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FCA disclosure – refining asset management

Rashim Arora Rashim Arora

The FCA recently updated their climate disclosure regulations for asset managers, life insurers and pension providers. Rashim Arora takes a closer look at the enhanced legislation and how firms can implement the changes.

These proposals aim to provide guidance and financial disclosure rules for firms, in line with the best practice proposed by the Taskforce on Climate-Related Financial Disclosures (TCFD). This is in response to the Financial Conduct Authority’s (FCA) ongoing focus on how firms are handling their climate initiatives in accordance with the government’s proposed net-zero emissions economy by 2050.

The move also aligns with the government’s roll out of mandatory disclosures to accelerate the transition to a green economy, with a confirmed climate-related disclosures roadmap set to be in place by 2025. Asset managers must consider how applying climate infrastructure could affect an asset’s financial exposure, opportunities and impacts.

In line with best practice, the FCA has asked firms to provide a more clear and precise measure of their assets and actions involving climate related uncertainties and opportunities, with a client and consumer focus. It is recommended that businesses report an entity-level TCFD report on annual basis and demonstrate this on the main pages of their company website, with information that demonstrates what action the firm is taking regarding climate related issues when managing investments.

Entity level

Entity level reports would require firms to publish disclosures that are consistent with the TCFD recommendations. A firm would also need to explain their approaches to investment strategy and asset class if it is noticeably different from their governance, strategy and risk management approach.

The report would also include a descriptive guideline on how a firm’s strategy has influenced decision making, including third party oversight and their incorporation into the report. This would tie into a climate-related scenario analysis in regards to assets and the investment process, specifically how firms plan to implement testing into their framework.

Portfolio level

The regulation also requires companies to cultivate a portfolio-level TCFD report to represent specific products or services provided. This would highlight core metrics with carbon-efficient data to support scenario analysis, and long term planning. The FCA recommends that disclosure centre on governance, strategy and risk management, and should similarly be detailed on the firm’s website.

The FCA proposes a mandatory set of climate emissions and carbon intensity metrics to include in their reports. This would provide consistent and comparable data across the sector, to assist the flow of information along the investment chain for client assets. These metrics would offer clients helpful information to inform decision making processes and provide greater benchmarking across the sector.

Consumer focus

The FCA has prescribed this level of disclosure with the purpose of increasing the scope of transparency between firms and clients. Following best practice would allow a better line of communication and give a more informed perspective to the consumer. In turn, this will allow them to make more informed decisions about their assets and investments when selecting firms.

The FCA’s approach also gives customers more scope to hold companies to account for their climate risk management and disclosure. Increased transparency would create greater market integrity and encourage financial service providers to efficiently manage climate related risks and opportunities, and improve the transition to a low carbon economy.

Governance, strategy and risk

There are also new reporting requirements on the firm’s governance, strategy and risk management, which must be available in a clear and detailed format. The FCA recommends firms follow TCFD guidelines, but also take a proportionate approach depending on the firms’ scale, products and portfolios.  The FCA highlights the need to tailor the report to the specific audience and consider key areas of interest for each audience segment.

Understanding the risk profile

The updated regulation also factors in potential climate risks and scenario analysis testing, which the FCA recommends firms consider during the investing and decision making process. Firms need a clear grasp of this in order to demonstrate climate risks and opportunities.

One of the biggest issues with climate risk management is not fully understanding the transmission risk, and how that can lead to financial losses. The FCA highlight two types of financial risks relating to climate that could affect asset and investment management.

Physical risks

This form of risk is likely to arise as a result of the rising temperatures and sporadic weather scenarios, such as flooding, which could lead to major losses and disruptions for firms. For example, the risk to a managed portfolio of physical asset such as property, where the value could rapidly decrease.

Transitional risks

As ongoing and adapted policies are brought into regulation in the lead up to a net zero economy, firms will also face transitional risks. These are caused by changes to policy, markets, technologies and behavioural changes, which could impact a company’s business models and practices.

Long term investment

In order achieve a less carbon intensive economy and meet government regulation, firms will need to prepare for the long term. Managing assets and investments in accordance with regulation, and creating effective disclosures, will require significant investment and operational changes.

Applying the right metrics to meet climate related disclosure will be a challenge, but following regulation and applying best practice is a necessary scope sustainability.

For more information on disclosures and climate risk, contact Rashim Arora.

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