New ESG rules for UK asset managers

During the past few years, the Financial Conduct Authority in the United Kingdom has developed and implemented climate-related financial disclosures. In November 2020, the chancellor of the exchequer announced the U.K.’s intention to make climate-related financial disclosures mandatory for large companies and financial institutions by 2025.

Since then, the U.K. has rolled out disclosure requirements for many institutions, including environmental, social, and governance rules for asset managers, life insurers, and FCA-regulated pension providers.

Most asset managers in the U.K. are preparing to publish their first disclosures by June 30, 2023, or by June 30, 2024.

Asset managers in scope for new FCA ESG Rules

Firms within the scope of the FCA’s climate-related financial closure requirements include U.K. asset managers defined as:

  1. Investment portfolio managers
  2. U.K. Undertakings for Collective Investment in Transferable Securities management companies
  3. Full-scope U.K. Alternative Investment Fund Managers
  4. Small authorized U.K. AIFMs

Although not under the scope of the regulations, asset managers in the U.S. and European Union might indirectly feel the impact of these new rules. Non-U.K. asset managers may need to provide in-scope firms with more product-level information.

Implementation dates for UK asset managers

As of January 1, 2022, the disclosure requirements covered asset managers with more than £50 billion in assets under management (or £25 billion in assets under administration for asset owners). These firms must make their first reports by June 30, 2023, for the 2022 calendar year.

Firms with more than £5 billion in AUM or AUA are subject to the new rules starting January 1, 2023, with their first reports due by June 30, 2024, for the 2023 calendar year.

The rules exempt firms from the disclosure requirement if their AUM or AUA is less than £5 billion, calculated as a three-year rolling average on an annual basis for business activities related to in-scope services.

The UK climate-related financial disclosures

The U.K. aligned its disclosure requirements with those developed by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures. The FSB is an international organization that monitors and makes recommendations for the global financial system.

The TCFD created a voluntary reporting framework based on four pillars and 11 underlying disclosures, and the U.K.’s disclosure framework relies on the same four pillars:

  • Governance: A firm’s governance around climate-related risks and opportunities.
  • Strategy: How climate-related risks and opportunities might impact a firm’s businesses, strategies, and financial planning.
  • Risk Management: A firm’s process to identify, assess, and manage climate-related risks.
  • Metrics and Targets: The parameters a firm uses to assess and manage relevant climate-related risks and opportunities.

The ESG Sourcebook for asset managers

The December 2021 FCA policy statement Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers announced the new ESG Sourcebook containing the rules for asset managers to make disclosures consistent with the TCFD’s recommendations.

Firms must make annual entity-level and product-level disclosures.

Entity-level disclosures

Asset managers must publish a TCFD entity report in a prominent place on their main website, describing how they take climate-related matters into account in managing and administering their investments for clients.

Firms should note the differences in their approach compared to the TCFD governance, strategy, and risk management pillars for their investment strategies, asset classes, and products. They must also disclose any transition plans as part of their strategy disclosures.

Product-level disclosures

Asset managers must publish disclosures related to TCFD-aligned and other metrics for their products and portfolios prominently in a public place on their website and in an appropriate client communication or upon request to certain institutional clients.

Asset managers must contextualize the metrics the first year they provide product-level disclosures. They must provide historical annual calculations on core metrics in subsequent years.

UK asset managers’ next steps for ESG disclosures

Asset managers in the U.K. should review the ESG Handbook extensively for guidance on their first disclosures. For the firm’s product-level disclosures, firms should consider which metrics they’ll track and publish to align with the necessary disclosures.

A critical step is beginning to locate and gather the necessary data for entity- and product-level disclosures. The FCA is aware of data gaps and challenges, which is why it allows firms to initially use proxy data or assumptions along with reasonable explanations.

 

Ontra is an alternative legal services provider in the United States. We are not a law firm and do not provide any legal services, legal advice, or referral services. We do not provide any legal representation to clients, nor do we participate in any legal representation of clients. The contents of this article are for informational purposes only. For assistance, please consult your legal advisers.

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