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Asset managers and the FCA's new rules on climate-related disclosures

Posted on 22 December 2021

Following its June 2021 consultation, and in line with the UK Government's Green Finance Strategy, the FCA has published a Policy Statement setting out new rules requiring FCA-authorised asset managers (among others) to disclose how they take climate-related risks and opportunities into account in managing investments. They will also need to make disclosures about the climate-related attributes of their products.

Background

In March 2021 the Chancellor wrote to the FCA highlighting the aspects of the Government’s economic policy to which the FCA should have regard. This included specific reference to the Government’s commitment to achieve a net-zero economy by 2050. 

The Policy Statement implements recommendations made by the Taskforce on Climate-related Financial Disclosures (TCFD) and forms part of the Government’s work to introduce TCFD-aligned disclosures across the UK economy by 2025.

The rules are intended to achieve three outcomes: firstly, better outcomes for clients and consumers through greater transparency around how firms are managing climate-related risks and opportunities in their investment decisions; second, a deeper consideration of climate-related risks and opportunities, leading to a smoother transition to a lower carbon economy; and finally, coordination of decision-useful information flow along the investment chain.

The types of firms in scope of the new rules are asset managers, investment portfolio managers and alternative investment fund managers. 

The Rules

The new rules, set out in the FCA's new ESG Sourcebook, relate to how a firm takes climate-related matters into account in its management or administration of assets on behalf of clients and consumers.  

The rules will require in-scope firms to make disclosures at both entity and product level:

  • Entity Level: By way of a public annual report, a firm will need to make climate-related financial disclosures regarding the overall assets managed or administered by that firm in relation to its 'in-scope business'. Broadly, the firm will need to explain (i) where its approach to a particular investment strategy, asset class or product is materially different to its overall entity level approach to governance, strategy or risk management under the TCFD Recommendations and Recommended Disclosures (TCFD Recommendations) and (ii) how the firm’s strategy under those TCFD Recommendations has influenced the decision-making and process by which it delegates functions, selects delegates, and relies on services, strategies or products offered or employed by third parties; and
  • Product Level: A firm will need to disclose specified product information including, among other things, a core set of climate-related metrics and relevant contextual information (such as if particular assumptions or proxies have been used).  Specific requirements apply in relation to products that have concentrated exposures or high exposures to carbon intensive sectors.

It is worth noting that, initially at least, asset managers and asset-owners with less than £5 billion in AUM or administration (calculated on a three-year rolling average basis) will be excluded from scope. This threshold will be reviewed by the FCA as part of its post-implementation review after 3 years of disclosure. 

Next Steps

The rules will come into effect from 1 January 2022. There will be a phased implementation, with the rules initially applying to the largest firms and coming into effect for smaller firms in a year's time. 

In the meantime, the FCA must continue to engage with stakeholders both in the UK and internationally to ensure its rules deliver, insofar as possible, a consistency of approach that will lead to meaningful transparency and accountability in this space.

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