The FCA proposes enhanced climate-related disclosures by asset managers, life insurers and pension providers

In June 2021, the Financial Conduct Authority (FCA) published a consultation paper CP21/17 outlining proposed financial disclosures rules and guidance for asset managers, life insurers, and FCA-regulated pension providers. 

The proposals are primarily intended to promote competition in the interests of clients and consumers as they will be better equipped to interrogate firms’ offerings and better protect themselves against unsuitable products. The proposals also seek to enhance the market’s integrity, allocate more effectively capital across companies and projects and ultimately facilitate the transition to a low-carbon economy. The proposed disclosures will indeed encourage financial market players to embrace change, and develop and deliver products that align with a net-zero emissions objective.

This consultation paper was built in line with the recommendations of the Financial Stability Board’s TCFD.

Adapting existing rules

As a first step, the FCA studied the existing disclosure regimes to ensure consistency among them. As a result:

1. The FCA proposed to extend the existing TCFD Listing Rule for premium listed companies to include UK standard listing commercial companies, excluding standard investment listed companies and shell companies.
2. The FCA proposed to make mandatory disclosures across all the 4 TCFD pillars beyond Principles for Responsible Investment (PRI) signatories. 
3. The EU SDFR applies to a wide range of financial market actors but there is no obligation for UK authorised firms, carrying on business in the UK, to comply. However, firms conducting cross-border business may have considered their obligations under SFDR. Thus, where disclosure requirements under EU rules cover matters like those under TCFD, the FCA aims to ensure consistency with the EU and internationally.
4. Finally, the FCA considered the DWP’s draft regulations to ensure their recommendations align with trustees’ information needs.

Addressing market failures

A consumer’s ability to make informed investment decisions can be impaired by the lack of coordination between clients and customers, asymmetries of information and the lack of comparability between firms. This gives rise to risks such as clients engaging firms that do not adequately manage climate-related risks and opportunities, consumers buying unsuitable products and capital not allocated efficiently towards less carbon-intensive projects and activities.

A coordinated flow of information along the investment chain, as well as high-quality climate-related disclosures, would lead to an enhanced market integrity in which asset pricing and capital allocation are better informed. Greater transparency about how firms are managing climate-related risks and opportunities would also lead to better outcomes for clients and consumers who would consider climate matters when granting investment mandates and selecting products. To meet these new requirements, financial services firms would therefore develop products that better meet consumers’ climate-related preferences.

The FCA also believes that the product-level information included in firms’ disclosures could be used as a basis for potential future product labels and would raise general awareness about climate-related risks.

Cost-benefit analysis

The proposed disclosures would lead to additional investments for firms but the FCA expects the benefits to investors and the wider market to outweigh the costs. Moreover, the financial risks of climate change explain the FCA’s willingness to implement these measures despite the costs associated with regulatory changes.

Firms and products in scope

The FCA’s intention is to cover the full range of asset management activities conducted in the UK. The proposals will directly affect:

• Asset managers, including portfolio managers, UK UCITS management companies, full-scope UK AIFM or small authorised UK AIFM
• Asset owners - excluding defined benefit (DB) schemes- who often manage assets with longer investment horizons, which may be particularly affected by the risks and opportunities associated with climate change;
  • life insurers (including pure insurers) 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
• FCA-regulated pension providers.

The products and portfolios directly within scope are:

• Authorised funds, excluding feeder funds and sub-funds in the process of winding up or termination
• Unauthorised Alternative Investment Funds (AIFs)
• Portfolio management services.

Asset managers and asset owners that have less than £5 billion in assets under management or administration on a 3-year rolling average, to be assessed annually, are not included.

Key elements of the proposals

The FCA believes that introducing a climate-related financial disclosure regime will foster the movement towards a decarbonised economy. To reach these goals, the FCA proposed two components:

1. Entity-level disclosures: Firms would publish an annual entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers. A scenario analysis will be required to explore the impact of climate-related risks over time. If the firms have not set climate-related target, they must explain why not. Otherwise they must describe it and include KPIs used to measure progress. These disclosures should be made in a prominent place on the firm’s main website and would cover the approach to all assets managed. 
2. Product or portfolio-level disclosures: Firms would produce an annual baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics. 

Depending on the type of firm and/or product or portfolio, these disclosures would either be published in a TCFD product report in a prominent place, while also being cross-referenced in client communication, or be made available upon request to certain institutional clients. In addition, all in-scope firms should provide data on the underlying holdings of their products to clients that request it to satisfy their own climate-related financial reporting obligations.

Core metrics

Having defined core metrics will foster comparability, support the flow of information along the investment chain and help for future product labels.

Selected metrics include scope 1, 2 and 3 greenhouse gas emissions, total carbon emissions, carbon footprint and weighted average carbon intensity (WACI). These metrics must be supported by contextual information to explain their scope and significance including historical time series for comparison.

Firms can report additional metrics on a ‘best effort basis’; such as Climate Value-at-risk, metrics showing the climate warming scenario with which a product or portfolio is aligned e.g. Implied Temperature Rise and any other metrics that firms consider would be helpful for investment decision-making.

Timing of implementation

A proposed first phase would be effective from 1 January 2022 for the largest firms comprising asset managers with assets under management of more than £50 billion and asset owners with £25 billion or more in assets under management or administration in relation to in-scope business. The disclosures would be made by 30 June each calendar year with the first publication before 30 June 2023. In the case of ‘on demand’ disclosures to institutional clients, firms will have to provide the requested information from 1 July 2023.

The second proposed phase would be effective from 1 January 2023 for the remaining firms above the £5 billion threshold for both asset managers and asset owners. Subsequent disclosures would be made by 30 June each calendar year thereafter. In the case of ‘on demand’ disclosures to institutional clients, firms will have to provide the requested information from 1 July 2024.

The FCA is considering allowing disclosures made at group level or other level of consolidation.

Data availability

The FCA concedes that there will be data gaps at the investee company level for as long as relevant climate-related disclosures are not mandatory. However, firms may use proxy data or make assumptions to address any gaps provided that the methodologies used are transparent, highlight the limitations of the approach and provide relevant contextual information.

As for private markets, where reporting is less developed, the FCA also recognises that proxy data as well as assumptions can be alternative solutions.

Timing

The consultation paper requests feedback on proposals and questions by 10 September 2021. Subject to feedback, the FCA aims to publish a Policy Statement later in 2021.