The FCA have just announced a Prospectus Review. Specifically, we draw your attention to a key section in the FCA’s consultation document – pages 53/4 of CP24-12: Consultation on the new Public Trading Offers and Admissions to the Trading Regulations regime (POATRs) (fca.org.uk).  

The ‘two submissions’ referred to in 6.46 are from Carbon Tracker and Client Earth. In our view, this represents an important development because the ideas in these submissions would mean that – if agreed - oil, coal and gas companies would have to explain through a revision to the competent persons reporting regime why they believe the development of their reserves would be consistent with the goals of the Paris Climate Agreement,  not pose a risk to the remaining carbon budget, whilst protecting overall market integrity. 

We believe that this development should matter to you as an investor and we therefore wanted to encourage you to respond to the FCA consultation, which has a deadline of 18 October. 

Please find links to two documents in the “Key Resources”, prepared by Carbon Tracker and Client Earth,  which we hope will assist you. 

• Investor Briefing:  a condensed version of what matters and why 

• Investor response template: a suggested response format to make it easier for you to participate in the consultation 

The briefing will give you more detail.  The proposed atmospheric viability test (“AVT”) is a stress test of reserves viability against different demand scenarios such as IEA 1.5NZ, APS or similar recognised scenarios.  In short, we would make the following points which we hope will help to concentrate your mind on this issue: 

Why This Matters: 

• Enhanced Disclosure: The AVT will improve transparency on the financial risks of an accelerating energy transition and how it might lead to falling demand in pathways consistent with the Paris Climate Agreement, thus aiding better price discovery/valuation of fossil fuel reserves. 

• Investor Protection: Current disclosures are inadequate, exposing investors to climate-related financial risks in the form of potential write down of reserves, leaving the risk of stranded assets. 

• Market Integrity: The AVT supports a transparent investor marketplace based on accurate data, objective science-based stress tests informing on how risk is managed in prospectus disclosures, both crucial for the long-term stability of the London Stock Exchange Group (LSEG). 

• Investment Decision-Making: this will enable investors to make better capital allocation decisions in relation to the energy transition, allowing for the risks associated with viability of reserves production to be accurately priced.

Current Situation: 

• Fossil fuel companies on the LSEG do not currently consider “carbon budgets”, a methodology that connects climate science and production scenarios, when analysing and valuing reserves. 

The Proposal: 

• Introduce the AVT in the CPR to assess reserves viability under various climate scenarios and policy responses. 

Supporting the Proposal: 

• Less Prescriptive: Allows the investor to choose the transition speed its investor teams deem most likely. 

• Aligned: With the UK’s net-zero ambitions and the City of London’s goal to be a ‘net zero’ financial centre.