FCA’s TCFD Rules for Asset Managers to Allow for Data Gaps

Product-level disclosures to users can be limited for transitional period where proxies deemed insufficient.

New climate disclosure rules for UK-based asset managers, entering force in January, will take account of “data gaps and methodological challenges”, the Financial Conduct Authority (FCA) has confirmed.

In its final guidance, the UK’s financial regulator said asset managers and other in-scope firms can make more limited product-level climate disclosures to avoid providing misleading information. But the FCA said it expects firms to explain their lack of disclosure, underlining that it sees the issue as “transitional”.

The clarification is one of several included in final guidance to asset managers, insurers and regulated pension providers on their new climate disclosure obligations, which are based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Applying from 1 January 2022, the new rules require the largest in-scope firms – managers with £50 billion-plus AUM and providers with £25 billion-plus – to provide annual entity-level disclosures on climate-related risks and opportunities, as well as product-level disclosures, which should enable comparison by users via a core set of metrics. First disclosures under the new rules will be made by June 2023, while reports from smaller firms, above the FCA’s £5 billion threshold, are due 12 months later.

The new rules are part of the UK’s efforts to introduce TCFD-aligned reporting for all relevant entities by 2025 in support of transition to a net-zero economy by 2050. Under separate rules from the Department of Work and Pensions, the largest UK occupational pension schemes are required to publish TCFD-aligned disclosures from October 2021.

Premium listed UK corporates have been required to report in line with TCFD since Q1 2021. This will be extended to issuers or standard listed shares and global depository receipts from January 2022.

“Better corporate disclosures will help inform market pricing and support business, risk and capital allocation decisions,” said the FCA, unveiling the policy statements relating to regulated asset managers and owners, and issuers of standard listed shares.

“And improved disclosures to clients and consumers will help them make more informed financial decisions. This, in turn, will strengthen competition in the interests of consumers, protecting them from buying unsuitable products and driving investment towards greener projects and activities.”

Avoiding misleading disclosures

The final rules and guidance for asset managers follow proposals issued for consultation by the FCA in June. Just under half of respondents said that the use of proxy data and assumptions to offset widely acknowledged problems with quantifying climate risks within portfolios could lead to flawed and unhelpful disclosures.

“Many were concerned that the use of proxies and assumptions where data gaps and methodological challenges are severe could lead to potentially misleading, inconsistent, and inaccurate disclosures that do not provide clients and consumers with meaningful metrics,” the FCA said.

As well as limited data availability in some asset classes and the immature state of methodologies for proxies and assumptions, respondents cited reliance on third-party data providers, with some flagging issues around liability for accurate data.

In response, the FCA said firms would not have to disclose information on metrics, quantitative scenario analysis or examples if their concerns over data methodologies cannot be addressed through use of proxies and assumptions “or if to do so would result in disclosures that are misleading”. Any firms using this caveat must provide an explanation, including steps being taken to improve the quality and completeness of their disclosures.

Further, the FCA specified that it only expects managers and other regulated firms to use the comply-or-explain option in specific circumstances where transitional challenges cannot currently be overcome. These include data availability issues in asset classes including corporate debt, private equity and emerging markets, and methodological issues relating to instruments including asset-backed securities, both of which are expected to be overcome in the medium term. The FCA acknowledged that methodological and interpretability challenges in currencies and derivatives may only “be resolved only over the longer term”.

The FCA rejected calls from some consultation respondents to delay a requirement for Scope 3 greenhouse gas emissions to be included among the core metrics provided by asset managers and other regulated firms on grounds of data gaps and differences in approach. The regulator said it would require Scope 3 emissions – those financed by institutions through lending or investing activities – to be disclosed from 2024 to recognise their importance “while allowing slightly more time for data and methodologies to improve”.

Other core metrics required include Scope 1 and 2 emissions, total carbon emissions, total carbon footprint and weighted average carbon intensity. Metrics should be calculated in line with TCFD guidance, while alignment with Europe’s Sustainable Finance Disclosure Regulation is optional.

However, the FCA has adapted its original guidance on the supply of additional metrics, such as climate value-at-risk and portfolio alignment, now asking for these to be supplied ‘as far as reasonably practicable’, rather than on a ‘best efforts’ basis.

Wider sustainability disclosures

The FCA’s new disclosure rules will apply to 34 asset management and 12 asset owner firms in the first phase, extending to 140 asset management and 34 asset owner firms in full implementation, covering £12.1 trillion in assets under management (AUM), or 98% of the UK market, the FCA estimates.

The FCA noted that climate-related and other sustainability disclosure requirements for regulated asset managers and owners would expand over time, in line with the introduction of Sustainable Disclosure Requirements (SDRs), as outlined in the UK government’s Roadmap to Sustainable Investing, released in October.

SDRs will cover sustainability topics beyond climate change, requiring disclosures on the impact of firms and their products on sustainability as well as financial risks and opportunities facing firms themselves. As such, the FCA’s new ESG Sourcebook, which currently contains climate-related disclosure guidance, will also cover sustainability topics over time.

The FCA said it expects to issue SDR-related policy proposals for consultation in Q2 2022.


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