FCA climate consultation: Standardise metrics but keep flexibility

Industry responds to UK regulator's climate-related disclosures consultation

The investment industry has called for a more unified climate reporting metrics for across the investment industry, as outlined in responses to the Financial Conduct Authority’s (FCA) recent consultation, but added flexibility would still be needed to ensure firms of all sizes and requirements could use the right metrics for them.

On 22 June, the UK regulator announced a consultation into climate-related disclosures, which includes extending the application of its Task Force for Climate-related Financial Disclosures (TCFD)-aligned listing rule to issuers of standard listed equity shares and introducing TCFD-aligned disclosure requirements for asset managers, life insurers and FCA-regulated pension providers. This closed on 10 September 2021.  

Earlier this year, the UK’s Department for Work and Pensions (DWP) announced it was pressing ahead with rules requiring trustees to report on climate change in line with TCFD, while the Department for Business, Energy & Industrial Strategy (BEIS) opened a consultation into climate-related financial disclosure for listed companies in March, proposing all publicly quoted companies, large private companies and large asset owners should disclose in line with the TCFD to support the transition to net zero.

Industry bodies and firms have now responded to the FCA’s recently closed consultation.

Although bringing the proposals for asset managers in line with the DWP’s consultation for pension funds has been welcomed by the industry, Joe Dabrowski, deputy director policy at the PLSA said it had created “misalignment”, particularly when it comes to metrics.

“The parallel activities, and differing regulatory focuses have created some misalignment of timetables for the reporting of information,” he said.

“We are concerned that different views on reporting metrics have been proposed across the two consultations. As schemes and investors generally have identified comparable and consistent data as a key issue we would urge the FCA, TPR and DWP to find a common set of expectations to ensure the whole of the investment chain is aligned, and can pull in the same direction.”

Will Martindale, group head of sustainability at Cardano, agreed metrics should be standardised to allow for comparability.

He added metrics should be accompanied by narrative-based disclosures to, for example, provide context to allocations to high-carbon assets, where the asset manager is engaging in support of transition plans.

The Investment Association, while also welcoming the FCA’s proposals for climate disclosures for asset managers and owners, and its suggestions for aligning it with the proposals for pension funds, similarly said agreeing on one set of metrics would be most suitable.

“We do not see the need for calculations to be made on a dual basis and believe that this would be particularly confusing for investors, as well as increasing the reporting burden for firms,” its consultation response said.

“Therefore, we recommend the FCA use only one set of formulae, in line with TCFD.”

Flexibility needed

However, the UK Sustainable Investment and Finance Association (UKSIF) said although it hopes “to see greater alignment in metrics and a reduction in the significant number of approaches that we currently see”, as well as more global coordination to work on common metrics frameworks, the differing needs of different asset managers and owners must be taken into account.

“While including core metrics is very positive, it should be recognised they will provide a partial picture to investors and most will want to establish a richer, more nuanced view on how their investments are addressing climate-related issues.”

This mirrors UKSIF’s similar concerns that the proposals fit all size of firm, including boutiques that will initially fall under the £5bn threshold.

Cardano’s Martindale added: “For additional metrics we encourage flexibility to allow for disclosures that are most relevant to the investment strategy. We do believe that proportions of the portfolio aligned with net zero greenhouse gas emissions, supported by science-based targets, is a powerful measure of real-world progress towards net zero.”

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Natasha Turner

Natasha was global editor at ESG Clarity, part of Mark Allen Financial, and a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the Year...