3 July 2022

FCA moves to expand climate risk reporting rules for UK investors

FCA moves to expand climate risk reporting rules for UK investors

Financial Conduct Authority consults on expanding TCFD risk disclosure rules to cover asset managers, life insurers, and regulated pension providers

Proposals to extend climate risk reporting requirements to cover asset managers, life insurers, and regulated pension providers have been launched for consultation by the UK’s Financial Conduct Authority (FCA), in a bid to help drive much needed investment in support of the net zero transition.

The proposals unveiled yesterday require investors to measure and publicly disclose the potential threats to their business and portfolios from climate change and the accelerating net zero transition in line with the guidelines developed by the Taskforce on Climate-related Financial Disclosures (TCFDs).

The scope of the proposals cover 98 per cent of assets under management either in the UK asset management market or held by UK asset owners, representing £12.1tr in assets managed in the UK, the regulator said. However, the rules would not apply to firms with less than £5bn in assets relating to relevant activities.

It comes alongside a separate FCA consultation on extending the TCFD-aligned listing rule to issuers of standard listed equity shares, while the regulator is also seeking views on environmental, social, and governance (ESG) issues in capital markets, including green and sustainable debt markets and with regards to ESG data and rating providers.

Both consultations form part of the government’s plans to ensure climate risk disclosures are mandatory for all large companies and investors across the UK economy by 2025, with disclosure rules affecting the most prominent listed commercial firms having already come into force in December 2020. From October this year, pension schemes holding more than £5bn in assets will also be required to make regular TCFD-aligned disclosures.

The rules are designed to help ensure information on climate-related risks and opportunities is available right along the investment chain – from companies in the real economy, to financial services firms, and through to clients and consumers – in order to improve investment decision making.

Such efforts should help protect consumers from unsustainable, risky products, and encourage more investment in the green economy, the FCA explained.

Sheldon Mills, the FCA’s executive director of consumer and competition, said climate change affected the whole of society, and it was therefore “vital that the financial services sector plays a leading role in addressing this challenge”.

“Managing the risks of climate change and transitioning to a cleaner and less carbon-intensive economy will require high quality information on how climate-related risks and opportunities are being managed throughout the investment chain,” he explained. “‘However, climate-related disclosures do not yet meet investors’ and market participants’ needs. The new rules will help markets, investors and ultimately consumers better understand the impact of climate change and make more informed decisions.”

The FCA said the climate risk proposals launched yesterday were among its most substantive policy plans for the asset management and ownership sector since the UK’s withdrawal from the European Union at the start of the year.

Given the global reach of regulated firms operating in the UK, the design of the new rules have been approached “with international consistency in mind and to accommodate firms’ different business models”, the regulator said.

The move follows the recent pledge from the world’s leading economies at the G7 Summit in Cornwall to introduce and collaborate on mandatory climate risk disclosure rules.

In related news, a survey commissioned by Aviva Investors found this week that 80 per cent of asset managers ‘always’ or ‘often’ incorporate climate risk into investment decisions, while in contrast just two per cent said they ‘never’ took climate risk into account in their decision-making process. The same survey also found 58 per cent of asset managers said the Covid-19 pandemic had accelerated their adoption of ESG investment strategies.

The two consultations will close on 10 September 2021, with the final policy on climate-related disclosures expected to be confirmed by the end of the year.

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