Tackling climate change is not a new initiative in the UK. Indeed, the UK was one of the first countries worldwide to endorse the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD)1 – aimed at ensuring climate-related risks and opportunities are priced into financial decision-making, and its 2019 Green Finance Strategy outlined an expectation that all UK listed issuers and large asset owners would be making disclosures in accordance with the TCFD’s recommendations by 2022.
The EU and UK are currently in a ‘transition period’ that is designed to maintain the regulatory status quo between the UK and the EU until 11 p.m. on 31 December 2020. The end of the ‘transition period’ will see EU law cease to apply in the UK. Although a great deal of existing EU legislation has been ‘on-shored’ into the UK statute book, this has not been the case for legislation that will take effect after 11 p.m. on 31 December 2020. In the context of ESG, this includes the Taxonomy Regulation2 and the Disclosure Regulation,3 as well as proposed draft amendments to existing legislation. However, whilst it will not follow the same direction of travel as the EU, the UK government has repeatedly stated its commitment to fighting climate change.
Until recently, there has not been much detail as to how the UK aims to achieve this once it is outside the EU and able to develop its own regulatory and legislative agenda. This has now changed, with the Financial Conduct Authority (FCA) and HM Treasury (HMT) launching a number of initiatives.
FCA initiatives – climate-related disclosure requirements for premium listed issuers
On 6 March 2020, the FCA issued a consultation paper outlining new climate-related disclosure requirements for premium listed issuers and consulting on guidance on existing obligations set out in EU legislation. It builds on the recommendations of the TCFD that are emerging as the leading voluntary framework for climate disclosures, and which have been endorsed not only by the UK government but also a number of other governments.4
HMT initiatives – the TCFD Roadmap and Report
On 9 November 2020, HMT published an Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce5 (the Report) and a Roadmap6 (the Roadmap) that provide an outline of the UK’s ambitions on climate change mitigation. The UK Taskforce describes itself as “charting a path towards mandatory TCFD-aligned climate-related disclosures to help accelerate progress.” The Report and Roadmap are designed to apply climate-related disclosure requirements to FCA regulated firms.
The Roadmap sets out an indicative path for the introduction of regulatory rules and legislative requirements over the next five years, with most action occurring during the first three years (Please see Figure 1 for a timeline of planned or potential regulatory actions or legislative measures). In promoting the TCFD’s recommendations, the UK Taskforce aims not only to improve the flow of information, but also to foster a step change in how organisations think about climate-related risks and opportunities.
The Roadmap emphasises that progress is subject to the outcomes of regulators’ and the government's consultations and other statutory requirements such as cost-benefit analysis, but shows the route that the government is planning to follow.
The Roadmap sets out a strategy for seven categories of organisation:
- listed commercial companies;
- UK-registered companies;
- banks and building societies;
- insurance companies;
- asset managers;
- life insurers; and
- FCA-regulated pension schemes and occupational pension schemes.
In implementing the Roadmap, the UK Taskforce has identified some key considerations that are likely to be relevant to matters such as scope, the design of disclosure expectations and the phasing of implementation across all categories. It is also mindful that, while the TCFD’s principles-based recommendations form a sound basis for enhancing climate-related disclosures across the UK economy, it may become necessary to supplement the principles-based approach with more detail.
The UK Taskforce recognises that, in some sectors, it may be appropriate to phase-in the introduction of mandatory disclosures, perhaps initially with some flexibility as to content – for example, to allow organisations to develop their capabilities and fill data gaps, or by permitting them to explain why they have not made complete disclosures, or to disclose on an “as far as able” basis.
Initial steps to introducing TCFD-aligned disclosures have been taken in respect of certain types of listed companies, banks and building societies, insurance companies and occupational pension schemes.
The FCA is proposing further measures for asset managers, life insurers and FCA-regulated pension schemes.
High-level plans for each category of organisation are given in the Report. The detail will be developed by the relevant regulator and government department. The UK Taskforce anticipates that a significant part of the mandatory requirements will be in place by 2023.
Summary of the implementation approach for Asset Managers
Strategy and Status – The FCA intends to consult in the first half of 2021 on potential TCFD-aligned disclosure rules, directed at clients and end-investors (rather than shareholders), for UK-authorised asset managers, life insurers and FCA-regulated pension providers.
Proposed Scope – The FCA is considering the appropriate scope of the rules, under which TCFD-aligned disclosures will be made to clients and end-investors by firms responsible for setting investment strategy and making investment decisions for institutional and retail investors. Implementation of TCFD-aligned disclosures for listed open- and closed-ended investment companies will be considered in parallel.
It is anticipated that proposals will include:
- disclosure of strategy, policies and processes at the firm level, covering relevant TCFD-aligned recommended disclosures; and
- more targeted disclosures at the fund or portfolio level. The scope of funds or portfolios that may be captured remains to be determined. The FCA has said that intends to prioritise the information needs of UK clients and end-investors.
The FCA expects carefully to refine the scope – and is considering applying thresholds to ensure that the obligations are proportionate.
Timing – The FCA will aim to finalise the rules by the end of 2021, which will then come into force in 2022.
The FCA will consider phasing-in the obligations, so that the rules will apply:
- in 2022, to UK-authorised asset managers with assets under management in excess of £50 billion; and life insurers and pension providers with policy asset values in excess of £25 billion; and
- in 2023, to other firms in scope, but excluding very small firms.7
Timing is subject to the outcome of the consultation and cost-benefit analysis.
The publication of the Report and Roadmap indicate that the UK will diverge from the EU’s requirements set out in the Disclosure Regulation and the Taxonomy Regulation by focusing on climate change, rather than the broader environmental, social and governance concerns addressed by both of those Regulations. This divergence will be a concern for asset managers with operations in both the EU and UK, although the scope of the UK’s rulemaking is likely to be narrower in the first instance. Hopefully, this will result in limited overlap, and UK managers will not have to double up on disclosure and other obligations to comply with a specific UK version of either of the Disclosure Regulation or the Taxonomy Regulation.
Further, the UK Taskforce recognises the global nature of the asset management industry and its interactions with related international initiatives, including those that derive from the EU’s Sustainable Finance Action Plan. Most encouragingly, the Report states that the proposed TCFD-aligned requirements would, as far as possible, be consistent with and complementary to these initiatives. Further clarity for asset managers will come when the FCA publishes its consultation paper in 2021.
1) The TCFD is a private sector led group convened by the Financial Stability Board in 2015 to “develop voluntary, consistent climate-related financial disclosures that would be useful to investors, lenders and insurance underwriters in understanding material risks.” The recommendations are intended to provide the market with decision-useful, forward-looking information on how organisations are addressing climate-related risks and opportunities in their activities. The TCFD Recommendations can be accessed here.
2) Regulation (EU) 2020/852.
3) Regulation (EU) 2019/2088.
4) The TCFD has over 1,000 supporters, which are headquartered in 55 countries, span the public and private sectors and include organizations such as corporations, national governments (Belgium, Canada, Chile, France, Japan, Sweden and the United Kingdom), government ministries, central banks, regulators, stock exchanges and credit rating agencies. For more detail on the FCA’s March 2020 Consultation Paper outlining new climate-related disclosure requirements for premium listed issuers, please see our related OnPoint, available here.
5) The UK Taskforce is comprised of the Bank of England and the Prudential Regulation Authority, the Department for Business, Energy & Industrial Strategy, the Department of Work and Pensions, the Financial Conduct Authority, the Financial Reporting Council and the Pensions Regulator. To access the Report, please click here.
6) To access the Roadmap, please click here.
7) The figures, which are included in the Report, are presented as an illustrative scope of application.