FCA tells asset managers, insurers and pension providers to report on climate risk

The FCA has opened two consultations into extending the application of its existing climate-related disclosure requirements, which currently apply to premium listed companies. It is also asking the financial services industry for its views on environmental, social and governance (ESG) issues in capital markets.

The rules are intended to make sure that information on climate-related risks and opportunities is available along the investment chain. The FCA said better information would help clients and consumers make better-informed decisions about their investments and drive investment towards greener projects and activities.

Although the FCA is currently consulting only on climate-related disclosures, it said a newly introduced ‘ESG Sourcebook’ within its Handbook would probably expand over time to include rules and guidance on other climate-related and wider ESG topics. The Sourcebook will apply to asset managers, insurers and other regulated asset owners with more than £5 billion under management, calculated under a three-year rolling average.

The expanded disclosure rules follow the same pattern as the rules for premium listed companies introduced in December last year, with entities required to report against the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) principles.

Financial services regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: “Firms will be relieved to read that the intention is to align UK requirements with requirements already in place whether it be the TCFD, the EU Sustainable Finance Disclosure Regulation and Taxonomy or Department of Work and Pensions requirements. This supports the FCA’s statement that the new rules should support the flow of information along the investment chain,” Budd said.

Asset managers, life insurers and FCA-regulated pension providers (99 page / 3.61MB PDF) will be required to 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. These disclosures will have to be made in a prominent place on the main website for the firm’s business, and would cover the entity-level approach to all assets managed by the UK firm.

Firms 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. Depending on the firm, product or portfolio, these disclosures will have to be made on the firm’s website and included or linked to in appropriate client communications, or be made upon request to certain eligible institutional clients.

Financial services regulatory expert Anthony Harrison of Pinsent Masons said: “These proposals serve as another clear indicator as to how seriously the FCA are taking the climate change issue as they look to introduce much greater accountability in the context of ensuring retail customers are better informed and protected.

“Self-invested personal pension operators, for example, are already under pressure from the FCA and Financial Ombudsman Service in relation to diligence checks they have to make with respect to underlying investments within their wrappers – introducing a further set of climate change disclosure requirements, whilst assisting customers, is likely to provide further operational challenges and increased costs.” Harrison said.

“But, such is the importance and urgency of the issue, these types of green disclosure requirements can’t be avoided and are going to become part of the norm in years to come – with their scope likely to increase even further and cover off many different retail products and sectors,” Harrison said.

The expanded rules for companies (87 page / 3.05MB PDF) would affect issuers of standard listed equity shares, but the FCA said they could also impact issuers of debt and debt-like securities and issuers of standard listed global depository receipts.

As with premium listed companies, those affected by the new rules would have to make a statement in their annual report setting out whether they had made disclosures consistent with TCFD recommendations, or explain why they had not.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons said the only difference between the rules for premium listed companies and the proposed expansion was a recognition that smaller standard listed companies may not be in a position to do, or pay for, the detailed work required to properly report.

“As reporting will be on a comply or explain basis, giving valid reasons for non-compliance will be acceptable for regulatory purposes, if not always for investors. The FCA intends to publish guidance clarifying the types of circumstance in which it might anticipate explanation rather than compliance, although companies will need to set out how their processes are intended to evolve so that they can, at some future date, report as required,” Proverbs-Garbett said.

“There is clearly some urgency behind the FCA's decision to extend reporting so quickly, understandable given the imperative of climate change, but the twin concerns that smaller corporates may not be in a position to comply and, separately, ongoing development of international standards by the International Financial Reporting Standards Trustees means that any extension of the regime must be flexible. Adopting a comply or explain approach permits – so the thinking goes – behaviour and reporting to develop over time as internal capabilities and external obligations become clearer,” Proverbs-Garbett said.

The consultations are open until 10 September 2021, and the FCA said it intended to confirm its final policy on climate-related disclosures before the end of this year. The regulator will separately consider stakeholder views on the ESG-related discussion topics in capital markets, with a view to publishing a feedback statement in the first half of 2022.