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We comment on the FCA’s consultation paper 20/3 'Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations '

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02 Oct 2020

We have published our comment letter on FCA’s consultation paper 20/3 Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations (“the CP”).

Deloitte Touche Tohmatsu Limited’s (DTTL’s) Global CEO, Chairman and CFO are signatories to the statement of support for the Task Force on Climate-related Financial Disclosures (TCFD) and DTTL was actively involved in its work through our colleague Eric Dugelay, a member of the TCFD.

Climate change is an undiversifiable risk, which requires an immediate and urgent response. It is essential for businesses to integrate consideration of climate-related risks into their existing operations. Corporate reporting in line with TCFD recommendations can play an important role in achieving that outcome.

TCFD is market-driven and investor-focused, and is recognised as an appropriate framework by the International Organization of Securities Commissions (IOSCO) globally and by the European Securities and Markets Authority (ESMA) in the EU. It is an important contribution to developing global sustainability-reporting standards for climate-related information. In recent weeks we have seen significant steps made by IOSCO and the IFRS Foundation. Furthermore, leading international sustainability standard setters and frameworks have published a statement of intent to work towards a comprehensive corporate reporting system and issued an open letter to call on IOSCO to take a leadership position in creating the standard-setting architecture that would deliver a global climate reporting standard that incorporates TCFD recommendations. This global direction of travel should be taken into account in the development of any UK climate-related disclosure requirements. Therefore we believe that the introduction of a rule regarding TCFD should be considered a short-term measure which aims to encourage those businesses in scope to embed climate-related considerations into their operations and prepare for mandatory compliance with a reporting standard in coming years.

For this reason, we recommend that the rule does not ‘hard wire’ specific elements of TCFD into the rule, as these could be updated as TCFD moves to a global standard. Instead we suggest that it should reference application of the TCFD recommendations in the round. Experience of existing Listing Rules relating to the UK Corporate Governance Code shows that the time lag to consult on an FCA rule change every time the Code changes can discourage early adoption by issuers.

Regarding the rule itself, we believe all companies should be thinking about climate. We recognise that many companies are a good way along the journey in doing so but a significant number are not. We consider that a “comply or explain” approach may not have the effect of driving adoption of the recommendations; as it stands, a company may comply with the draft rule by repeatedly explaining non-compliance. Also, as TCFD is a set of recommendations rather than a reporting standard, it may prove challenging to determine what compliance might look like in some respects. It may be more valuable to require reporters to explain how they have had regard to TCFD; to what extent they have adopted and made disclosures according to the recommendations of TCFD; and, where necessary, the plans they have to adopt further recommendations in future years. This will not only allow investors to hold directors to account now, but also in future if insufficient progress is made.

Given the need for urgent action to stand any chance of meeting the Government’s target to be carbon neutral by 2050, we think issuers should be reporting progress now. Therefore, despite the extension of the consultation period, we believe that the new rule should take effect for periods commencing on or after 1 January 2021; we suggest that the Technical Note relating to current requirements also encourage early adoption of the new rule.

In the long term, we believe reporting of climate related information in line with TCFD recommendations or subsequent climate reporting standards should be required for all large economic enterprises – including both users and providers of financial capital. A rule for commercial premium-listed issuers is a good start; further rules for other issuers, larger private companies (perhaps those for whom a Statement of Corporate Governance Arrangements is required), and for major investors should follow. We encourage the FCA to work with the Prudential Regulation Authority (PRA), the Pensions Regulator (tPR), the Department for Business, Energy and Industrial Strategy (BEIS) and other UK regulators to ensure a consistent and joined-up approach to the introduction of climate-related reporting requirements across the various types of entity within the regulators’ respective remits.

Finally, we support the provision of guidance to issuers about how the current regulatory regime applies to climate change-related risks and encourage the FCA to finalise and publish the Technical Note as soon as possible so that it is available for December 2020 year-end reporting.

Click to view the full comment letter including our responses to the specific questions raised in the CP.

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