Primary Market Bulletin 45

Newsletters Published: 10/08/2023 Last updated: 10/08/2023

Newsletter for primary market participants

August 2023 / No. 45

About this edition

Welcome to the 45th edition of the Primary Market Bulletin (PMB)

International Sustainability Standards Board: IFRS S1 and S2

The International Sustainability Standards Board (ISSB) published its first 2 IFRS Sustainability Disclosure Standards (ISSB standards) on 26 June 2023:

  • IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information requires an entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions relating to providing resources to the entity. This involves disclosing material information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects.
  • IFRS S2 Climate-related Disclosures requires an entity to disclose information about its climate-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. 

We welcome the publication of the 2 standards that deliver, for the first time, a global reporting standard for corporate sustainability disclosures. It’s our view that internationally consistent, comparable and useful sustainability disclosures will improve the transparency of issuers’ activities. This will give investors the information they need to make business, risk and capital allocation decisions. 

We’ve been a strong advocate of the development of international corporate reporting standards on sustainability. Along with our regulatory partners at the International Organization of Securities Commissions (IOSCO), we’ve supported the work of the IFRS Foundation in this area, since the ISSB was first considered. And we’ve previously stated our intention to consult on updating our disclosure framework for listed companies to reference the ISSB standards, once the standards are available for use in the UK.

In this article we:

  • set out key features of our process for implementing the standards and plans for consultation 
  • explain how we’ll continue to supervise existing disclosures under the Task Force on Climate-related Financial Disclosures (TCFD) framework, until any new requirements are implemented 
  • advise issuers on what they can do now to prepare for any future obligations relating to reporting on the ISSB standards

Implementation of ISSB standards for listed companies – our proposed approach

Following the publication of the final ISSB standards, jurisdictions including the UK need to consider how to reference the standards in their legal and regulatory frameworks. 

On 25 July 2023, IOSCO announced the outcome (PDF) of its review and endorsement assessment of the ISSB standards. We co-led this work. IOSCO concluded that the ISSB standards serve as an effective and proportionate global framework of investor-focused disclosures in relation to climate-related matters (IFRS S2) and sustainability-related information (IFRS S1). 

IOSCO called on its 130 member jurisdictions to consider how they might adopt, apply or otherwise be informed by the ISSB standards, within the context of their jurisdictional arrangements. And do so in a way that promotes consistent and comparable climate-related and other sustainability-related disclosures for investors. 

The UK Government has also voiced its support for the ISSB standards. In Greening Finance: A Roadmap to Sustainable Investing (PDF), the Government confirmed that it expects the ISSB’s standards to form a core component of the Sustainability Disclosure Requirements (SDR) framework, and be the backbone of its corporate reporting element.

In Mobilising Green Investment: 2023 Green Finance Strategy (PDF), the Government reiterated its commitment to introduce mandatory reporting against the ISSB standards, subject to a formal assessment and endorsement process. It aims to complete this assessment and endorsement process within 12 months of the final standards being published.

The Secretary of State for Business and Trade will be responsible for this endorsement decision. Two advisory committees are being established to support the Secretary of State’s decision-making on endorsement and to coordinate the implementation of reporting requirements by Government and the FCA. One committee will focus on public policy and implementation (the UK Sustainability Disclosure Policy and Implementation Committee (PIC)), and the second committee—the UK Sustainability Disclosure Technical Advisory Committee (TAC)—will focus on the technical aspects of the standards for endorsement. We’ll contribute to this process as a member of the Policy and Implementation Committee. The Government will publish a framework document setting out the roles and responsibilities of each committee in due course.

FCA consultation

We’ve previously stated that we intend to consult on updating our TCFD-aligned disclosure rules for listed companies to refer to the UK-endorsed ISSB standards. This will build on our existing climate disclosure requirements (LR 9.8.6 R (8) and LR 14.3.27 R). 

The ISSB standards build on the TCFD framework and IFRS S2 is consistent with the four core recommendations and eleven recommended disclosures published by the TCFD. The TCFD has now been consolidated into the IFRS Foundation and a comparison (PDF) of IFRS S2 with the TCFD recommendations has been published.

We expect to consult in the first half of 2024 on proposals to implement disclosure rules referencing UK-endorsed IFRS S1 and IFRS S2 for listed companies. We’ll take into account inputs to the Government’s endorsement process and our own cost-benefit analysis. Assuming the Government’s endorsement process is completed in the timeframe envisaged, our aim is to finalise our policy position by the end of 2024, with a view to bring new requirements into force for accounting periods beginning on or after 1 January 2025. The first reporting would begin from 2026.

We’ll also consult on an appropriate scope and design for the new regime. As part of this, we’ll consider the interaction with our proposed equity listing rule reforms to identify a proportionate scope for the rule. These reforms include the potential replacement of premium and standard listing categories with a single category of equity shares in commercial companies. We’ll also identify any transitional measures that may be required to ensure smooth implementation. As we have previously indicated, we also expect to consult on moving from the current comply or explain compliance basis to mandatory disclosures for listed issuers. 

