FCA introduces new corporate guidelines to improve ESG disclosures
23 Apr 2020 10:23 am by Mark Dunn
In early March, the British Financial Conduct Authority (FCA) announced new efforts to help provide transparency to the risks, companies face due to climate change. The City watchdog’s proposal would require all companies listed on the UK’s premium stock markets—including those listed on the FTSE—to toe the line with comprehensive new climate standards. Unsurprisingly, efforts to increase transparency on the private sector’s climate change impact have developed steadily in the last couple of years.
Nevertheless, some questions remain. What does the FCA proposal include, how will it affect the private sector, and how can third party risk monitoring tools help mitigate possible compliance risks?
Enhancing climate related disclosures
The recently published FCA proposal draws heavily on the recommendations envisaged by the Task Force on Climate-related Financial Disclosures (TCFD)—one in a number of initiatives aimed at reviewing how the private sector addresses financial risks related to the climate crisis. The FCA proposal embraces the TCFD’s recommendations for premium listed commercial companies. In 2017, the TCFD established one of the most comprehensive standards for climate disclosure in the world, presenting a number of interconnected proposals intended to help companies identify, assess and mitigate climate-related risks and opportunities. These propositions have since emerged as the leading framework for climate change reporting and focus on four complementary elements:
1. Governance: Transparency regarding a company’s governance around risks and opportunities concerning climate-related issues.
2. Strategy: Disclose the existing and tentative impacts of climate-related risks and opportunities on strategy, operations and financial sustainability.
3. Risk Management: Transparency concerning the identification, assessment, mitigation and management of climate-related issues.
4. Metrics and Targets: Disclose the metrics and targets used to assess and manage relevant climate-related issues.
Why the private sector must embrace ESG efforts
The present climate emergency calls for all parties to combine their efforts in order to decrease and prevent the negative environmental impact the world is facing today. This is particularly true for the private sector. Ben Stansfield, an environmental lawyer at Gowling WLG, recently told The Guardian¹ that measures such as the newly proposed FCA guidelines are “‘a significant step” for climate disclosure and companies “who don’t respond to it will very likely struggle.”
Although many regulatory bodies across the globe first started to emphasise the importance of sustainable investment through non-binding standards and measures, regulators such as the FCA are increasing their pressure towards the private sector. Governmental agencies have since set out concrete policy changes which were supported by binding regulatory requirements.
In late 2019 the European Union adopted a regulation on sustainability-related disclosures in the financial services sector. This Disclosure Regulation², which will come into force in early 2021, seeks to further coordinate present European policies on sustainability-related disclosures by introducing new requirements on financial advisors and financial market participants.
Similar to the FCA’s proposal, the EU aims at enhancing the transparency of professional investors and financial advisors by disclosing potential negative ESG impacts of their investments. Accordingly, investment products that already claim to be sustainable will face further legal scrutiny and are required to provide even more detailed information in order to avoid fraudulent claims.
What follows from the FCA financial disclosure proposal?
In anticipation of possible issues arising with the new regulation, the FCA announced that it will consult on extending the time-period for comments and feedback and plans on publishing the final rules at the end of 2020.This timeframe can be crucial for industry-stakeholders who will be affected by the proposed measures.
The new guidelines would require premium listed commercial companies to adjust their annual financial report by including a statement establishing:
- Whether they acted in compliance with the TCFD’s recommendations
- Whether and why they did not act in compliance with some or all of the TCFD’s recommendations
- Whether the necessary disclosures can be found in their annual financial report or in a document other than that
Andrew Bailey, the FCA’s chief executive officer, has made the intentions behind this recent regulatory proposal clear, saying “The changes we propose will help to provide the transparency the market needs to be able to assess how well companies are adjusting to the risks of climate change.”
Additionally, improved sustainable disclosure will support the global transition to a low carbon economy and comprehensive and sustainable green financing.
Why comprehensive risk management is essential
The high number of new regulatory demands the private sector faces due to recently proposed legislation in the UK and elsewhere showcases the importance of developing a comprehensive due diligence and risk monitoring process so companies can respond in real time to a variety of issues.
By investing into tools that help your company to mitigate compliance-related risks they can streamline your efforts by giving you access to a variety of powerful and comprehensive data-sets. This can help you identify possible negative ESG impacts concerning your company and enhance transparency of third-party operations, assessing potential climate-related risks and opportunities in your network
1. City watchdog may demand UK's top firms reveal climate impact, guardian.com
2. Regulation 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector Official Journal of the European Union