The 30 June 2023 deadline for the first disclosures by the largest asset managers is now fast approaching under new Financial Conduct Authority (FCA) rules requiring mandatory climate-related financial disclosures. Here, we provide a run-down of everything UK asset managers need to know about these upcoming requirements.
The new rules are aligned with the recommendations of the international Task Force on Climate-related Financial Disclosures (TCFD), established to create a global standard for the information required by market participants to assess and price climate-related risks and opportunities.
The UK adopts a more focused approach than the EU
In aligning its new disclosures with the TCFD recommendations, the UK is providing a globally-standardised framework focused solely on climate-related metrics. Meanwhile, the EU’s Sustainable Finance Disclosure Regulation (SFDR) aligns to the UN General Assembly’s 2030 Agenda for Sustainable Development, which has a much broader scope of still-developing ESG indicators and metrics without reference to the TCFD.
The adoption of the TCFD framework by the UK not only represents a more focused approach, but can also be regarded as more pragmatic than the EU approach because the TCFD is increasingly being adopted by investee companies (listed and private), providing the necessary data in annual financial statements that asset managers rely on to compile their own product or portfolio level disclosures.
As the UK did not adopt SFDR before leaving the EU, this is a major post-Brexit divergence in financial regulation policy-making. There is no obligation for UK asset managers to comply with SFDR unless they are marketing to EU investors using the National Private Placement Regime (NPPR).
The FCA rules apply to certain categories of firm as set-out in ESG 1.2.1 R. The following firms currently fall within the ‘asset managers’ category:
- Full-scope UK alternative investment fund managers (AIFMs) managing an AIF
- Small authorised UK AIFMs managing an AIF
- Discretionary investment managers
- Investment advisors to funds investing in unlisted investments (e.g. private equity funds)
- Externally and self-managed UK UCITS
Deadlines depend on AUM thresholds
The FCA has adopted a phased approach:
- Asset managers with assets under management (AUM) in relation to their TCFD in-scope business of more than £50 billion were subject to the rules from 1 January 2022 and the deadline for publishing first disclosures is 30 June 2023
- Asset managers with AUM in relation to their TCFD in-scope business of more than £5 billion (calculated as a three-year rolling average) but less than £50 billion were subject to the rules from 1 January 2023 and the deadline for publishing first disclosures is 30 June 2024
Asset managers with less than £5 billion AUM (calculated as a three-year rolling average) are exempt from the obligations, although this exemption may be removed in the future.
Entity and product reports required
In-scope asset managers will need to prepare the following:
- Entity report in respect of the investment management activities of the firm
- Product or ‘portfolio level’ report for each in-scope fund managed by the firm
Both reports must be published by 30 June of each calendar year covering a reporting period of 12 months (starting no earlier than 1 January of the previous calendar year). The firm must make its most recent TCFD reports available in a prominent place on its main website, as a minimum.
Entity report contents
- Signed Senior Manager Statement, confirming that the disclosures in the report comply with the FCA requirements
- Climate-related financial disclosures regarding the overall assets managed of its in-scope business.
- Explanation of where its approach to a particular investment strategy, asset class or product is materially different to its overall approach to governance, strategy or risk management under TCFD
- Explanation of how the firm’s strategy under TCFD has influenced the decision-making and process by which it delegates functions, selects delegates, and relies on services, strategies or products offered or employed by third parties, including delegates
Product report contents
- Core TCFD metrics:
(a) Greenhouse gas emissions
(b) Total carbon emissions
(c) Total carbon footprint
(d) Weighted average carbon intensity
- Enhanced disclosures for products that have concentrated exposures or high exposures to carbon intensive sectors, including quantitative analysis of ‘orderly transition’, ‘disorderly transition’ and ‘hothouse world’ scenarios
- Complex calculations as far as reasonably practicable:
(a) Climate value-at-risk
(b) Metrics that show the climate warming scenario with which a TCFD product is aligned, such as using an implied temperature rise metric
What needs to be done?
Managers with AUM more than £50 billion should already be at advanced stages of drafting their TCFD entity and product reports to meet the 30 June 2023 deadline for publishing.
Managers with AUM less than £50 billion but more than £5 billion (calculated as a three-year rolling average) need to develop good understanding of their TCFD disclosure obligations and be preparing for practical implementation now to meet the deadline for publishing reports of 30 June 2024.
These managers need to start implementing new reporting processes to track and publish the relevant data. A key challenge in meeting the product report disclosure obligations for the reporting period 1 January 2023 to 31 December 2023 is data availability and quality. The FCA has provided guidance on the data that can be used in the reports and how to deal with data gaps.
Asset managers with AUM below £5 billion (calculated as a three-year rolling average) need to put in place a process to monitor AUM levels to demonstrate that the exemption is available to them.
How IQ-EQ can help
To aid compliance with these new requirements, we at IQ-EQ have created pragmatic guidance and practical support materials to help our clients prepare for implementation, including assessing if firms are in scope and delivering tailored TCFD training presentations.
There is no mandatory TCFD template for the reports, in contrast to SFDR, which prescribes the use of mandatory templates for certain key disclosures. We can provide entity and product report templates and support to address the key challenges of obtaining data from listed investee or unlisted portfolio companies and addressing data gaps in line with FCA guidance.
If you’d like to discuss TCFD and find out more about all the support available from IQ-EQ’s expert compliance consulting and technical regulatory reporting teams, please get in touch.
This also forms part of IQ-EQ’s broader ESG service offering, including ESG set-up, data platform, data acquisition and management, and reporting and compliance.