As set out in our earlier OnPoint “Is Brexit Green?”1, the UK has adopted a different approach to ESG compared to the EU, by not “on-shoring” the EU’s Sustainable Finance Disclosure Regulation (“SFDR”) and focussing specifically on the recommendations of the Task Force for Climate-related Financial Disclosures (the “TCFD”) and its associated report (the “TCFD Report”).
The latest phase in the development of this regime was the publication in June of Consultation Paper CP21/17 (the “CP”) setting out proposals for enhancing climate-related disclosures by asset managers, life insurers, and FCA-regulated pension providers. In this OnPoint, we look in detail at the proposals for asset managers.
The CP’s new rules apply to FCA regulated firms with respect to their assets managed or administered from the UK, regardless of where the client, product or portfolio is based.
Specifically, the following FCA regulated firms are in scope:
- portfolio managers subject to MiFID
- a UK UCITS management company
- a full-scope UK AIFM
- a small, authorised UK AIFM
The products and portfolios directly within scope of the FCA’s proposed rules are:
- authorised funds, excluding (i) feeder funds, and (ii) sub-funds in the process of winding up or termination
- unauthorised alternative investment funds (“AIFs”)
- portfolio management services.
Note that there is no intention to apply these rules to non-FCA regulated firms.
The FCA has set a relatively generous bar to exempt certain asset managers from these rules: An asset manager will be exempt if it has less than £5 billion in assets under management on a three-year rolling average, to be assessed annually, with respect to its business activities relating to the products and portfolios referred to above.
The FCA proposes that each in-scope firm publish a TCFD entity report in accordance with the disclosure required in the TCFD Report2, on an annual basis, by 30 June each calendar year. The report must be published in a prominent place on the main website for the business of the firm (e.g. with a link from the homepage).
Contents of the TCFD entity report
This report needs generally to address the disclosures required in the TFCD Report under its associated headings, with specific disclosure in relation to the following TCFD Report headings:
1. Governance, strategy and risk management: Firms must explain any material differences in their approach to governance, strategy, or risk management for specific investment strategies, asset classes or products, where relevant.
2. Scenario analysis: Firms must disclose:
- their approach to climate-related scenario analysis3;
- how they apply climate-related scenario analysis in their investment and risk decision-making process; and
- quantitative examples to demonstrate their approach to climate-related scenario analysis, where reasonably practicable.
3. Metrics and targets: Firms not yet setting climate related targets must explain why not. Where a firm has set a climate-related target, the firm must describe the target, including the key performance indicators (KPIs) it uses to measure progress.
4. Specific proposals for asset managers:
Where an in-scope firm is an authorised fund manager (“AFM”) and delegates investment management to a third-party portfolio manager which is not in the same group, the AFM will remain responsible for producing a TCFD entity report. The firm must also explain the reasons for selecting the delegate, where relevant to the TCFD’s recommendations. This must include a description of how climate-related matters have been taken into account in selecting delegates and relying on their products and services.
Firms may include hyperlinks and cross references in their entity-level TCFD report to relevant climate-related financial disclosures made by delegated managers, though if these delegated managers are firms that do not have mandatory climate related disclosure obligations (e.g. those under the SFDR), the delegating firm must produce its own.
Product and portfolio-level disclosure
The content of the disclosure
The FCA is proposing a set of core, mandatory, carbon emissions and carbon intensity metrics that in-scope firms would be required to disclose, as set out in Table 1.4
Table 1: Core metrics
|Scope 1 and 2 Greenhouse gas (GHG) emissions
These metrics are widely used in the market, including as part of disclosure regimes in the UK and internationally.
The FCA proposes to mandate this metric from when the FCA’s proposed rules enter into force. (see “WHAT NEXT?” below).
|Scope 3 GHG emissions
Although this is a widely-recognized metric, the FCA acknowledges that methodologies differ and there may be significant data gaps among investee companies, at least in the short term until the implementation of further disclosure requirements in the UK and internationally.
Therefore, the FCA is proposing that firms should disclose Scope 3 emissions from no later than 30 June 2024. This is one year later than the deadline for the first disclosures in accordance with the rest of its proposals.
|Total carbon emissions
||As total carbon emissions are the sum of the GHG emissions referenced above. The FCA consider it appropriate to mandate that this metric be disclosed on the same timeframes. Scope 3 emissions would therefore need to be included in the total figure from 30 June 2024.
||This is a widely used metric in the market. The FCA propose that this be disclosed on a mandatory basis from when its proposed rules enter into force.
|Weighted average carbon intensity (WACI)
||In its final report, the TCFD acknowledged limitations with this form of carbon foot printing due to data availability. As such the TCFD is currently proposing that asset managers and owners should disclose a financed missions metric based on WACI and the Partnership for Carbon Accounting Financials (PCAF) methodology, if relevant, or a comparable methodology. The PCAF provides methodologies for asset managers, asset owners and banks to measure or estimate financed emissions for different asset classes. It also provides for alternative solutions when data is not available.
