Prepare to share: is executive pay part of your approach to managing climate-related risk?

New listing rule on climate-related financial disclosures 

With everything else going on at the moment, readers may be forgiven for missing that on 1 January a new listing rule came into effect (although well done if you didn’t). What was arguably even easier to miss is the relevance of this new rule to the evolving integration of ESG and executive pay. As explained below, it is important for affected companies to understand this and ensure they are ready to comply.

Published by the FCA on 21 December 2020, the final text of new LR 9.8.6R(8) requires commercial companies with a UK premium listing to include a statement in their annual financial report setting out whether they have made disclosures therein that are consistent with the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD). Failure to do so must be accompanied by both an explanation and an action plan for providing such disclosures in future.

In 2017 the TCFD published 11 recommended climate-related financial disclosures that sit under the four pillars of governance, strategy, risk management, and metrics and targets. The intention was to provide a consistent framework in which companies can disclose information relevant to the climate-related risks facing their businesses. The proposals received widespread international support and were therefore an appropriate candidate for the FCA to incorporate expressly into this new listing rule.

In its guidance on appropriate metrics and targets for assessing and managing climate-related risk, the TCFD recommend that “organisations in all sectors should consider describing whether and how related performance metrics are incorporated into remuneration policies”. While this is only guidance rather than itself a recommended disclosure, LR 9.8.6BG expressly requires readers to take TCFD guidance into account when “undertaking a detailed assessment” of the disclosures to determine whether their climate-related financial disclosures are consistent with the TCFD recommendations.

The result of the new listing rule therefore seems to be that affected companies must now either disclose whether and how their remuneration arrangements incorporate environmental performance metrics or explain why they did not do so. For companies that do not currently link climate risk management to executive pay, this may provide a catalyst for doing so.

What should companies do right now? 

The new rule applies to accounting periods beginning on or after 1 January 2021, so the first set of relevant reports will be published in 2022. Companies within the scope of the new listing rule should familiarise themselves with the details of the rule and associated guidance and consider what arrangements they need to put in place to ensure that they are able to comply.

As noted above, one of TCFD recommendations focuses on using performance metrics to manage any climate-related risks the company faces or explain why no such metrics have been adopted. In a previous post we discussed the incorporation of ESG metrics into remuneration arrangements and undertook a survey on FTSE 100 companies’ disclosure. 

Companies may also wish to review the extent to which they may already be required to make climate-related (or broader ESG) disclosures under existing obligations set out in the FCA Handbook or retained EU legislation. The finalised technical note (at Appendix 2 of the Policy Statement) published by the FCA at the same time as its finalised text for the new listing rule is intended to provide further clarity on when this may be the case.