21 December 2021 Victoria Hickman Environment and Climate Change - Financial Regulation

FCA finalises TCFD disclosure rules for FCA regulated asset managers and standard listed companies

On 17 December 2021, the FCA published two policy statements finalising its climate-related financial disclosure rules for (i) asset managers, life-insurers, FCA-regulated pension providers; and (ii) issuers of standard listed equity shares. The FCA consulted on the rules in June 2021 (see our earlier briefing note). 

This note focusses on the first policy statement.

FCA-regulated asset managers and asset owners, including life insurers and pension providers, will have to disclose how they take climate-related risks and opportunities into account in managing investments. They’ll also have to make disclosures about the climate-related attributes of their products. 

Following the feedback received to its consultation paper, the FCA has made some helpful changes and provided additional guidance. These are summarised below:

  • Data gaps and use of proxies/assumptions: The FCA has added further rules and guidance to clarify that it will not require firms to disclose information (e.g., 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. The FCA also clarifies that it expects such data gaps or methodological challenges to be transitional and consider that they are only likely to arise in relation to certain asset classes. The FCA also require firms to explain where and why they have not been able to disclose, as well as the steps they will take to improve the completeness and the quality of disclosure.
  • Core and additional metrics: Given the FCA’s policy approach is to remain consistent with the TCFD framework, it is only mandating disclosure of core metrics using TCFD methodologies. It has also amended the requirement to disclose additional metrics from a ‘best efforts’ basis to ‘as far as reasonably practicable’.
  • Transition plans: The FCA has added an additional guidance provision to clarify that a firm headquartered in, or operating in, a country that has made a commitment to a net zero economy is encouraged to consider the extent to which it has considered that commitment in developing and disclosing its transition plan.
  • On demand: The FCA have amended the ‘on demand’ obligation to require that firms provide a report to clients at a single reference point consistent with public disclosures, or at a date agreed between the client and the firm, and in a ‘reasonable’ format. The FCA reiterates that its rule on the provision of additional underlying climate-related data to clients is limited to where reasonably practicable and permitted under licensing arrangements.
  • Scope: The FCA has made some technical amendments to clarify its intended scope of firms and products. It will review the £5 billion AUM exemption threshold after 3 years of disclosures.

Timing

There is a phased approach to implementation:

  • from 1 Jan 2022 for large UK asset managers (i.e. enhanced SMCR firms that have AUM of more than £50 billion) and large asset owners (i.e. FCA regulated life insurers and pension providers that have £25 billion or more assets under management / administration) – with the first annual report due by 30 June 2023;
  • from 1 Jan 2023 for all other UK asset managers and asset owners that aren’t excluded under the £5 billion threshold above - with the first annual report due by 30 June 2024.

The FCA will publish a consultation paper in Q2 2022 on policy proposals on how Sustainability Disclosure Requirements  can build on its TCFD-aligned disclosure rules and guidance.

The FCA also confirms that it will introduce a new ESG Sourcebook to the FCA Handbook containing the rules and guidance for asset managers to make disclosures consistent with the TCFD’s recommendations.

FCA policy statement PS21/24 is available here.

The FCA press release is available here.