UK watchdog beefs up climate-related disclosures

Like many other countries, the UK has been increasing disclosure of the risks and effects of climate change to promote sustainability across the financial chain and support its ambition to become a net-zero economy by 2050.

This is part of the government’s commitment to introduce mandatory disclosure obligations across the economy by 2025, aligned with the Task Force on Climate-related Financial Disclosures (TCFD). In December 2021, the Financial Conduct Authority (FCA) revealed its final rules (PS21/24) that require asset managers, life insurers, and FCA-regulated pension providers to disclose against the TCFD framework.

A new ESG Sourcebook

The mandatory disclosures, which will be required on an annual basis at both an entity and product level, were introduced via a new ESG Sourcebook to the FCA Handbook on 1 January 2022.

Firms must publish an annual TCFD entity report in a prominent area on their main website, explaining how they take climate-related matters into account when managing or administering investments. They must also include a statement to confirm their compliance with the rules.

Disclosures on products and portfolios, including a core set of climate-related metrics, must be made public on the company’s main website and be included in client communications. Disclosures should also be given to eligible institutional clients upon request.

After consulting the industry on its proposed rules last year, the FCA has made some important changes in the final version. For example, the watchdog will not require firms to disclose information on metrics or quantitative scenario analysis if it is not possible to address data gaps or methodological challenges through proxies and assumptions, or if doing so would create misleading disclosures.

However, firms must explain why they cannot disclose and what steps they will take to improve transparency.

Asset management firms with over £50 billion in assets under management (AUM), and FCA-regulated asset owner firms with over £25 billion, must comply with the rules from January 2022, while smaller entities have an additional year. The first public disclosures must be made by 30 June 2023.

The FCA says the exemption for asset managers and asset owners with less than £5 billion will be reviewed after three years. The £5 billion threshold will be calculated on a three-year rolling average basis, assessed annually, for both AUM and assets under administration.

Extension to standard-listed companies 

Also, on 1 January 2022, the FCA extended its climate-related disclosures, which have applied to premium-listed companies since January 2021. In a policy statement (PS21/23), the watchdog says these rules now apply to issuers of standard-listed shares and global depositary receipts representing equity shares, as well as standard-listed issuers of shares other than equity shares.

These standard-listed companies must state in their annual financial report whether they have made disclosures consistent with the TCFD’s recommended disclosures. If they have not, they must explain why and set out any steps they are taking, or plan to take, to be able to make consistent disclosures in the future.

If disclosures are included in another document different to the annual financial report, companies must explain why and where the document can be found.

The rules apply to firms with accounting periods beginning on or after 1 January 2022, which means that the first annual financial reports under the new regime will be published in early 2023. Issuers do not have to seek third-party audit or assurance of their TCFD disclosures under the FCA’s rules.

The watchdog is also encouraging listed companies to consider the Sustainability Accounting Standards Board’s (SASB) metrics when making their disclosures.

A trusted ESG expert can help

Complying with these new regimes will be challenging and require expertise in environmental issues, ESG regulatory guidance and data gathering.

At Apex Group, we offer a broad range of services that can help asset managers, asset owners and standard-listed companies comply with the FCA’s new TCFD disclosure rules. From ESG compliance advisory to policies and procedures, carbon footprint, training, and financial promotions servicing, our services can help firms with all their needs.