Climate-related disclosures for issuers: FCA publishes final rules

The Financial Conduct Authority (FCA) has published a Policy Statement (PS20/17) and final rules and guidance in relation to climate-related financial disclosures for UK premium listed companies.

Companies will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations, and to explain if they have not done so. The rule will apply for accounting periods beginning on or after 1 January 2021.

As well as some additional guidance, the FCA has made only one material change to the rules consulted upon in March 2020 (CP20/03) with the final LR 9.8.6(8)(b)(ii)(C) R requiring non-compliant companies to set out details of how and when they plan to be able to make TCFD-aligned disclosures in the future.

With regard to monitoring compliance with the new listing rule, the FCA confirmed in its Policy Statement that it will provide further information on its supervisory approach to the new rule in a Primary Market Bulletin later in 2021.

In light of this latest regulatory development, issuers may also want to consider what, if any, litigation risks may arise in connection with climate-related disclosures (and indeed other sustainability-related disclosures which are made in response to these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) in which we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

For a more detailed analysis of the FCA’s Policy Statement, please see our Corporate Notes blog post.

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Nihar Lovell

Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000

Sousan Gorji

Sousan Gorji
Senior Associate
+44 20 7466 2750

Climate-related disclosures for issuers: next steps from UK financial regulators outlined

This month, there have been some significant regulatory announcements in relation to climate-related disclosures. These announcements are a result of the increasing focus on climate change and sustainability risks across governments, regulators and industry and a continued move towards corporate compliance with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.

While not launching new developments or heralding the unexpected, these announcements are noteworthy for issuers as they mark a change in tone from the UK regulators regarding climate-related disclosures. Previously, the Financial Conduct Authority (FCA) and Prudential Regulation Authority took a cooperative and directional view, in recognising that issuers’ capabilities were continuingly developing in some areas which might limit their ability to model and report scenarios in the manner recommended by the TCFD. With the latest announcements, it seems increasingly likely that there will now be a shift away from voluntary climate-related disclosures towards mandatory TCFD aligned disclosures across the UK economy.

Key announcements

Recent key announcements include:

  • HM Treasury publishing the Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce (the Taskforce) on the implementation of the TCFD recommendations and a roadmap towards mandatory climate-related disclosures;
  • the Governor of the Bank of England’s (BoE) speech reaffirming what the BoE is doing to ensure that the UK financial system plays its part in tackling climate change;
  • the FCA’s speech on rising to the climate challenge; and
  • the Financial Reporting Council’s (FRC) publication of its Thematic Review on climate-related risk.

Summary of key announcements

These announcements highlight the UK’s financial regulators’ strategy for improving and developing climate-related disclosures. The key points from these announcements include:

Taskforce

  • The Taskforce’s Interim Report highlighted the UK government’s commitment to introduce mandatory climate-related financial reporting, with a “significant portion” in place by 2023, and mandatory requirements across the UK economy by 2025. The Interim Report considered regulatory steps around tackling climate change, and also identified proposed legislative changes from the Department for Business, Energy and Industrial Strategy (which is intending to consult in the first half of 2021 on changes to the Companies Act 2006 to insert requirements around the TCFD recommendations on compliant disclosures in the Strategic Report of companies’ Annual Reports and Accounts, including large private companies registered in the UK).
  • The Taskforce strongly supports the International Financial Reporting Standards Foundation’s proposal to create a new global Sustainability Standards Board on the basis that internationally agreed standards will help to achieve consistent and comparable reporting on environmental and, social and governance (ESG) matters.

BoE

  • The BoE reaffirmed its commitment to driving forward the business world’s response to tackling climate change and reiterated the importance of data and disclosure in firms’ attempts to manage climate risk.
  • The BoE announced that the delayed climate risk stress test (its biennial exploratory scenario dubbed “Climate BES”) for the financial services and insurance sectors would be carried out in June 2021.
  • While the Climate BES will not be used by the BoE to size firms’ capital buffers, the BoE has put down the marker that it expects firms to be assessing the impact of climate change on their capital position over the coming year and will be reviewing firms’ approaches in years to follow.
  • The BoE also directed financial firms and their clients to the TCFD recommendations to encourage focus and drive decision-making, pointing to the benefits that the BoE has itself felt from reporting this year in line with the TCFD recommendations.

