Call to Support Climate Disclosures in UK Prospectus Rules
FCA rule revision would require fossil fuel companies to explain reserve development while considering climate goals.
Investors are being urged to support the inclusion of detailed climate disclosure requirements for fossil fuel firms in planned new UK prospectus rules ahead of a deadline next month.
Reporting obligations are being drafted by the Financial Conduct Authority (FCA) following the passage of legislation in January to replace existing UK prospectus rules, which were largely based on the EU legislation.
Earlier this week, climate change think tank Carbon Tracker hosted a webinar to highlight the opportunity for investors to influence the FCA’s Public Offers and Admissions to Trading Regulations regime (POATR) consultation. The consultation closes on 18 October, with the FCA aiming to finalise rules by the end of H1 2025.
Carbon Tracker and environment-focused law firm ClientEarth have made submissions to the FCA which call for a review of the requirements for specialist issuers with a specific focus on sustainability-related disclosures by companies operating oil, gas or coal projects.
The submissions argued that current disclosures fail to sufficiently address the impact of extracting and consuming oil, gas or coal resources on the climate and how government policy may change to meet national and international climate goals, which could heighten the risk of stranded assets for investors.
Following the submissions, the FCA called for views on whether additional disclosures relating to climate-related matters for mining or oil and gas companies were needed, or whether proposed wider climate-related reporting requirements would offer “sufficient transparency”.
If agreed, through a revision to the competent persons reporting regime (CPR), oil, coal and gas companies would have to explain why they believe the development of their reserves would be consistent with the goals of the Paris Climate Agreement and not pose a risk to the remaining carbon budget while protecting overall market integrity.
“If companies wishing to raise funds off the back of reserves valuations have to include within their disclosures the constraints of climate scenarios, this will have significant implications both for financial materiality and for the carbon budget,” Richard Folland, Head of Policy and Engagement at Carbon Tracker, told ESG Investor.
“We believe this change would carry significant implications for institutional investors in terms of how they address the energy transition, as it should help to mitigate their risk from the consequences of climate change and to help realise the opportunities of the shift from a high-carbon to a low-carbon economy.”
Falling demand, impending surplus
The FCA currently requires the disclosure of sector-specific information in the prospectus of firms involved in oil, gas or coal projects to enable an informed assessment of their prospects. Such companies need to provide an independent CPR which analyses the viability of companies’ mineral resources, reserves and projects.
The International Energy Agency (IEA) has forecast a major surplus of oil by 2030 as global demand slows. The agency has also named oil as the sector responsible for the highest amount of methane emissions at 49 million tonnes (Mt), followed by coal (40Mt) and gas (29Mt).
A Carbon Tracker report previously showed that the fossil fuel reserves held by listed companies on the world’s stock exchanges significantly exceed those that can be burned even in a scenario exceeding 3°C.
Last December, NGOs Reclaim Finance and BankTrack led 67 organisations in calling on the world’s top 50 banks to cease all financial support for new metallurgical coal production and expansion. The UK’s last coal plant is also due to close on 30 September. Coal power provided almost 40% of UK generation in 2012, but this had fallen 2% by 2019 is due to reach zero by next month.
Plans to open a new coal mine in Cumbria were quashed this month by a High Court ruling which pointed out that the initial approval process had not considered its impact on climate change.
In an investor briefing, Carbon Tracker said that CPR and mineral company disclosures in their current state do not recognise the impact of the renewable energy transition, global decarbonisation efforts or remaining carbon budgets on the viability of the commercial extraction of fossil fuel companies’ reserves, hampering transparency for investors.
It said reform is needed to offer investors a “transparent and externally verified” picture of the viability of companies’ fossil fuel reserves to help them make informed investment decisions.
“For markets to be allocating capital effectively, they need reliable information,” said Natasha Landell-Mills, Head of Stewardship at asset manager Sarasin & Partners. “One of the things that is concerning us as investors is the increasing politicisation of climate change. Rather than treating decarbonisation or physical risks as economic phenomena that have real material impacts on the outlooks for many businesses, climate change is instead being treated as a set of beliefs. This can be harmful if it leads to real economic risks being overlooked.”
She added that the disclosure proposal would benefit institutional investors, and that there was a “real need for them to be voicing their support for the provision”.
Folland said that over the last few weeks, Carbon Tracker has “engaged intensively” with investors and investor bodies on this proposal, with many indicating they plan to respond to the FCA consultation. The think tank has created a template investors can use to communicate their support to the regulator.
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