The Financial Conduct Authority (FCA), the UK’s conduct regulator for financial services firms and financial markets, announced plans to streamline and improve its sustainability reporting framework for asset managers, life insurers and pension providers, including examining how to simplify disclosure requirements and ease regulatory burdens on firms.
The announcement follows a review carried out by the FCA of the results of climate reporting rules put in place by the regulator in 2021, which required asset managers, life insurers and FCA-regulated pension providers to disclose climate-related information in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations.
The review found several positive impacts from the implementation of its climate reporting rules, particularly in the area of risk management, with firms indicating that the requirements have helped them to consider climate change as a material risk and to build their capabilities, as well as to help them to integrate climate risks and opportunities into their strategies. The review also found that the rules have also improved transparency with clients on how firms take climate risks into account when managing or administering their assets.
The review also found, however, that while detailed climate disclosure information is helpful for institutional investors, some firms indicated that the level of detail required under the TCFD recommendations was too complex for retail investors. Firms – and asset managers in particular – also noted that they are required to report under multiple sustainability disclosure regimes and that they consider the TCFD rules too granular, and suggested that sustainability disclosures could be simplified and streamlined.
Firms in the review also indicated some data challenges in meeting their sustainability reporting requirements, particularly related to providing quantitative data to support forward-looking disclosures, such as scenario analysis. The FCA noted, for example, that around half of the reports that it reviewed did not disclose the impact of all 3 climate scenarios on the fund, limiting comparability between firms’ reports.
Since the launch of the FCA’s climate disclosure requirements, the IFRS Foundation’s International Sustainability Standards Board (ISSB) has taken over responsibility for monitoring progress of companies’ climate-related disclosures from the TCFD, and the TCFD has been disbanded, while multiple jurisdictions have moved towards implementing the ISSB’s sustainability reporting standards into their regulatory frameworks.
In the review, the FCA said that firms have been asking for clarity around the future of the TCFD-focused rules in light of the broader adoption of the ISSB standards, and encouraging the regulator to consider international consistency.
The FCA said that in light of its review, it is considering how to streamline and enhance its sustainability reporting framework, specifically looking at simplifying disclosure requirements and easing unnecessary burdens on firms, improving the decision-usefulness of reporting for clients and consumers, improving trust and reducing greenwashing by building on its Sustainability Disclosure Requirements (SDR) regulation, and promoting international alignment.
The FCA said:
“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.”
