New climate disclosure requirements as FCA launches ESG sourcebook

New climate disclosure requirements as FCA launches ESG sourcebook

The new ESG sourcebook outlines climate-related disclosure rules which will affect asset managers, insurers and pension providers. For those in scope understanding the data requirements and establishing an appropriate framework will be key. If you’re not in scope it’s an indication of what is to come. And with ESG developments happening across the UK regulatory landscape it’s important to understand when and how you’ll be affected.

The FCA’s ESG sourcebook

The FCA launched its ESG sourcebook in January as part of the FCA’s Business Standards Handbook. So far, apart from “Purpose and application”, there is only one chapter in this sourcebook, and it’s on the “Disclosure of climate related financial information” for asset managers and asset owners. It came into effect on 1 January this year for larger firms and will be required a year later for smaller ones.

Who is affected by the climate disclosure rules

For these purposes, the regulator’s definition of asset managers are investment portfolio managers and UK UCITS management companies and AIFMs. The definition of asset owner is a life insurer in relation to insurance‑based investment products and DC pension products, or a non‑insurer FCA‑regulated pension provider, which includes platform firms and SIPP operators, to the extent that SIPP operators provide a ready‑made selection of investments. Firms with less than £5bn in-scope assets under management or administration are exempt from these rules.

What are the new rules?

The new requirements are in line with last year’s consultation papers on climate-related disclosures and are part of the government’s ‘roadmap’. The rules require in-scope firms to make climate related disclosures on an annual basis at both entity and product level, and these disclosures must be consistent with the TCFD recommended disclosures (TCFD stands for The Task Force on Climate-related Financial Disclosures, whose recommendations cover Governance, Strategy, Risk Management and Metrics & Targets). Larger firms (asset managers with assets under management of more than £50bn, or asset owners with assets under management or administration of more than £25bn) are required to make their first disclosures by June 2023, with a deadline of June 2024 for the smaller in-scope firms.

If the firm is a member of a group, then it may rely on the group’s financial disclosures to the extent that they are relevant, and cover the firm’s in-scope assets under administration or management. The entity report must include a compliance statement, signed off by a member of the senior management.

What to do if you’re in scope

If you are in scope for the new ESG rules there are a number of questions you should ask yourself:

  • Do you have a corporate ESG strategy and positioning? Do you have an ESG investment strategy?
  • Have you built an ESG governance framework or have a set of ESG policies?
  • Do you know your ESG risks, and have they been integrated into your risk management framework?
  • Do you know how you are going to source your ESG metrics and ratings? If not, how will you go about selecting suitable ESG metric and rating providers? Have you built your data feeds? And will there be gaps in your data?
  • Do you have any ESG products, or are you thinking of launching one? If yes, how are you measuring whether or not these products are ESG compliant, ensuring that you are not ‘greenwashing’? Are your marketing disclosures fair and not misleading?

ESG – understanding the broader regulatory landscape

This is of course only one part of the wider move to embrace ESG. From the FCA’s perspective there are a number of other initiatives underway. These include:

  • Looking to widen the set of disclosures, beyond those that are climate related, to SDR (Sustainability Disclosure Requirements)
  • Proposing a sustainable investment labelling system
  • Exploring how best to introduce sustainability-related requirements for financial advisers, including introducing them into suitability tests, mirroring the amendments we have already for EU MiFID firms
  • Considering, with HM Treasury, how overseas funds marketed into the UK would be treated.

Even if you are not in scope of the rules, you may still wish to provide ESG data, in particular product data, to support your clients, ensuring that they can minimise their own data gaps. As ESG becomes ever more ubiquitous, understanding how these kinds of requirements could affect you in future would be prudent for any regulated firm.

We can help

We have sectoral experts across UK financial services and insight into global regulations so are tracking ESG developments at every level. Here are just some of the ways we can help.

  1. We can guide you through the management of the ESG regulatory pipeline
  2. We can help you with designing your ESG governance framework and ESG policies, including the governance around data gaps.
  3. If you are thinking of launching a UK authorised ESG fund, then we can help you with your FCA application, advising you on its compliance with the FCA expectations (as given in the ‘Dear Chair’ letter of June 2021)
  4. We can review and comment on the disclosures in your marketing materials, including those for any ESG products you may have.
  5. We can support and guide you in the selection of ESG data providers and the specification of metrics.
  6. We can help you with the preparation of your entity or your product TCFD disclosures report.
  7. We can support you in your ESG compliance monitoring programme, oversight of third-party providers, or with your compliance statement.
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