FCA

  • The FCA confirmed that from 1 January 2021 new rules will be added to the Listing Rules requiring premium-listed commercial company issuers to report in line with the TCFD recommendations. As anticipated by last year’s Feedback Statement, the new rule will be introduced on a ‘comply or explain’ basis. The general expectation is that companies will comply, with expected allowances for modelling, analytical or data based challenges. It is expected that these allowances would be limited in scope. The Taskforce’s Interim Report notes that the FCA is considering providing guidance on the “limited circumstances” where firms could explain rather than comply. A full policy statement and confirmation of the final rules are expected before the end of 2020.
  • The FCA is also intending to consult on “TCFD-aligned disclosure” by asset managers and life insurers. These disclosures would be aimed at “clients” and “end-investors”, rather than shareholders in the firm itself. The consultation is intended for the first half of 2021 and is stated that “there will be interactions with related international initiatives, including those that derive from the EU’s Sustainable Finance Action Plan” (it should be noted that such standards cover much more than climate disclosures). Current indications are that these disclosure standards would come into force in 2022.
  • The FCA is co-chairing a workstream on disclosures under IOSCO’s Sustainable Finance Task Force, with the aim of developing more detailed climate and sustainability reporting standards and promoting consistency across industry.

FRC

  • The FRC emphasised that all entities (boards, companies, auditors, professional advisers, investors and regulators) needed to “do more” to integrate the impact of climate change into their decision making. One of the FRC’s ongoing workstreams is investigating developing investor expectations and better practice reporting under the TCFD recommendations.

Regulatory reporting requirements and litigation risks for issuers

The recent announcements are a reminder by the UK’s financial regulators that issuers must look beyond the current Covid-19 crisis to the oncoming climate emergency. It is clear that not engaging is not an option, even as the regulatory environment continues to change. Issuers and firms will therefore want to consider the impact of those disclosure requirements/suggestions across the board, from investor interactions to regulatory reporting to meeting supervisory expectations.

As the sands shift, issuers may also want to consider what, if any, litigation risk may arise in connection with climate-related disclosures (and indeed other sustainability related disclosures that are brought out from the shadows with these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) where we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Nish Dissanayake

Nish Dissanayake
Partner
+44 20 7466 2365

Nihar Lovell

Nihar Lovell
Senior Associate
+44 20 7374 8000

Sousan Gorji

Sousan Gorji
Senior Associate
+44 20 7466 2750

Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis

The Journal of International Banking Law and Regulation (JIBLR) has published an article written by members of our securities class action practice: Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis.

Covid-19 will make it inevitable that some companies will need to bolster their capital positions, which will lead to rights issues and other forms of capital raising later this year and into 2021. On the other hand, there will be other companies who emerge from the immediate crisis and identify opportunities to gain market share or pursue other strategic goals through mergers and acquisitions. The article considers class action specific issues which companies may face during these types of transaction. There are certain parallels which may be drawn between the current environment and the financial crisis, and the article identifies learning points from the two class actions commenced in the English courts following major transactions in the run-up to and at the height of the financial crisis—the Royal Bank of Scotland rights issue and Lloyds’ acquisition of HBOS.

In particular, the article considers:

  • The legal tests governing what information is required to be disclosed;
  • Relevant considerations when information is excluded from public disclosures;
  • Forward-looking guidance;
  • Specificity of risk factors;
  • The impact of timetable pressure;
  • Working capital statements;
  • Recommendations to shareholders; and
  • Regulator capriciousness.

Please contact Ceri Morgan if you would like to request a copy of the full article.

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Chris Bushell

Chris Bushell
Partner
+44 20 7466 2187

Sarah Penfold

Sarah Penfold
Senior Associate
+44 20 7466 2619

Climate-related disclosures: the new frontier?

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the Financial Conduct Authority (FCA)’s proposals for regulating climate-related disclosures and the litigation risks which may arise for issuers from such proposals.

Climate change has been part of the political and regulatory discourse for years. However, it is an issue which is gaining increasing prominence on the global stage. Over a thousand companies now support the Task Force on Climate-related Financial Disclosures (TCFD)’s recommendations, while shareholder activism in the climate arena is stretching beyond Greenpeace’s proposed resolutions at energy companies’ AGMs. Against this backdrop, both the EU and the UK have advocated for adapting their financial systems to address climate risks. Whilst the European Central Bank and Bank of England are addressing the risks from climate change in their financial systems, attention has also turned to how companies themselves can be affected by climate change, both in terms of risk assessment and management, and in terms of investor and market-facing disclosures. The current legal framework regarding issuer disclosure already provides some requirements for issuers to disclose climate-related risks in certain circumstances. However, the existing disclosure requirements fall short when it comes to consistent and meaningful disclosures. There are therefore systemic and policy drivers to increase transparency, reporting and potential regulation in this space.

