Sarasin & Partners LLP today made a submission to the FCA’s consultation on revised guidance for prospectuses - Consultation Paper 24/12 on the new Public Offers and Admissions to Trading Regulations regime (POATRs). Sarasin has been a longstanding advocate for reliable company reporting and financial statements as a key pillar underpinning market efficiency and investor protection. We therefore welcome the FCA’s consultation on improvements to the existing prospectus regime. Our submission focused in particular on questions relating to sustainability related disclosures (Chapter 6 of the consultation paper), drawing particular attention to the following points:
- Sustainability related disclosures: We support the FCA’s proposal to require equity issuers to make clear and consistent disclosures on material climate-related (or indeed any sustainability) risks and opportunities, in line with evolving listing rules for annual reporting of sustainability information. This is important to enable investors “to assess (amongst other things) the assets and prospects of the issuer”[1].
- We do not agree with the proposed exclusion of debt issuers from the sustainability disclosures requirements. Climate (or any sustainability) factors that are material, and thus have a potential impact on default risks, are just as pertinent for debt holders as shareholders. This is also highlighted in the FCA’s Technical Note 801.2. While this would, in our view, already fall under the FCA’s ‘necessary information test’, making this explicit would help to deliver greater transparency and consistency in reporting.
- Underline the importance of connectivity/consistency with financial statements: While the consideration of material climate (or other sustainability) factors are already required under existing accounting standards[2], this appears to be widely disregarded[3]. The weak accounting disclosure has prompted regulatory statements from the Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA)[4]. Given the critical role played by reliable accounts in underpinning investor protection and market efficiency, the FCA should set explicit expectations within the prospectus rules. Namely,that the financial consequences of entities’ identified risks and opportunities and transitions plans be incorporated into their accounting assumptions.
- Mineral (particularly oil and gas) companies’ reserve viability tests should consider material climate-related consequences – In the same way that climate change and decarbonisation need to be factored into entities’ financial statements where material, they need also to be considered in oil and gas companies’ reserve viability tests undertaken as part of the required Competent Person’s Report. We are also supportive of the introduction of 1.5°C and well below 2°C sensitivity tests in the form of the proposed Atmospheric Viability Test (AVT).
Alongside the above points, we underline the importance of ensuring the prospectus regime prioritises investor protection. While we are supportive of the FCA’s goal to ‘reduce the costs of listing on UK markets’ wherever this stems from unnecessary red tape that provides little benefit to investors, we underlined the equally important goal of ensuring reliable information for investor protection and market efficiency. The UK has built a reputation for high standards of disclosure and corporate governance over many years, and we cautioned against any steps that could weaken that reputation, as underlined by a global investor statement representing US$77 trillion in assets on this matter earlier this year[5]. We flag the proposal to loosen the regulation by raising the threshold for when a prospectus may be required from further issuance equivalent to 20% of existing issuance to 75% is one area of concern.
[1] See FCA TN801.2: https://www.fca.org.uk/publication/ukla/fca-tn-801.2.pdf
[2] The International Accounting Standards Board (IASB) published Educational Material to underline the relevance of climate-related information to existing accounting standards in 2020, updated in 2023: https://www.ifrs.org/content/dam/ifrs/supporting-implementation/documents/effects-of-climate-related-matters-on-financial-statements.pdf. In July 2024 the IASB issued an Exposure Draft on “Illustrative examples of climate-related and other uncertainties in the financial statements” (https://www.ifrs.org/content/dam/ifrs/project/climate-related-other-uncertainties-fs/iasb-ed-2024-6-climate-uncertainties-fs.pdf).
[3] Carbon Tracker analysis since 2022 has reviewed financial statements for some of the most carbon-intensive listed companies globally and shown that few issuers provide adequate visibility on how they have considered material climate factors in their accounting: See the latest report covering 140 listed issuers, published in February 2024: https://carbontracker.org/reports/flying-blind-in-a-holding-pattern/
[4]FRC has reminded Boards and Chief Finance Officers of their responsibility to consider material climate risks in annual guidance and thematic reviews, for instance: https://www.frc.org.uk/news-and-events/news/2023/07/frc-thematic-review-examines-quality-of-climate-related-metrics-and-targets-disclosures/; PRA outlines concerns over a lack of consideration of climate in banks’ accounting: https://www.bankofengland.co.uk/prudential-regulation/letter/2022/october/thematic-feedback-2021-2022-written-auditor-reporting ; https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2023/september/thematic-feedback-2022-2023-written-auditor-reporting.pdf
[5] https://www.icgn.org/icgn-statement-high-standards-corporate-governance-and-investor-protections-pre-requisites-uk
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