FCA sets out proposals to extend climate-related disclosure rules as countdown to COP26 begins
By Mark Wolff , Bovill
Published: 20 September 2021
The UK’s FCA recently published two consultation papers setting out its proposals to extend the climate-related disclosures rules for companies with premium UK listings, to companies with a standard listing (CP21/18) and to asset managers, life insurers, and FCA-regulated pension providers (CP21/17). Importantly, the new rules will apply to:
- UK AIFMs (full-scope and sub-threshold)
- UCITS management companies and self-managed UCITS funds
- Discretionary portfolio managers
However, the new rules will not apply to UK-based asset managers that have less than £5 billion of assets under management (calculated on a rolling three-year basis). Nevertheless, this would be a significant extension of the scope of disclosure rules, and we are likely to see firms investing in significant resource to ensure compliance.
The publication of these consultation papers comes as part of a recent flurry of ESG-related activity ahead of the UK’s hosting of COP26 in Glasgow in the Autumn and ties into the UK government’s overarching net-zero carbon emissions by 2050 commitment.
The new disclosure rules are designed to align with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations, published in 2017, and with HM Government’s intention to make TCFD-aligned disclosures mandatory across most industries and include all listed companies, large private businesses and regulated financial services companies by 2025. Many requirements will be in place by 2023 – as described in the government’s roadmap to mandatory climate-related disclosures document, published in November 2020.
The FCA’s climate-related disclosure regime overlaps with the EU’s Sustainable Finance Disclosure Regulation (SFDR), the main entity-level provisions (the Level 1 provisions) of which came into force on 10 March 2021 in the EEA. This, however, was not onshored into UK law post-Brexit. Though compliance with the provisions of SFDR are not required by the FCA, UK firms are still required to comply with its provisions when marketing products and services into the EEA. In contrast, the UK climate-related disclosure requirement will not apply to non-UK firms which market relevant products and services on a cross-border basis into the UK.
Though both the SFDR and UK climate-related disclosure regimes are concerned with sustainability disclosures, the UK regime is considerably narrower in scope, as it only deals with climate-related issues. In contrast, SFDR imposes disclosure requirements in relation to the wider environmental, social and governance (ESG) aspects of sustainability.
In addition, the approach that the UK has taken in relation to disclosure is markedly different than that of the SFDR. While the SFDR piggybacks on the EU Taxonomy Regulation, which attempts to classify all or most economic activities in terms of ESG factors and is highly prescriptive, the UK regime (and TCFD) is principles based, allowing more flexibility in how it is employed by firms. Though the contents of the disclosures under the UK regime are more prescriptive than the SFDR counterparts, it is likely be a more universal (and potentially useful) standard for disclosure because TCFD has been largely embraced by many countries around the world.
In practice, the new UK climate-related disclosure regime will mean that asset managers, life insurers and FCA-regulated pension providers will need to publish (on their website) an entity-level annual report which describes how they take climate-related risks and opportunities into account in managing or administering investments on behalf of their clients and consumers. This report, called the entity-level disclosures, will also need to be accompanied by a product or portfolio-level disclosure report that contains a minimum baseline set of consistent, comparable disclosures, which include a core set of metrics.
The purpose of the entity-level disclosures will be to provide information to firms’ clients (as well as consumers) on how firms go about managing climate-related risks and opportunities for the firm itself and its clients – and hence make relevant decisions when selecting products and services.
The entity-level disclosure report will require firms to cover (in a manner consistent with the TCFD recommendations) how their governance arrangements, corporate strategy, risk management systems incorporate climate-related issue as well as the metrics and targets used to measure the firm’s performance in these areas (including scope one, two and,if appropriate, three greenhouse gas emissions levels). Furthermore, firms will also need to disclose how they use scenario analysis to evaluate the risks/rewards presented to the firm. Finally, a senior manager of each firm will be required to sign a compliance statement that confirms the disclosures meet the new requirements.
In terms of the product or portfolio-level disclosures required under the new UK regime, the focus is on reporting of core greenhouse gas and carbon emissions metrics according to recommended TCFD methodologies. Total greenhouse gas emissions, total carbon footprint and weighted average carbon intensity need to be computed and disclosed in accordance with both TCFD and SFDR methodologies. Though product/portfolio level disclosures must be made to investors of in-scope firms, firms will not have to make these disclosures public for portfolio management services or unauthorised and unlisted AIFs.
The UK climate-related disclosures are set to be phased in over the next few years. While the rules will first apply on 1 January 2022, the deadline for publishing the first disclosure reports will not be until 30 June 2023 for asset managers with more than £50 billion in AuM. Firms with more than £5 billion under management, but less than £50 billion will have until 30 Jun 2024 to publish their first disclosure reports.
The FCA has acknowledged that firms will likely need to comply with multiple ESG disclosure regimes in relation to their international businesses – indeed, one of its aims in adopting a TCFD-aligned regime is to promote compatibility with the most common global approach. Nevertheless, it will likely take considerable resource for firms to ensure compliance with each disclosure regime that they are subject to.