The FCA has noted that voluntary adoption of the TCFD’s recommendations has been increasing. However, based on the feedback that the FCA received in response to a 2018 Discussion Paper, the FCA considers that there is evidence to support the case for it to intervene to accelerate such progress.

In our article, we examine the existing disclosure requirements for issuers, the FCA’s new proposals for regulating climate-related disclosures, the FCA’s reasons behind the proposals, how issuers will be impacted by the proposed regulatory change, the litigation risks which may arise for issuers and how issuers can mitigate against such litigation risks.

This article can be found here: Climate-related disclosures: the new frontier? This article first appeared in the October 2020 edition of JIBFL.

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Nihar Lovell

Nihar Lovell
Senior Associate
+44 20 7374 8000

Sousan Gorji

Sousan Gorji
Senior Associate
+44 20 7466 2750

Securities class actions in England and Wales: the challenges for funders and a perspective from Australia

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the principal characteristics of third party litigation funding in the securities class action markets in Australia and England and Wales.

In Australia, the rise of securities class actions over the last decade has been driven in part by the presence of an active third party litigation funding market: every shareholder class action to date has been backed by litigation funders. In England and Wales, securities class actions are a more recent trend (but rapidly growing), in which third party litigation funders are increasingly taking an active role.

In our article, we compare and contrast how recent case law developments in Australia and England and Wales may impact the approach adopted by third party litigation funders to securities class actions, and therefore the risks faced by listed companies in each of these jurisdictions.

This article can be found here: Securities class actions in England and Wales: the challenges for funders and a perspective from Australia. This article first appeared in the September 2020 edition of JIBFL.

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Hannah Lau

Hannah Lau
Associate
+44 20 7466 2314

The Tesco Litigation: lessons learned from split trial orders in the context of securities class actions

The long-running Tesco Litigation (a securities class action brought by shareholders under section 90A Financial Services and Markets Act 2000 (FSMA)) has reached the Pre-Trial Review stage and there are a couple of snippets arising from the PTR judgment which will be of interest to those who follow the development of the class action landscape in the UK: Manning & Napier Fund, Inc & Anor v Tesco plc [2020] EWHC 2106 (Ch).

First, it is apparent from the judgment that one of the claimant groups (the group of shareholders represented by Stewarts Law) have settled their claims (on confidential terms) with Tesco, leaving the Manning & Napier Fund and Exeter Trust Company claimants (represented by Morgan Lewis, the MLB Claimants) to continue alone. One potential reason for the difference in approach to settlement (at least for now) may be the difficulties which one of the MLB Claimants appears to have in establishing its reliance on the alleged disclosure defects, highlighting the critical importance of that battleground in these types of claim.

Second, the court’s decision brought into focus a key case management decision for securities class actions; whether the trial will be split and, if so, what the precise split of issues to be determined should be.

In this blog post, we consider the relevance of the different elements of the typical causes of action pursued in shareholder claims to parties’ preference for a split trial, and the approach the court has adopted to date in the key securities class actions which have progressed through the courts of England and Wales.

Key elements of shareholder claims

A securities class action brought under section 90A FSMA (as in the Tesco Litigation) or under common law (such as a negligent misstatement, as was the case in the Lloyds/HBOS Litigation) requires claimants to establish that:

  • There was a defect in the disclosures made with the requisite degree of fault on the part of relevant officers of the company;
  • The claimants relied on the alleged defect in their investment decision;
  • The claimants suffered loss; and
  • This loss was caused by the defect (i.e. but for the alleged breach by a defendant, the claimants would not have suffered that loss).

The enquiry into the existence of a defect and establishing the requisite knowledge and fault on the part of the company will inevitably focus principally on the position and conduct of the company, placing a heavy burden in the production of documentary and witness evidence squarely on the defendant(s) in a securities class action.

By contrast, the need for the claimants to prove reliance involves an enquiry into their investment decision-making and, as we have commented previously, courts have been clear that claimants will not be able to side-step the need to undertake an appropriate search for documents and produce witness evidence in support of their case on this issue (see our previous blog posts: The Lloyds/HBOS litigation: The first shareholder class action judgment in England & Wales and High Court orders claimants to provide disclosure to prove investment decisions were made in reliance on defective publications in the Tesco section 90A FSMA group litigation).

Claimants will also need to incur substantial time and expense in preparing the evidence which is required to establish causation and loss, a large part of which will be expert in nature but may also include (as is the case in the Tesco Litigation – see below) evidence about the alternative investments which the claimants may allege they would likely have made but for the defects.

