As investors seek to align their assets with the fight against climate change, more firms are offering ESG-based investment products. The UK’s Financial Conduct Authority (FCA) wants to ensure that all such ESG claims are matched with real impact, and has introduced rules requiring large asset managers and owners—including life insurers and FCA-regulated pension providers—to offer full transparency on the climate aspects of their portfolios.
Covered firms must make their first disclosures as soon as 30 June 2023, using the best practices established by the Task Force on Climate-related Financial Disclosures (TCFD). We recommend that firms start collecting the required data early—which will soon include portfolio company emissions—so as to begin bending their carbon graphs before their first filings.
Watershed helps financial institutions like Bain Capital and Oakley Capital measure, report, and act on their emissions—including the collection of portfolio company data. This guide covers what the FCA is asking for, and how and when to report it.
Covered organisations and deadlines
The FCA’s criteria are based on where actual assets are managed or administered, not where the client, product, or portfolio may be formally domiciled. Their initial focus is on the largest of these firms, including:
- Asset managers with £50bn+ in AUM (as measured here)
- Asset owners with £25bn+ in AUM (as measured using a 3-year rolling average)
Firms captured in this first wave must report by 30 June 2023 on their 2022 calendar-year holdings. This annual filing date was chosen to coincide with the EU’s SFDR calendar, as many filers will report into both programmes.
A second wave will then follow, covering any asset manager or asset owner with £5bn+ in AUM—measured using a 3-year rolling average—who must file by 30 June 2024 on 2023 holdings. (Though they’re encouraged to consider doing so in 2023 as well.) Once they’ve all filed, the programme will have captured roughly 98% of the UK market and ~£12.1tn in assets.
Firms not yet in scope
Whilst the FCA’s first focus is on the largest asset firms, they were clear in their latest supervisory strategy memo that they want to soon see TCFD reporting from additional firms—including those in private equity and venture capital. The FCA intends for TCFD reports to gradually cover the full range of asset management activities conducted in the UK.
Filing early—or at least beginning with internal reporting—is beneficial to all investment firms. TCFD disclosures are ultimately a forcing mechanism that helps firms and portfolio companies evaluate how well climate thinking has been integrated across their governance and operational structures. Starting this self-evaluation early helps filers identify and manage both carbon hotspots and climate blindspots—which offers substantial risk-management benefits.
What the rules ask for
Covered firms must make two types of annual TCFD disclosures: one entity-level report covering the firm itself, and one report for each product offered.
Entity level reports
These cover how the firm manages their climate risks and opportunities on behalf of clients and consumers, and must include the total emissions across all three greenhouse gas accounting “Scopes” for the firm's underlying assets. These are a firms 'financed emissions', the fair shares of emissions from portfolio companies (calculated using these formulae).
Whilst Scope 3 emissions don’t need to be disclosed until 2024—ie. on 2023 holdings—firms are encouraged to begin measuring and managing them early.
Each entity-level report must be published in a prominent place on the firm’s website on or before 30 June for each filing year.
Product level reports
Each individual product needs its own TCFD-style report, which must cover five key climate metrics:
- Scope 1 and 2 emissions
- Scope 3 emissions
- Total carbon emissions
- Total carbon footprint
- Weighted-average carbon intensity (ie. emissions relative to asset value)
Each report must also cover:
- Historical comparisons for the data points above (starting on a firm’s second year of filings)
- Commentary on any discrepancies between how the firm approaches governance, strategy, or risk management for the covered product vs. their entity-level approach
Firms must also provide product-level scenario analyses in a way that’s slightly different from the normal TCFD guidelines. The FCA asks firms to disclose the physical and transitional risks of climate change on assets in three specific scenarios:
- “An orderly transition”, where climate policies are introduced in a timely manner and global warming is kept below 2° C by 2050.
- “A disorderly transition”, where climate policies are delayed and sharper emissions reductions become required at higher costs and with greater physical risks.
- “A hothouse world”, where only current policies enter effect and severe disruption ensues with high physical risks and severe social and economic disruption.
For each of these scenarios, firms are expected to provide a qualitative description of the expected impact of climate change on their assets, including detail on the most significant drivers of impact. They must also provide some amount of quantitative analysis where practical, especially where a product or portfolio has high exposure to a carbon-intensive sector.
Where these reports need to be filed depends on the type of firm in question, and on client requests. A full summary of requirements can be found here.
Dealing with assumptions
The FCA has acknowledged that there may be cases—such as scenario analysis or measuring emissions for more complex asset classes—where it’s not possible to calculate precise, decision-useful climate metrics. Wherever this is the case, firms are required to explain the steps they took to fill the data gaps—including any proxies or assumptions.
By beginning to collect this data now, firms can increase their own risk-management whilst also sparking wide-scale improvements to both data coverage and methodologies.
These rules are just the first wave of several for the FCA, which sees TCFD reports as the foundation for broader climate disclosures. The FCA plans to gradually introduce a three-tier system, consisting of (1) sustainability-based product labels, (2) consumer-friendly packets of additional decision-useful information, (3) more detailed disclosures based on upcoming standards from the International Sustainability Standards Board (ISSB). The consultation process for the three-tier system will begin at the end of October 2022.
If we can help you parse these requirements further or prepare any programme reports—including carbon measurement for portfolio companies—please get in touch.