FCA consults on TCFD requirement amid ESG ‘data gaps’

Industry reactions to regulator's consultation on climate-related disclosures

The Financial Conduct Authority‘s (FCA) new proposals for extending climate-related disclosures have been welcomed by industry commentators, but the lack of data currently for these disclosures might make them less impactful than intended in the short term.

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.  

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.

The FCA’s consultation asks for views on ESG issues in capital markets, including on green and sustainable debt markets, and the role of ESG data and rating providers, but some have shared concerns around the availability of data. 

Sheldon Mills, executive director of consumer and competition at the FCA said: “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. 

“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 consultation will close 10 September 2021, with the final policy planned before the end of the year.  

‘Plain and simple’

The news has been largely welcomed by the investment industry. Sarah Woodfield, stewardship manager at the Investment Association and ESG Clarity editorial panellist, said: “We welcome the FCA’s proposals to extend the scope of listing rules on TCFD to cover standard listed companies.

“We also welcome the proposals to introduce TCFD reporting for asset managers, life insurers, and FCA-regulated pension providers, as another key milestone in the government’s ambition to introduce climate reporting across the economy. We will be working closely with our membership to make robust TCFD disclosures that help their clients make well informed decisions on the sustainable value of their investments.”

David Croker, partner at PwC, said: “We welcome this progress towards improved disclosures by asset managers to their clients and the market – this is an important step forward in properly understanding and aligning investment flows to achieve the government’s net-zero ambition by 2050. The proposals should also make it easier for investors to make informed choices, and we know investors are increasingly seeking to invest in sustainable funds.”

But he also added the proposals may be challenging for asset owners because of the lack of data available. “The regulator acknowledges there will initially be data gaps at the investee company level – the FCA suggests asset managers may use proxy data or make assumptions to address these gaps, which risks lessening the effectiveness of the disclosures in the short term,” he said.

Lee Wild, head of equity strategy at interactive investor added disclosures need to be “plain and simple” and not “buried at the end” of reports and accounts. “Otherwise, this is a wasted opportunity,” he said.

Regulator scope

The FCA said the new proposals are among the FCA’s first substantive policy proposals for the UK asset management and asset owner sectors since the end of the EU withdrawal transition period.

Becky O’Connor, head of pensions and saving at interactive investor, said it makes sense for this responsibility to fall to the regulator.

“Climate reporting is a new area of scrutiny for the City regulator and it is no doubt on a steep learning curve. But it makes sense for responsibility for these rules to fall to the FCA, if climate risks are to be truly embedded and properly considered alongside other kinds of risk in all areas of the investment industry, not just within siloed sustainability teams,” she said.

“There is demand for better information on this area from retail investors, some of whom remain cynical about the impact that money can have. Ratings, measures and better reporting will help to give confidence.”

Will Martindale, group head of sustainability at Cardano, said the whole industry should be setting decarbonisation targets.

Introducing these regulations will help expedite methodology development, particularly around hard-to-reach asset classes, such as private equity, infrastructure, and derivatives. From October 2021, the UK’s largest pension funds will be required to prepare TCFD reports. It’s right that the companies in which they invest – and the asset managers through which they invest – are also required to do so,” he said.

“However, we also see benefits in introducing mandatory, but non-binding, target setting, rather than the comply-or-explain approach introduced by the consultation. While we understand the complexities of target setting, it shouldn’t stop the industry from trying. We need to see the whole industry adopt target setting on decarbonisation, not just pension funds.

“We believe the FCA should also require disclosure on climate-related stewardship as a core part of TCFD. There have been some successes here such as Climate Action 100+, but we need to see more industry collaboration on stewardship goals to send clear messages to the companies in which we invest.”

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Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...