On August 6, the UK Financial Conduct Authority ("FCA") released its findings following a multi-firm review of climate reporting by asset managers, life insurers and FCA-regulated pension providers.
Background: since 2021, these firms have been required by FCA rules to disclose climate-related information in line with the Taskforce on Climate-related Financial Disclosures ("TCFD") recommendations.
FCA's overall findings: The FCA found that its rules have increased firms’ consideration of climate risks and supported their integration into firms’ decision-making. Firms were more transparent with their clients and consumers but encountered some challenges with the availability of data and consistent, well-developed methodologies. Reporting firms also considered some information too complex for retail investors to engage with and thought the regime could be less granular and more proportionate. Firms saw opportunities to simplify reporting, particularly given their broader sustainability disclosure obligations.
We set out some of the FCA's specific findings and observations below. However, perhaps most importantly, the FCA used this opportunity to set out its next steps to refine and improve its sustainability reporting framework.
"In light of our [the FCA's] findings, we are also considering how to streamline and enhance our sustainability reporting framework. We want to:
- Simplify disclosure requirements and ease unnecessary burdens on firms.
- Maintain good outcomes for clients and consumers and improve the decision-usefulness of reporting, building on the work of SDR to improve trust and reduce greenwashing.
- Promote international alignment and help maintain the UK’s position as a global leader in sustainable finance.
…As we take it forwards, we will consider sustainability reporting as a whole. This includes SDR, the ongoing endorsement of the ISSB standards (known as UK Sustainability Reporting Standards), and developments on transition plans. We will continue to work closely with the Government and regulatory counterparts to support consistent outcomes along the investment chain.
We also plan to engage further with industry to guide our next steps."
Specific findings:
- Risk management: Firms noted that the rules have helped them to consider climate change as a material risk, build their capabilities and integrate climate risks and opportunities into their strategies. The rules have also helped firms to be more transparent with their clients and consumers about how they take into account climate risks when managing or administering assets on their behalf.
- Audience: Some firms reported that while detailed climate disclosure information is helpful for institutional investors, the disclosures may be too complex for retail investors. As such, firms said they receive limited response from retail investors on their TCFD reports, particularly at product level.
- Accessibility: While entity reports were broadly accessible from a firm’s main webpage, product reports were often difficult to find. This may have contributed to the lower levels of engagement at product level by retail investors.
- Data: Firms were generally able to report on backward-looking data, such as carbon emissions. But some firms found it more challenging to provide quantitative data to support forward-looking disclosures, such as scenario analysis. For example, only around half of the product reports we reviewed disclosed the impact of all three climate scenarios on the fund, as required. This limited comparability between reports.
- Proportionality: Firms, particularly asset managers, noted that they are required to report under multiple sustainability disclosure regimes and considered our TCFD rules too granular. They suggested that sustainability disclosures could be simplified and streamlined.
- Regulatory clarity: Firms were aware of the broader direction of travel towards the ISSB standards, globally and in the UK. So, they asked to clarify the future of the TCFD rules. They encouraged consideration of international consistency while working with industry to develop a future regime which is practical for firms.
Overall, we found that our rules have increased firms’ consideration of climate risks and supported their integration into firms’ decision-making. Firms were more transparent with their clients and consumers but encountered some challenges with the availability of data and consistent, well-developed methodologies
www.fca.org.uk/...