Accordingly, it is natural for the question of a split trial to be a key case management battleground for parties seeking a strategic, as well as practical, advantage: claimants will often seek to defer the expenditure of the costs involved in establishing reliance, causation and loss to a later trial and have the focus of trial one solely on the defendants’ conduct.

Approaches to split trials in securities class actions to date

It is interesting, therefore, to compare the different approaches taken by the courts in the cases which have been pursued to date on this critical case management question:

  • In the RBS Rights Issue Litigation, only questions of breach were going to be determined at the first trial. This was in large part because the defendants accepted that section 90 FSMA (which governs claims for prospectus liability) did not require the claimants to establish that they relied on any defects in the disclosures. Accordingly, the court was persuaded that, for reasons of efficiency, the difficult questions of causation and loss could be held over until a second trial (if that was necessary based on the finding in trial one). Given the breadth of the issues in the case and hence the number of permutations of potential findings on questions of breach, it was simply unworkable for issues of causation and loss to be prepared for a unitary trial (for example, involving expert reports) on the basis of assumptions as to what findings the court might make at trial on questions of breach. However, this had a clear strategic benefit for the claimants who were able to focus all of their resources on seeking to establish that there had been disclosure breaches. Indeed, in contrast to the enormous volume of documents which the defendants had to search for and ultimately disclose, the claimants were required to produce no disclosure whatsoever for the purposes of trial one.
  • By way of contrast, in the Lloyds/HBOS Litigation, the defendants successfully resisted attempts by the claimants to seek a split trial. The question of whether the claimants relied on the alleged defects was an essential part of the liability question. Moreover, the evidence on causation and loss was bound up in the important question about the materiality of the information which was said to have been omitted (an essential element of establishing breach) since proving loss largely depended on the market reaction when the information was subsequently disclosed.
  • In the Tesco Litigation, the claimants initially proposed a split trial along similar lines to the RBS Rights Issue Litigation so that the first trial focused only on the allegations of breach and all other issues (including reliance, causation and loss) would be dealt with at a second trial. However, at the first CMC the court ordered a single trial, reserving only the question of whether “quantum calculation issues” should be decided separately. Accordingly, issues of reliance and causation fell within the scope of the first trial (reflecting the centrality of those questions to any claim under section 90A FSMA). At the second CMC, the court ordered that “issues of quantum calculation shall be dealt with at a subsequent hearing, if necessary”. As a result (and borne out in the disclosure issues which have led to various case management judgments during the lead up to trial), the claimants have not been able to defer production of evidence on these issues and, at the upcoming trial, reliance and causation issues will no doubt feature heavily in the course of evidence and argument. Indeed one of the issues at the PTR was a specific disclosure application by Tesco for documents relating to whether the relationship between one of the MLB Claimants and its investment adviser was one of agency such that any reliance which the adviser placed on the defects when making investment decisions would meet the reliance requirement of section 90A. The judge made the order, noting that the issue was “an important one capable of being determinative”.

Cautionary note: the importance of precision in your case theory

One of the issues which arose at the PTR in the Tesco Litigation highlights the importance of precisely analysing the elements of a claim which parties need to establish at a trial. This need is particularly acute when a trial is split:

  • The MLB Claimants’ primary loss claim is calculated by reference to the difference between the purchase price of the Tesco shares and the value of those shares on 23 October 2014 (when Tesco disclosed the “expected impact” of the £263 million overstatement in its previous profits guidance statements). In addition to this primary loss claim, the MLB Claimants are claiming for loss of profits they allege they would or might have made had their money not been invested in Tesco.
  • Although the loss of profits claim requires a loss calculation, which will be determined (if necessary) in the second trial, it also gives rise to questions of reliance and causation, which are issues which were ordered to be dealt with at the first trial.
  • It appears from the judgment that the MLB Claimants mistakenly assumed that all aspects of the loss of profits claim would be dealt with at the second trial and their witness evidence had not, therefore, addressed what alternative investments the MLB Claimants would have been made. Accordingly, in the absence of such evidence, the loss of profits claim would have to fail at trial.
  • At the PTR, the MLB Claimants sought permission to rely on evidence in relation to the loss of profits claim, which had been adduced out of time. The court viewed the application as a question of relief from sanctions, rather than an application for permission out of time, and was critical of the MLB Claimants failing to appreciate that such an application was necessary much sooner.
  • The court has given the MLB Claimants a short timeframe (until 14 August 2020) to provide relevant disclosure evidence in support of its loss of profits claim, but the application will be refused if the resulting extra work for Tesco in processing the disclosure is not fairly and proportionately manageable.
  • The court was reluctant to make an order, given that it will likely deprive the MLB Claimants of the chance to obtain full recovery of its losses, but gave significant weight to Tesco’s objections that any substantial exercise would distract them from trial preparation.
Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Harry Edwards

