UK FCA proposes public, investor-facing, climate-related disclosures by asset managers from 2023

As expected, the proposals mandate only disclosure, in the hope and expectation that transparency will lead directly and indirectly to the allocation of capital to greener opportunities. There is to be no prescription about the ways in which intermediaries must invest. The proposals complement rules addressed to UK occupational pension scheme trustees, in their capacity as investors, which are expected to take effect from 1 October 2021, and to which asset managers servicing this client base may need to react sooner. 

The FCA's consultation is in the context of the UK government's aims to reach a net-zero economy by 2050 and its roadmap towards mandatory climate-related disclosures - based on TCFD standards - across the UK economy by 2025. Earlier proposals have concerned disclosures by UK listed issuers about their own businesses (amongst whom will be certain financial services groups, who will be within the scope of TCFD reporting in two different capacities). Certain aspects of the TCFD framework are still being finalised, in parallel with the FCA's consultation.

Compared to EU Sustainable Finance Disclosure Regulation (EU SFDR), the new proposals are narrower in scope, being confined only to climate-related disclosures (as opposed to other environmental and social considerations).  The FCA plans to introduce a new "ESG Sourcebook", whose name illustrates the FCA's intention to expand it over time to include new rules and guidance on wider ESG topics. There is nothing in this consultation paper on the related topic of a UK environmental taxonomy, in respect of which work is taking place separately, nor on initiatives to launch a taskforce on nature-related financial disclosures. 

The new disclosure obligations apply to the following types of firm in the asset management industry:

• UK MiFID segregated portfolio managers;
  
  
• UK UCITS management companies;
  
  
• UK full-scope AIFMs;
  
  
• Small authorised UK AIFMs (but see below);
  
  
• Any firms in respect of "portfolio management".

As regards the last category, the term "portfolio management" will be given an extended meaning for the purposes of the new rules. It will capture private equity and other private market activities consisting of either advising on investments or managing investments on an ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities. 

Asset managers with less than £5 billion relevant AUM will be exempt. This threshold is to be calculated on a three-year rolling-average basis. As stated above, small UK authorised UK AIFMs are, on the face of it, subject to the rules. However, it seems unlikely that an AIFM which manages AIFs which, by definition, do not exceed the AIFMD €500m or €100m total AUM threshold (as applicable) could ever be subject to the disclosure rules, except in a few rare cases.

As with EU SFDR, certain of the proposals apply at asset manager entity level and others at product level, but only in respect of certain types of product and service. 

Disclosures for asset managers will cover in-scope firms' asset management activities in respect of:

• authorised funds (excluding feeders and sub-funds), such as UCITS, QIS, NURS and UK LTIFs and, prospectively, LTAFs;
  
  
• alternative investment funds (AIFs);
  
  
• segregated discretionary portfolio management services (typically caught by UK MiFID); and
  
  
• (as above) private equity and other private market activities.

It is less clear whether this extends to non-AIF unregulated collective investment schemes such as funds-of-one and deal-specific co-investment vehicles. 

In contrast to EU SFDR, the proposals will not generally have extra-territorial reach, applying only to FCA-authorised firms. For example, the new rules and guidance will not apply to AIFs managed by non-UK AIFMs registered for marketing to UK professional investors under the UK's national private placement regime. (Such products may be harder to sell to certain UK investors, of course, if - as will be increasingly likely - those investors are required to make TCFD disclosures themselves.) They will also not apply to EEA firms subject to the Temporary Permissions Regime.

However:

• entity-level reports will apply to FCA-regulated firms with respect to their assets managed or administered from the UK, irrespective of where the client, product or portfolio is based; and
  
  
• the FCA proposes flexibility for certain disclosures to be made on a global business-wide basis, even where certain activities and products may not strictly be within the scope of the proposed rules.  We elaborate on this proposal below.

In-scope UK firms will be required to publish prominently on their main public website an annual entity-level TCFD report on how they take climate-related risks and opportunities into account in managing investments. 

In the context of the provision of certain products and services, firms will also be required to produce a product or portfolio-level TCFD report in respect of each relevant product or fund. This must include a number of prescribed "core" metrics, together with, on a "best efforts" basis, some additional metrics. Depending on context, these product-level TCFD reports may need to be published on a website or made available upon request only to clients. (In some respects, this is not dissimilar to periodic reporting required for EU SFDR Article 8 and 9 products but without taxonomy-alignment reporting.)

The details of these entity-level and product-level disclosure requirements are set out in sections 8 and 9 below. 

