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Freshfields Sustainability

| 3 minutes read

FCA consults on proposals for Environmental, Social and Governance Sourcebook

The FCA has published a consultation paper  (CP 21/17) setting out its proposals to introduce new, climate-related financial disclosure rules and guidance for asset managers, life insurers and FCA-regulated pension providers. The proposals are aligned with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

Key elements 

The FCA proposes requirements for disclosures to be made at two levels:

Entity-level disclosures: Firms would be required to publish, in a prominent place on their websites, annual TCFD entity-level reports on how they take climate-related risks and opportunities into account when managing or administering investments on behalf of clients and consumers.

Product or portfolio-level disclosures: Firms would be required to produce, on an annual basis, a baseline set of consistent, comparable disclosures in respect of their products and portfolios. The FCA proposes a baseline of core, mandatory, carbon emissions and carbon intensity metrics that in-scope firms would be required to disclose.


The proposals will cover 98 per cent. of assets under management in both the UK asset management market and held by UK asset owners, amounting to £12.1 trillion in assets managed in the UK. The proposals will not apply to firms with less than £5 billion in assets relating to relevant activities.

The rules and guidance will be set out in a new ‘Environmental, Social and Governance (ESG) Sourcebook’ in the FCA Handbook. The proposals in the consultation paper relate only to climate-related disclosures, but the FCA anticipates that the ESG Sourcebook will expand over time to cover other climate-related issues and wider ESG topics.

Key outcomes 

The FCA is seeking three primary outcomes through these new rules:

  • better outcomes for clients and consumers: greater transparency will help clients and consumers take climate-related risks and opportunities into account when granting investment mandates and selecting products. It will also allow them to hold their providers to account;
  • deeper consideration of climate-related risks and opportunities by in-scope firms: the proposals promote a structured approach to considering climate-related risks and should encourage an ‘ecosystem’ of service providers to develop analytical tools, data, guidance and thought-leadership; and
  • coordinated information flow along the investment chain:  this would support the assessment of climate-related risks and opportunities associated with investments.

Interaction with existing regulation  

The FCA has taken into account other related requirements to which firms may be subject in their cross-border business, such as the EU Sustainable Finance Disclosure Regulation (SFDR). These proposals aim to ensure coherence with existing requirements on firms in this area and the FCA will continue to consider the interaction with such rules as the Government develops its policy position.

Firms will welcome the flexibility of the proposals and the fact that they are less prescriptive than the requirements under SFDR. In particular, the FCA expressly recognises the difficulties firms may encounter where the available data is limited and proposes that firms should fill the gap by using assumptions and proxies. Further, although the disclosures are intended to be at entity-level, it is recognised that disclosures on climate-related matters are likely to be relevant to the firm’s global business activities. The FCA currently proposes to permit firms to make disclosures at the level of consolidation that the group considers would be most useful for clients and consumers, including by cross-referring to climate-related disclosures made by the group or an affiliate member of the group.

Nevertheless, it is worth noting that in some instances, firms or groups which are subject to SFDR requirements may need to comply with additional UK rules. For example, while firms are able to cross-refer to climate-related disclosures made by the group, this is only the case where those reports comply with the TCFD requirements, rather than the SFDR model. While there are some common elements between the TCFD’s recommendations and the SFDR standards, including certain metrics, there are some differences in calculation methodologies. Where calculation methodologies differ between the TCFD recommendations and the final report on the draft regulatory technical standards for the SFDR, the FCA proposes to require firms to report according to the formulas under both regimes. Therefore, while the UK proposals are generally quite flexible, they may still impose some additional reporting requirements on firms which already comply with SFDR obligations. Further differences between SFDR standards and the requirements under the UK proposals may emerge as the consultation progresses.

Timing of implementation 

The consultation closes on 10 September 2021, and the FCA aims to publish a policy statement later in 2021.

In line with the Government’s Roadmap towards mandatory climate-related disclosures across the UK economy, the FCA proposes to introduce the new rules and guidelines in two phases:

  • First phase: effective from January 2022: the rules would come into effect at this time for the largest, most interconnected firms. The publication deadline for the first disclosures for this group would be 30 June 2023.
  • Second phase: effective from 1 January 2023: the rules would take effect for the remaining in-scope firms from this date with a deadline of 30 June 2024 for the publication of the first disclosures.