The UK Financial Conduct Authority’s new climate-related disclosure rules, which came into force in early January and build on the 2017 recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, will require the largest asset managers in the UK to assess and report on the financial risks posed by climate change.
Taking a phased approach, the new ESG rules apply to FCA-regulated asset managers and firms that provide private investment advice with more than £50 billion ($66 billion; €60 billion) in assets under management. Foreign asset managers that market funds in the UK are excused from the new legislation for now, though they may still receive requests from investors for climate-related information.
Benjamin Maconick, a managing associate at Linklaters, says: “It is very typical for asset management groups and private equity groups to have an entity in the UK that does delegated portfolio management or advice. That is likely to be the entity caught up by this, rather than the group as a whole.”
“The FCA’s ESG rules will be supplemented by the UK’s forthcoming Sustainability Disclosure Requirements”
Leonard Ng, Sidley Austin
For the largest UK asset managers, the first raft of annual disclosures is scheduled for 30 June 2023, though the FCA will not require firms to disclose information if data gaps or methodological challenges could be misleading.
Asset managers with assets below £50 billion are set to fall in scope from 1 January 2023 and make their disclosures in June 2024, while firms with less than £5 billion in assets are initially excluded.
The FCA will next publish a consultation paper on policy proposals in H2 2022, focusing on how the UK’s Sustainability Disclosure Requirements regime can build on its TCFD-aligned disclosure rules and guidance. The FCA’s new ESG sourcebook contains guidance for asset managers on making disclosures consistent with the TCFD recommendations.
“The FCA’s ESG rules will be supplemented by the UK’s forthcoming SDR, which will bring together new and existing sustainability reporting requirements for the UK’s financial system,” says Leonard Ng, financial regulation partner at Sidley Austin. “The disclosure requirements will be extended beyond climate change to cover sustainability impacts, sustainability risks and opportunities, and alignment with the UK’s Green Taxonomy.”
Stress testing
The new ESG rules promise to promote greater transparency on climate-related risks and opportunities, made essential by the global shift to a lower-carbon economy and the need for more than $1 trillion in annual decarbonisation investment.
Exposure to climate change is projected to drastically impact the risk-return profile of assets over the coming decades. Without adequate disclosures, valuations will likely fail to factor in these climate risks and investors will be left in the dark about how resilient asset manager portfolios truly are.
Floods, droughts and other effects of climate change are likely to devalue assets in the future. A report from the Economist Intelligence Unit estimates potential value losses of $4.2 trillion by 2100 – a global temperature increase of 5 degrees Celsius could result in losses of $7 trillion. The Paris Agreement aims to keep the global average temperature well within 2 degrees Celsius of pre-industrial levels.
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