Authority’s (FCA) efforts to speed up the uptake of high-quality climate-related financial reporting by premium listed companies, but warns that a comply or explain approach will not result in a timely and adequate response to the climate risks faced by the market.

On Friday, 6th March, the FCA published a consultation on its proposed approach to implementing a listing rule requiring approximately 480 premium listed companies to report in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) or to explain why they have not done so.

While this heightened focus on climate disclosure is a welcome development, a comply or explain approach would not result in enhanced disclosures, because companies still have the option to not report such information. Given the significant risks arising from climate change to the UK and global economy, this approach will not yield sufficient transparency fast enough to allow financial markets to manage and price these risks appropriately. Instead, setting a mandatory Listing Rule would be a commensurate response to the magnitude and probability of climate risks that the UK market faces and more in keeping with the expectation in the 2019 Green Finance Strategy that all listed companies and large asset owners should disclose in line with the TCFD by 2022.

In response to the FCA’s consultation paper, CDSB Managing Director Mardi McBrien said:

“Having developed the CDSB Framework over ten years ago, whose principles and requirements form the basis for the TCFD’s recommendations, the time has come to mandate quality climate-related reporting. This means a level of reporting that reliably informs decisions, stands up to scrutiny, directly influences the movement of financial capital and supports the transition and transformation necessary to a low-carbon economy. While we strongly commend the FCA’s impetus, the lack of progress in tackling climate change demands that we fast track the implementation path originally set by the TCFD in 2017. There’s no more time to be on the journey. We need to be at the destination, neatly packing our climate-related financial disclosure in mainstream reports.”

To address the FCA’s concerns regarding developing corporate capabilities to report information in line with the TCFD, it could commit to more leniency in its supervision of the first year of reporting under this Listing Requirement. It is important to note however that the TCFD provides sufficient flexibility to gradually improve reporting. 

While the proposal in its current form is welcome, it is by no means sufficient but it does bring some incremental benefits. The proposed rule will allow the FCA to supervise and enforce implementation of this new listing rule, which will provide a key productive feedback loop for premium listed companies in relation to their climate-related financial reporting. This will set clear expectations and give a signal to all issuers, reducing reporting burden arising from uncertainties and contribute to consistent and verifiable decision-useful information to investors.