Harry Edwards
Partner
+61 448 072 588

Ceri Morgan

Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Sarah Penfold

Sarah Penfold
Senior Associate
+44 20 7466 2619

Herbert Smith Freehills contributes chapter to The Securities Litigation Review (6th Edition)

Herbert Smith Freehills have contributed the England and Wales chapter of The Securities Litigation Review. Now in its sixth edition, The Securities Litigation Review, edited by William Savitt of Wachtell, Lipton, Rosen & Katz, is a guided introduction to the class action regimes for securities claims in the key jurisdictions across the globe, providing a valuable resource for corporates and financial institutions who might face such claims.

Download Chapter

Reproduced with permission from Law Business Research Ltd.This article was first published in June 2020. For further information please contact Fraser.mcintosh@lbresearch.com

Previous Editions:

5th edition, 2019

4th edition, 2018

3rd edition, 2017

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Jon Ford

Jon Ford
Senior Associate
+44 20 7466 2539

What does Lloyds/HBOS tell us about sections 90 and 90A of FSMA?

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law considering how the findings in Sharp v Blank [2019] EWHC 3078 (Ch) (also known as The Lloyds/HBOS litigation) may be of assistance in interpreting sections 90 and 90A of the Financial Services and Markets Act 2000.

Lloyds/HBOS is the only securities class action to have reached trial in England and Wales to date. While this case considered the common law duty not to negligently misstate and equitable duty to provide shareholders with sufficient information, there are parallels between these duties and the bases for shareholder claims found in the statutory regime under sections 90 and 90A FSMA.

The article can be found here: What does Lloyds/HBOS tell us about sections 90 and 90A of FSMA? This article first appeared in the February 2020 edition of JIBFL.

Harry Edwards

Harry Edwards
Partner
+61 3 9288 1821

Sarah Penfold

Sarah Penfold
Associate
+44 20 7466 2619

Ceri Morgan

Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

High Court orders claimants to provide disclosure to prove investment decisions were made in reliance on defective publications in the Tesco section 90A FSMA group litigation

In the claims brought by shareholders of Tesco under section 90A Financial Services and Markets Act 2000 (“FSMA”) relating to false and misleading statements allegedly made by Tesco regarding its commercial income and trading profits in 2014, the High Court has ordered that the claimants must provide disclosure of documents that will assist the court in determining whether their investment decisions were made in reliance on the defective publications: SL Claimants v Tesco plc; MLB Claimants v Tesco plc [2019] EWHC 3315 (Ch).

In summary, the court considered, amongst other matters, an application by Tesco for disclosure relating to the claimants’ investment decisions.

The court found that the claimants must take additional steps to search for documentary evidence which would allow the defendants to test whether their investment decisions were made in reliance on defective publications. The court made the points that “reliance will ultimately have to be established in the case of each investor” and “the documents seemed to be as necessary for the purposes of establishing as they are for rebutting the reliance case”.

The decision is significant because of the approach that the court took to the question of reliance under section 90A FSMA. There have been steps taken by claimants in section 90A cases (including in the Tesco case) to argue that there are alternatives to the requirement that each claimant must individually prove reliance. In the Tesco case, for example, an argument based on the US ‘fraud on the market’ theory was pleaded but then abandoned at an early Case Management Conference. This latest decision, in the context of a disclosure application, appears to suggest that attempts to circumvent the reliance requirement will continue to be difficult.

The additional implication of this disclosure order is that future shareholder class actions are likely to be more costly to pursue. If exhaustive searches for documents are ordered, the shareholders (and the litigation funders who typically support these claims) may need to invest significantly more funds to get the claim through to trial.

Harry Edwards

Harry Edwards
Partner
+44 20 7466 2221

Sarah Penfold

Sarah Penfold
Associate
+44 20 7466 2619

Ceri Morgan

Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

First securities class action judgment in Australia

The Australian Federal Court has recently handed down judgment in the first securities class action in Australia to reach trial: TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747.

The decision is likely to be of interest from a UK securities litigation perspective. A briefing paper setting out the observations and insights of our Australian colleagues is now available to download: Myer Shareholder Class Action: Briefing Paper (October 2019).

Simon Clarke

Simon Clarke
Partner
+44 20 7466 2508

Harry Edwards

Harry Edwards
Partner
+44 20 7466 2221

Ceri Morgan

Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

Sarah Penfold

Sarah Penfold
Associate
+44 20 7466 2619