Transition plans

At the same time as consulting on our policy approach in relation to the ISSB standards, we’ll consult on guidance that will set out our expectations for listed companies’ transition plan disclosures. 

A climate-related transition plan is an aspect of an entity's overall strategy that lays out the entity's targets, actions or resources for its transition towards a lower-carbon economy. This includes actions such as reducing its greenhouse gas emissions. We’ll develop our guidance with reference to the final outputs from the Transition Plan Taskforce (TPT). 

The TPT was commissioned by the Government in 2022 to develop a good practice framework for private sector climate transition plans. It published its draft Disclosure Framework (PDF) and Implementation Guidance (PDF) in November 2022. It recently published an update on its progress (PDF) and expects to finalise its sector-neutral disclosure framework in October 2023. 

Our current framework encourages listed companies to consider the TCFD Guidance on Metrics, Targets and Transition Plans. And where they’ve developed and disclosed a transition plan, listed companies should assess the extent to which they’ve considered national net zero commitments.

IFRS S2 includes a requirement to make disclosures that relate to transition planning (for example, the requirement in paragraph 14(a)(iv) that an entity disclose information about "any climate-related transition plan [it] has”). But we consider that listed companies would benefit from additional clarity on what a good practice climate transition plan should cover. Our view is that the TPT Framework will provide that detail, helping issuers to report more effectively on the transition plan-related aspects of IFRS S2. 

The TPT Framework has been designed purposefully to interoperate with IFRS S2. The draft TPT Framework recommends a ‘strategic and rounded approach’ to transition planning. It considers both the steps an entity can take to reduce its own greenhouse gas emissions and any actions that contribute to an economy-wide transition. By consulting on introducing guidance aligned with the TPT Framework within our Handbook at the same time as the UK-endorsed ISSB standards, we’ll explicitly recognise the relationship between the 2 frameworks. 

Monitoring international developments

Alongside developing our approach to implementation of the ISSB standards and the TPT Framework, we’ll continue to follow and engage with international developments relevant to the landscape for sustainability reporting. We will soon be publishing our response to the ISSB’s Request for Information Consultation on Agenda Priorities on its future workplan. We are also monitoring the ISSB’s work on developing a digital taxonomy to support machine-readable disclosures. 

We are also engaging with work on developing international standards for assurance and ethics by the International Ethics Standards Board for Accountants (IESBA) and the International Auditing and Assurance Standards Board (IAASB). As co-chair of IOSCO’s workstream on assurance over sustainability disclosures, we’ve strongly encouraged the development of international standards to support a trusted assurance ecosystem and improve the quality of disclosures. IOSCO published a report (PDF) in March 2023 setting out key considerations for the standard setters and other key stakeholders across the ecosystem, including issuers. We encourage issuers to consider the matters in the report as work towards a global assurance framework progresses.

Our supervisory approach

When we introduced the current climate-related disclosure rules, we developed a supervisory approach, in collaboration with the Financial Reporting Council (FRC), which was designed to set issuers up to succeed. 

We recognised that, to raise levels of compliance, our efforts should be focussed on: 

  • raising awareness of the new rules and guidance; and
  • improving the quality of disclosures

We’ve published our supervisory approach and regulatory activities in respect of the current rules in some detail in Primary Market Bulletin 36, Technical Note 802.1 and Primary Market Bulletin 42.

We also published a thematic review of TCFD-aligned disclosures by premium listed commercial companies in July 2022, alongside a complementary review (PDF) by the FRC. 

We envisage continuing to use thematic reviews in 2023/24 to consider TCFD-aligned disclosures made by all listed companies in scope of our existing TCFD aligned disclosure rules, noting that standard listed companies are reporting for the first time. The FRC has also published its second thematic review (PDF) of TCFD disclosures, focusing on climate-related metrics and targets.

We recognise that our supervisory approach will need to evolve as we move closer to the implementation of IFRS S1 and S2 and enhanced expectations on transition plan disclosures. We’ll provide more information on our supervisory approach as part of our consultation.

What listed companies can do now to prepare

The ISSB standards and enhanced transition plan guidance won’t replace the TCFD disclosure framework immediately. But we strongly encourage listed companies and their advisers to start considering the standards now, and to build them into their plans for future reporting.

