Keeping in touch with new and upcoming ESG-related regulations impacting institutional investors in the UK.
UK-based asset owners and managers are bracing themselves for a raft of new regulations in upcoming months which will impact how they report, assess and govern their ESG strategies. Some, such as insurance firms or pension funds, will have sector-specific requirements too, while those with European operations are also focused on compliance with emerging and evolving ESG-related rules from Brussels. In addition, all investors will be watching for climate mitigation and adaption policy developments with implications for their portfolios in the run-up to COP26. As such, this article does not claim to be comprehensive, but highlights some of the key challenges and deadlines up to the end of the year and beyond.
Of most pressing interest is the Department for Work and Pensions Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations which come into force from 1 October. These introduce new requirements relating to reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Trustees of primarily larger occupational pension schemes and authorised master trusts, extended to schemes with assets of £1 billion or more from October 2022, will be required to implement climate change governance measures and produce a TCFD report. They will then have to publish this report on a publicly available website and make it accessible free of charge.
Failure to meet the requirement may lead to enforcement action by The Pensions Regulator.
In essence trustees need to assess the impact of climate change on their investments and have effective governance, strategy, risk management and accompanying emissions-based metrics and targets for the assessment and management of climate risks and opportunities.
This includes undertaking scenario analysis, taking into account the potential impact of climate change such as global warming on the scheme’s assets and liabilities, and identifying and assessing climate related risks.
These can include physical risks such as extreme weather events, transition risks such as changes in industry regulation, and litigation risks if businesses and investors fail to account for climate change and financial risks.
Apart from reducing investment risks trustees should look at climate change opportunities to boost returns such as new low-carbon technologies.
Investors are also awaiting feedback on the Department for Business, Energy & Industrial Strategy’s consultation on requiring mandatory climate-related financial disclosures by large publicly quoted companies, private companies and LLPs. Again, this would require the companies to mandatorily disclose climate-related financial information in line with the TCFD namely governance, strategy, risk managements, metrics and targets.
They will have to report the information in the non-financial information statement that forms part of their Strategic Report, or the Energy and Carbon Report that forms part of their Annual Report.
It is expected that the requirements will begin from 6 April 2022.
The Financial Conduct Authority (FCA) is also currently consulting on a climate-related financial disclosure regime for asset managers, life insurers and FCA-regulated pension providers consistent with the TCFD’s recommendations. It states that its proposals aim to “increase transparency and enable clients and consumers to make considered choices, while remaining proportionate for firms”.
The key elements of the proposals would require firms to publish, annually, an 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.
They would also be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.
The consultation closes on 10 September.
As noted above, UK pension funds with over £5 million in AUM are required to begin preparing TCFD-aligned disclosures from 1 October 2021, publishing finalised TCFD reports seven months after their year-end dates. However, asset managers et al currently have until 30 June 2023 to prepare their TCFD reports, under current timelines. Industry observers have pointed out that this is extra time that they just don’t need.
The FCA is also consulting on extending climate-related disclosure requirements to standard listed companies.
From 1 January 2021 UK premium listed commercial companies have had to include a statement in their annual financial report setting out whether their disclosures are consistent with TFCD recommendations.
Diversity and inclusion governance and disclosures
The FCA is also consulting on the social aspects of ESG.
It launched a consultation in July on new disclosure rules relating to diversity and inclusion on the boards and executive committees of listed companies.
Policy options being considered include use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion in their firms, linking remuneration to diversity and inclusion metrics and the regulators’ approach to considering diversity and inclusion in non-financial misconduct.
It is also proposing to amend the corporate governance rules within its disclosure guidance and transparency rules (DTRs) to indicate that existing reporting requirements on board diversity policies could consider wider diversity characteristics. This could include ethnicity, sexual orientation, disability and socio-economic background.
It is seeking comments by 20 October 2021.
Allied to this was a discussion paper from the FCA, Prudential Regulation Authority and the Bank of England in July, exploring how to promote diversity and inclusion across the whole financial services sector. This consultation runs until 30 September.
Another ongoing ‘S’ consultation affecting trustees is the DWP’s ‘Consideration of Social Risks & Opportunities by occupational pension schemes’. This is looking at what extent trustees fulfil their duty in assessing financially material social factors and the subsequent risks in their stewardship activities. This includes company supply chains and treatment of workers within them.
The consultation ended in June 2021 and the DWP is currently analysing feedback.