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Climate Financial Risk Forum (CFRC) Guide – Disclosures and Managing Legal Risks

13 October 2021

Managing legal risks for liabilities for ESG related disclosures and reporting was a key aspect considered by the CFRC. Financial institutions should take their reporting duties seriously and consider what disclaimer language may be included in TCFD reporting and other climate and ESG disclosures.

The CFRC has considered the legal risks and liabilities associated with ESG related disclosures and reporting duties for financial institutions.

For example, failure by a UK listed company to disclose a climate-related risk in its annual report could potentially involve a range of corporate liabilities under UK law if not considered appropriately, inter alia:

  • Criminal liability for breach of provisions of the UK Companies Act 2006;
  • Civil liability of its directors to the company for false or misleading statements liability of the company to investors either under general principles of liability for misstatement (for example fraud or tort)
  • Sanctions imposed by the FCA for listing rules breaches, transparency rules breaches or for market abuse.

It concluded that financial institutions should take their reporting duties seriously, if not already the case, and consider what disclaimer language may be included in TCFD reporting and other climate and ESG disclosures to address the data gaps and uncertainties that this reporting currently involves, and what disclosure can be made pertaining to the ESG data that is being relied upon for such reporting. In this current period where agreed definitions are still absent, there is, perhaps, greater responsibility and prudence to be exercised in the formulation of disclosures.

The Taxonomy Regulation identifies environmentally sustainable economic activities based on technical screening criteria set out in the Commission’s delegated acts developed under this Regulation. The first delegated act concerning the technical screening criteria for economic activities with significant contribution to climate change mitigation and adaptation (the ‘Climate Delegated Act’) was adopted on 4 June 2021.

Another Delegated Act concerning the technical screening criteria for the remaining four environmental objectives (‘the Environmental Delegated Act’) will be developed and adopted later.

The Delegated Act specifies the disclosure obligations under Article 8 of the Taxonomy Regulation. The rules set out in the Delegated Act allows companies to translate the technical screening criteria of the Climate Delegated Act (and the future Environmental Delegated Act) into quantitative economic performance indicators - the KPIs - which will be publicly disclosed (e.g. the percentage of environmentally sustainable economic activities in a company’s turnover or capital expenditure). This disclosure will help investors and the public to understand the companies’ trajectory towards sustainability through the annual publication of their KPIs associated with environmentally sustainable economic activities.

The Delegated Act will therefore increase transparency in the market and help prevent greenwashing by informing investors about companies’ environmental performance.

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