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FCA Softens TCFD Mandate for Issuers with ‘Comply or Explain’ Rules 

UK regulator clarifies next steps toward mandatory climate-related disclosures.  

The Financial Conduct Authority (FCA) has announced that the introduction of mandatory disclosures for UK-listed companies in line with the Task Force on Climate-related Financial Disclosures (TCFD) will be introduced next year on a “comply or explain” basis. This follows respondents to the UK regulator’s consultation asking for more flexibility in complying with the disclosure requirements in the early stages.  

The new rule will initially allow UK-listed companies the flexibility to explain how they intend to comply with climate-related disclosures, mapping out future intentions rather than adopting mandatory disclosures immediately. 

“Many saw ‘comply or explain’ as an interim step towards mandatory disclosure obligations in due course,” the FCA noted in its response“They considered that flexibility in the compliance basis was important, particularly where companies faced data, modelling or analytical challenges.” 

However, the FCA qualified that “issuers should not ordinarily need the flexibility to explain non-disclosure”.  

Market discipline 

The FCA noted that stakeholder respondents argued “market discipline will be more effective if listed companies are transparent about anticipated future enhancements”. The regulatory body has therefore amended the rule to promote transparency of any steps companies are taking / plan to take in order to make consistent disclosures in the future.  

From Q1 2021, commercial companies with a UK premium listing will need to include a statement in their annual financial report which should include acknowledgement that their disclosures are consistent to TCFD recommendations and, if they are not TCFD-aligned, and explanation of why and steps that will be taken to remedy this.  

“We have provided guidance to clarify that a company’s determination of consistency with the TCFD’s recommendations should be informed by a detailed assessment of their disclosures which takes into account certain of the TCFD’s published guidance materials,” the regulator added. 

The FCA also published a final Technical Note clarifying existing climate disclosure obligations arising from EU legislation and the regulator’s handbook. The updated guidance in the note applies to a wider range of listed issuers, including listed issuers, issuers with securities admitted to trading on regulated markets and other entities in scope of requirements under the EU Market Abuse Regulation and the Prospectus Regulation.

Next steps 

The FCA will be issuing a further consultation paper in the first half of 2021 on proposals to extend “the application of [its] rule to a wider scope of listed issuers, and consider strengthening the compliance basis”.  

Furthermore, the FCA plans to consult on potential TCFD-aligned disclosures by UK-authorised life insurers, FCA-regulated pension providers and asset managers in early 2021, in order to ensure these groups are “better [able to] inform their clients and end investors” on the changes.  

Occupational pension schemes with assets under ownership of more than £5 billion, building societies, insurance companies and building societies will be among the first expected to adhere to TCFD requirements from early 2021. By 2022, this will extend to occupational pension schemes with assets under ownership over £1 billion and other FCA-regulated pension providers. The remainder will fall under the scope by 2023. 

The first annual financial reports including disclosures subject to FCA rules will be published in spring 2022.  

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