Actions that listed companies can take to prepare for the potential future introduction of the standards include:

  1. Continue to improve your reporting in line with existing climate-related disclosure rules. As the ISSB standards build from existing rules, we encourage listed companies to continue to improve their climate reporting by considering the TCFD recommendations and accompanying guidance. We also encourage listed companies to consider the areas identified for improvement in our relevant publications, including Primary Market Bulletin 36, Technical Note 802.1 and Primary Market Bulletin 42, and thematic reviews undertaken by us and the FRC. This includes expectations under the IFRS Foundation’s educational material, that companies should consider disclosing climate-related matters in financial statements when the effect is material, and show clear connectivity between climate-related disclosures and the financial statements.
  2. Engage early with IFRS S1 and S2, the associated guidance, and the TPT Disclosure Framework and Guidance (once published) and consider reporting on a voluntary basis. Building familiarity with the ISSB standards and the TPT Framework will help listed companies to identify data gaps and opportunities to improve internal processes. We encourage listed companies to supplement their existing reporting with reporting aligned with both the ISSB standards and TPT Framework on a voluntary basis, ahead of potential future requirements.
  3. Engage with the UK endorsement and implementation process for the ISSB standards. We encourage listed companies to respond to the Technical Advisory Committee call for evidence (which will close on 11 October 2023) and our consultation on implementation, when published.

Audit of financial statements by third country audit firms – suspensions of listings

Under DTR 4.1.7 R (4), an issuer which is a UK-traded third country company within the meaning of Section 1241 of the Companies Act 2006 (third country issuers), must ensure that its auditor is on the FRC’s register

Financial statements that don’t include an audit report provided by an FRC registered third country auditor, won’t be audited for the purposes of compliance with DTR 4.1.7 R. 

Third country issuers without an FRC registered third country auditor should make sure they appoint one as soon as possible and within a reasonable time frame ahead of the audit process starting. 

We’ve previously written to third country issuers with published financial statements that don’t include audit reports by an FRC registered third country auditor to remind them of their obligations. In the letter, we also inform them that we may take action including temporarily suspending the issuer’s listing as a result of a breach of DTR 4.1.7 R (4). 

Now, where we become aware that a published audit report hasn’t been provided by an FRC registered third country auditor, we propose to take action by temporarily suspending the issuer’s listing under our powers set out in LR 5.1.1 R (1). Such a suspension would remain in place until the issuer has complied with DTR 4.1.7 R (4) by publishing an audit report provided by an FRC registered third country auditor. 

We encourage third country issuers who are at risk of breaching DTR 4.1.7 R (4) to apply to us for a suspension of listing before any breach occurs. 

Issuers should also consider whether any such breach may give rise to a disclosure obligation under the Market Abuse Regulation (MAR).

If you wish to request a suspension of listing, please refer to LR 5.3. All suspension requests should be sent to [email protected].

Application of our transitional provisions in relation to minimum market capitalisation for shell companies

We recently wrote to shell companies (as defined within LR 5.6.5A R) to remind them about the transitional provisions available to certain issuers where the company intends to undertake a reverse takeover that will result in the enlarged entity needing to apply for listing. 

Such transitional provisions enable companies to list with a minimum market capitalisation of £700,000. 

If an issuer wishes to rely on such transitional provisions, the deadline for complete submissions to the FCA, for an eligibility review and a prospectus review, for the proposed application for listing in accordance with Listing Rule 5.6.21 R (ie where the issuer’s listing is cancelled following completion of a reverse takeover) is 4pm on 1 December 2023. After this date, such applications will require a minimum market capitalisation of £30 million.

The transitional provisions for shell companies described in PS21/22 and implemented in LR TR 16 (transitional provisions in relation to market capitalisation under LR 2.2.7 R (1)) were designed to ease the impact of the changes on shell companies. They allow such companies up to 2 years to find a target and start the process to list a new entity. It applies only to issuers that were a shell company before 3 December 2021. If an issuer is in any doubt whether the company was a shell company as per the definition in LR 5.6.5A R before this date, then please ask us for guidance.

Where no eligibility/prospectus review is submitted before 4pm on 1 December 2023, or where one is submitted but is subsequently withdrawn or lapsed, the company can remain listed. 

However, after that date, if it were to carry out a reverse takeover as defined in LR 5.6.4 R, the new enlarged entity would need to meet the higher £30 million minimum market capitalisation threshold to be eligible to be listed. This would also apply to any future reverse takeover the company undertakes, regardless of whether the company has relied on the transitional provisions referred to above in relation to a previous reverse takeover.
We encourage affected issuers to get their advisers’ assistance in considering the availability of the transitional provisions in relation to any transaction timetable. 

Please email the Primary Market Monitoring team ([email protected]) if you would like to discuss any of the information set out above.  

Multi-factor authentication for our systems

We’ve introduced multi-factor authentication (MFA) to strengthen how you log into the Electronic Submission System (ESS), and to further protect and control access to our data. This was previously communicated in PMB 43

Please be aware that the option to skip MFA registration when you log in to ESS will end soon. So please register as soon as possible to continue accessing ESS.    

When you next log on to the ESS system, you’ll be prompted to turn on MFA using the quick and easy registration process. Once you have registered, you can authenticate at every log in, by entering a one-time passcode generated from either:  

  • an authenticator app 
  • a text message      
  • an automated phone call

Find out more about MFA for our systems (including user guides and videos).