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Mar 12, 2020

UK regulator to push companies on climate-risk reporting

Investors urge companies to manage climate-change risk ahead of 2020 AGM season

The UK’s Financial Conduct Authority (FCA) is looking to strengthen regulation on climate-risk reporting for premium-listed companies, with a potential for expansion to all UK issuers. 

The FCA proposes requiring premium-listed companies to report on climate risk using the Task Force on Climate-related Disclosures’ (TCFD) guidelines, or to explain why they’re not using the framework, according to a statement issued by the regulator on March 6.

It is asking for feedback on existing obligations set out in EU legislation and the FCA Handbook that may require issuers to disclose information on climate-related and wider ESG matters. Market participants concerned have until June 5 to submit their responses. 

Issuers with a premium listing on the main market of the London Stock Exchange typically look to benefit from an increased profile and highly liquid market. In turn, these firms have to face greater scrutiny and comply with higher standards of regulation and corporate governance than the minimum EU requirements.

The proposed new rule promoting the adoption of the TCFD’s recommendations will directly affect commercial companies with a UK premium listing. The FCA is also looking at possibly extending the forthcoming rule to a wider range of issuers.

The TCFD reporting initiative was set up by the Financial Stability Board in 2015 and is chaired by Bloomberg founder Michael Bloomberg. It encourages issuers to report on four key areas: governance, strategy, risk management & metrics and targets. In February IR Magazine reported that the initiative had surpassed 1,000 supporters

Joint forces on climate-risk reporting
The Investment Association’s (IA) director for stewardship and corporate governance Andrew Ninian has embraced the regulator’s proposal. ‘We welcome the proposals from the FCA that will require companies to report on climate-related risks in a clear and comparable manner in line with the TCFD by 2022,’ he says. 

In a separate development, the IA is asking issuers for the first time to disclose in their annual report the impact climate change will have on their business model and how these risks are being measured and mitigated. The trade body, which represents 250 fund managers with £7.7 tn ($9.7 tn) in assets under management, is urging companies to report in line with the TCFD recommendations by 2022.

The IA will monitor issuers’ reporting through its Institutional Voting Information Service (Ivis) this year, to see whether there is significant progress toward TCFD reporting. 

‘With one third of the FTSE owned by IA members, our industry is looking to the UK’s largest listed companies to demonstrate that climate change is being taken seriously in boardrooms’, says Ninian in a press statement. ‘Climate change could result in a significant loss of value in companies if risks are not effectively measured and managed, ultimately hitting savers’ pockets.’

Key areas to focus on ahead of 2020 AGMs
UK issuers are facing a busy AGM season as they are also urged by the association to focus on pay ratio, audit quality and diversity issues this year.

‘In addition to climate change, investment managers will also be increasing the pressure on companies to improve gender diversity at a senior level and to bring executive pensions in line with the rest of the workforce,’ notes the IA’s statement.

Gender diversity on boards and in senior leadership teams is expected to be another key concern for shareholders in 2020. This year, Ivis will issue the highest warning level to FTSE 350 companies failing to have at least 20 percent gender diversity in their senior leadership teams as well as on their boards by the end of 2020.

Pay ratio
The IA is taking a tough stance on company directors’ pension deals following a change to the UK’s Corporate Governance Code, effective for accounting periods beginning on or after January 1, 2019. ‘The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce,’ notes the strengthened code.

The IA is urging FTSE 350 companies to comply with the principles of the code when a new executive director’s pension deal is negotiated. The pension contribution of existing executive directors should be brought in line with the rest of the workforce by the end of 2022. 

Audit quality
Audit quality remains another key concern for investors in 2020, topping shareholder concerns in response to recent corporate failures calling the quality of current audits into question, according to the Shareholder Priorities for 2020 booklet.

The IA press release notes that ‘in this year’s AGM season, investors will be looking to audit committees to better explain how they assessed the quality of the audit and – when necessary – challenged management judgments.’