Where prescribed calculation methodologies differ between the TCFD’s recommendations and the final report on draft Regulatory Technical Standards (RTS) for the SFDR (e.g. the choice of normalisation factors in the denominator), the FCA is proposing that they be reported according to the formulas under both regimes.
The FCA further proposes that firms must supplement the core, mandatory, metrics with certain additional metrics on a “best efforts” basis. The metrics and rationale are set out in Table 2.5
Table 2: Additional metrics
|Climate Value-at-Risk (VaR)
Climate VaR could be a useful metric for assessing the potential future financial impact of a product’s or portfolio’s climate exposure. It may be particularly helpful for institutional investors that are subject to their own regulatory obligations, particularly in supporting scenario analysis.
It may also help to disclose the outcome of scenario analysis to retail investors in a more accessible way.
|Metrics that show the climate warming scenario with which a product or portfolio is aligned
||These metrics provide a forward-looking view of a product or portfolio’s carbon exposure. They could provide useful visibility over the progress funds are making towards any climate-related targets they have set.
||Consistent with the TCFD’s supplemental guidance, firms should provide other metrics that they consider would be helpful for decision making. Firms may refer to the list of recommended metrics in the Climate Financial Risk Forum (“CFRF”) disclosure guide. The CFRF's disclosure working group is currently developing a Climate Risk Dashboard made up of a more focused list of key decision-useful metrics to be published later in 2021.
Publication of the disclosure
For asset managers, product or portfolio-level disclosures must be made annually in a prominent place on the firm’s main website, using the most up-to-date data at the time of reporting.
These firms will also need to include their product or portfolio-level disclosures in the appropriate form of client communication which is published most closely after the annual reporting deadline of 30 June.
This would be in either:
- the annual long report or half-annual report of an authorised fund, provided that the disclosures are always included in the annual report.
- a periodic client report.
- the TCFD entity report for a listed unauthorised AIF.
The FCA has, however, acknowledged that for some client relationships, public disclosures are not appropriate, specifically:
- investment portfolio managers in respect of discretionary portfolio management mandates.
- full-scope UK AIFMs or small authorised UK AIFMs in respect of non-listed unauthorised AIFs.
In this context, the FCA is proposing that product or portfolio-level disclosures must be made available upon request to clients that need the information to satisfy their own (or their clients’ or customers’) climate-related financial disclosure obligations (‘on demand’ disclosures). The FCA is not prescriptive regarding the format that should be used.
Subject to feedback on the CP, the new rules will come into force as set out below.
Effective from 1 January 2022: Rules to come into force for asset managers with assets under management (AuM) of more than £50 billion.
Publication deadline 30 June 2023: First disclosures to be made. Subsequent disclosures would be made by 30 June each calendar year.
- Entity-level disclosures: These disclosures would be made with reference to activities over the previous 12 months, using the most up-to-date information available. Firms would have the flexibility to select the 12-month reporting period for their first entity-level TCFD report, provided that the period begins no earlier than 1 January 2022 and that the first disclosures are published on their website by 30 June 2023.
Firms may change the reporting period in subsequent years provided that there is no period of time which is not covered by the firm’s TCFD entity reports (e.g. by issuing an interim report if necessary) and that the reports are published by 30 June each calendar year.
- Product and portfolio-level disclosures: Firms would be required to make public disclosures and to publish them on their websites by 30 June of each calendar year. These disclosures would be made using the most up-to-date data available at the time of reporting. The data must be calculated within the 12-month reporting period covered by the TCFD entity report.
Firms would be required to publish disclosures on their website, by 30 June, then include (or cross-reference to) the website disclosures in the appropriate client communication which is published most closely after the reporting deadline.
In the case of ‘on demand’ disclosures to institutional clients, firms must provide the requested information from 1 July 2023.
Effective from 1 January 2023: Rules would take effect for the remaining firms above the proposed £5 billion threshold for both asset managers.
Publication deadline 30 June 2024: First disclosures to be made. Subsequent disclosures would be made by 30 June each calendar year thereafter.
In the case of ‘on demand’ disclosures to institutional clients, firms must provide the requested information from 1 July 2024.
What Should UK Asset Managers Be Doing Now?
- Assess if they are in scope.
- Familiarise themselves with the TFCD Report and its associate disclosures.
- Assess to what extent any data used for SFDR disclosure and reporting can be leveraged for the FCA regime.
The FCA deadline for responses to the CP is 10 September 2021.
1) Is Brexit Green? A UK Roadmap Towards Mandatory Post-Brexit Climate-Related Disclosures.
2) See, Figures A to E and supplemental guidance section in Appendix 2 of the CP.
3) “Climate-related scenario analysis” means an analysis of the firm’s strategy taking into consideration different climate-related scenarios, including a 2 degree Celsius or lower scenario – see Appendix 2 of the CP, Figure A - the Recommendations and Recommended Disclosures.
4) For the full table, see para 5.16 of the CP.
5) For the full table, please see para. 5.29 of the CP.