FCA set to expand climate-related reporting rules

The FCA has revealed it will consult on plans to require asset managers, life insurers and FCA-regulated pension schemes to meet climate-related disclosure rules. In doing so, the FCA is expanding the scope of firms required to report on climate-related risks in accordance with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD).

The FCA is set to open a consultation on the planned expansion of climate-related disclosure rules next month, with the final rules to be announced in the final quarter of 2021. There will also be a second consultation looking at extending the scope of listed issuers covered by the rules which will also be confirmed in the final quarter of the year.

The aim of the change is to ensure firms make client-focused TCFD-disclosures throughout the investment chain, to allow investors to make informed decisions, whilst serving as a broader benefit to the financial markets through better asset pricing. It is also hoped it will help asset managers' development of increasingly popular environmental, social and governance (ESG) products and allow firms to provide information in a way that is "clear, fair and not misleading".

These consultations follow the FCA's introduction of a rule in December 2020 requiring companies with a UK premium listing to state in annual reports whether they have made disclosures that are consistent with TCFD's requirements and if not, why. The rule applies to accounting periods beginning on or after 1 January 2021, which gives an indication of how quickly firms will be expected to comply.

This FCA's incentive stems from the UK's endorsement of the TCFD's recommendations in 2017, with its stated aim to "help identify the information needed by investors, lenders, and insurance underwriters to appropriately assess and price climate-related risks and opportunities".  The FCA is part of a taskforce of regulators and government bodies that aims to make TCFD-aligned disclosures mandatory across the UK by 2025.

So, what should the new stakeholders expect? The rules are expected to align with those proposed by the Department for Work and Pensions (DWP). In January, the DWP proposed broadening the scope of climate risk analysis to cover not just the environmental impact of pension scheme portfolios, but also sponsor covenants and actuarial valuations. Schemes with assets exceeding £5bn could be expected to meet the new requirements from October 2021, and trustees would need to publish a TCFD report within 7 months of the end of the scheme year.

The FCA's plan to extend the TCFD-disclosure requirements is unsurprising as ESG investing continues to grow in popularity. As an example, NextWealth has estimated that one fifth of financial advisers' client conversations concern ESG investments as of March 2021, up three-fold since October 2019. This trend seems likely to continue as governments set targets for zero-emissions (as the UK has with its 2050 target). With this comes an expectation of greater transparency as to where and how money is invested.

The FCA's initiative should encourage the financial services sector to lead the way in the regeneration of the economy during the climate crisis. Some may be concerned about the challenge this presents, as a firm's disclosure report may be dependent on the information provided by others in the market. The issue is not going away, and we expect the disclosure requirements to become easier as more firms are required to align with TCFD's disclosure requirements.