The UK proposals do not currently include a labelling (or kite-mark) scheme for financial products, of the sort which Articles 8 and 9 EU SFDR have, in practice, become (despite this not being the intention of the European Commission) but the FCA indicates that such a labelling scheme could be developed in future.

At the technical level, the metrics are broadly consistent with the climate-related data required to be gathered for EU SFDR periodic reporting. 

The FCA proposes a phased implementation, depending on the size of the asset manager, as follows:

Subsequent disclosures must be made by 30 June of each calendar year. 

In addition, the FCA acknowledges that there will be data gaps and that in-scope firms may use "proxy data" or "make assumptions" to address any data gaps provided that such assumptions are "transparent" and the methodologies underlying them are set out. 

Entity-level reports must be published on an annual basis and no later than 30 June each calendar year. These must be published in a "prominent place" on the main website for the firm (for example, with a link from the homepage to ensure that the disclosures are easily accessible).

The entity report should cover disclosures in relation to all assets managed or administered that are in scope (see above).  

The TCFD entity report must include a compliance statement (signed by a member of senior management) confirming that the disclosures comply with the relevant FCA requirements.  

As noted above, the FCA accepts that firms may make disclosures at a group level (i.e. as part of a group report), and that a firm's TCFD entity report may therefore cross refer to the climate-related disclosures made by the group as a whole or by another member of the group. However, where a report does so it must set out: (a) the rationale for doing so, (b) how the disclosures are relevant to the firm's activities; and (c) where a firm's approach to the TCFD's recommendations materially deviates from the climate-related financial disclosures contained within the group report, a clear explanation of that fact.

The entity-level report must cover the following matters.

• Disclosures consistent with the recommendations and recommended disclosures of the TCFD. 
  
  
• Where a firm's approach to a particular investment strategy, asset class or product is materially different to its entity level approach to governance, strategy or risk management, an explanation of this.  (This requirement could give rise to some tricky considerations in the context of global securities offering laws.)
  
  
• A brief explanation of how the firm's strategy has influenced decision-making and the process by which it delegates functions or selects delegates and relies on services or strategies or products offered or employed by third parties. In instances of delegation, the delegating firm remains responsible for its own entity-level report.
  
  
• The firm's approach to climate-related scenario analysis and how the firm applies climate-related scenario analysis in its investment/risk-decision making process. If it is reasonably practicable, the firm must also provide quantitative examples to demonstrate its approach to climate-related scenario analysis.

A description of any targets the firm has set to manage climate-related risks and opportunities (including the KPIs the firm uses to measure progress against these targets). Alternatively, where a firm has not set any such targets, an explanation of why this is the case. 

For many firms, portfolio/product level reports must be published on an annual basis in a "prominent place" on the firm's main website, no later than 30 June in each calendar year. The disclosures must also be published in the appropriate client communication which follows most closely after the annual reporting deadline of 30 June, such as the annual report or periodic client report.   

Firms that manage listed unauthorised AIFs must include their product/portfolio level disclosures in the TCFD entity report.

However, and importantly, the FCA accepts that public disclosures are not appropriate for some client relationships – i.e. in the context of discretionary portfolio management or AIFMs managing non-listed unauthorised AIFs. Instead disclosures should be made available to clients upon request in order to satisfy the clients' own climate-related financial reporting obligations.  Firms would only be required to provide this information once in each annual reporting period; they would not be able to request data that precedes the start of the relationship.

The disclosures should include:

• A "baseline" set of core metrics based on a subset of the TCFD's recommendations. The FCA notes that there is some overlap between the metrics in the TCFD's recommendations and those in the ESAs' final report on the draft RTS for the EU SFDR and that, in some cases, the calculation methodologies differ. The proposal at this stage appears to be that, where the formulas differ and the firm is subject to both regimes, it should report according to the formulas under both the UK and EU regimes.
  
  
• A set of additional metrics to be supplied on a "best efforts" basis including those which the firm considers would be helpful for decision making.
  
  
• Key performance indicators used to measure progress against climate-related targets at product-level.
  
  
• Disclosures in respect of governance, strategy and risk management where these differ at product/portfolio level from those made at entity level.

A qualitative climate-related scenario analysis with more detail for portfolios with concentrated exposures or higher exposures to more carbon-intensive sectors. This is likely to be costly for firms (and the FCA acknowledges this) given the need to build the relevant capabilities and/or rely on inputs from third parties. The FCA encourages firms to make use of specialist service providers or industry guidance. 

We have been following the EU and UK's sustainability initiatives closely and have been instrumental in industry lobbying efforts. We have considerable expertise in the new rules and their impact for firms. If you would like to discuss these further then please contact any of the persons below or your usual Travers Smith contact.