On 17 December 2021, the FCA released its rules and guidance (Policy Statement 21/24) for asset managers and certain FCA-regulated asset owners to make disclosures consistent with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. The requirements will be contained in the new Environmental, Social and Governance (ESG) Sourcebook in the FCA Handbook and will apply from 1 January 2022 for the largest in-scope firms and from 1 January 2023 for smaller firms above the £5bn AUM exemption threshold. The first public disclosures in line with the FCA’s requirements must be made by 30 June 2023.
The consultation process (see our previous blog on the consultation here) has resulted in some changes from the rules proposed by the FCA in the summer. The regulator has responded to a negative reception of certain points, most notably by clarifying the issue of data availability and the use of proxies and assumptions, as well as scrapping the requirement for certain firms to comply with both SFDR and TCFD methodologies.
Who will the new rules affect?
The rules will directly affect:
- Asset managers, made up of:
- investment portfolio managers;
- UK Undertakings for Collective Investment in Transferable Securities (UCITS) management companies;
- full-scope UK Alternative Investment Fund Managers (AIFMs);
- small authorised UK AIFMs; and
- Life insurers and FCA-regulated pension providers, made up of:
- life insurers (including pure reinsurers) in relation to insurance-based investment products and defined contribution (DC) pension products; and
- non-insurer FCA-regulated pension providers, including platform firms and Self-invested Personal Pension (SIPP) operators, to the extent that SIPP operators provide a ready-made selection of investments.
What are the requirements?
The rules require in-scope firms to make disclosures on an annual basis at:
- Entity level – an annual TCFD entity report published in a prominent place on the main website of the firm’s business setting out how climate-related matters are taken into account in managing or administering investments on behalf of clients and consumers. For firms which include a large UK company as parent, this regime will apply in addition to the TCFD reporting requirements for Strategic Reports to take effect through the Companies Act from next year, and where they also sit within a consolidated group listed on the Premium List, Listing Rule 9.8.6R will impose additional TCFD reporting requirements.
- Product level – disclosures (including a core set of climate-related metrics) on the firm’s products and portfolios made publicly in a prominent place on the main website of the firm’s business and included or cross-referenced in an appropriate client communication, or made upon request to certain eligible institutional clients.
How did the consultation process inform the rules?
Since the consultation in June 2021, the FCA has made several amendments to the finalised rules, in order to reflect issues raised in response to the consultation and in order to find a “balanced and proportionate approach” that continues to encourage progress on climate-related disclosures, while at the same time ensuring that disclosures remain fair, balanced and not misleading.
For example, limitations in data and methodological challenges were raised by multiple participants in the consultation, in particular regarding asset classes or companies for which there is limited information on which to base proxies and assumptions (such as asset-backed securities, currencies, private equity, venture capital and microcap companies amongst others). As a result, the FCA has clarified that it will not require firms to disclose information (eg in relation to metrics or quantitative scenario analysis or examples) if data gaps or methodological challenges cannot be addressed through use of proxies and assumptions, or if to do so would result in disclosures that are misleading. In acknowledging such transitional difficulties, the FCA has included a requirement that firms explain where and why they have been unable to disclose, as well as the steps they will take to improve the completeness and quality of disclosure.
Initially, the FCA proposed that metrics to be reported should be calculated according to both the TCFD and the EU Sustainable Finance Disclosure Regulation (SFDR) methodologies in order to promote consistency of disclosures across the EU and internationally. Following the consultation, the FCA acknowledged the concerns of respondents and amended the rule to require disclosure of metrics using the TCFD’s methodologies only. Some firms may still opt to disclose against both TCFD and SFDR methodologies, for example to meet EU client needs, but the fact this is no longer mandatory will be a welcome announcement for those who highlighted the costly and burdensome nature of reporting under both regimes.
The new rules represent a further step in the UK’s journey to make TCFD-aligned disclosures mandatory across the economy by 2025 and to support the transition to net zero by 2050. The Government’s introduction of economy-wide Sustainability Disclosure Requirements (SDR) (see our previous blog post on SDR here) will further build on the UK’s implementation of TCFD, as it expands the scope of disclosures over time to cover topics beyond climate change and will require disclosures related to firms’ impact on sustainability, as opposed to purely analysis of a firm’s financial risks and opportunities.
The FCA’s advice is that firms that are directly affected by the new obligations should familiarise themselves with the details of the rules and associated guidance, and consider what arrangements they need to ensure that they are able to meet the requirements.