What UK asset managers need to know about TCFD reporting

Practical overview of climate-related disclosures including which firms are subject to the rules, time scales and the products in scope.

What is TCFD?

The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board to develop recommendations for more effective climate-related disclosures in order to promote more informed investment decision making.

What’s in scope so far?

June 30, 2023 marked the publication deadline for the first mandatory TCFD reports published under the FCA’s rules for asset managers with assets under management (AuM) of more than £50 billion ($61 billon).

The second phase of the FCA’s rules have also now taken effect. January 1, 2023 marked the date upon which the rules took effect for firms exceeding £5 billion ($6.1 billion) in AuM with the date of first publication being June 30, 2024.

What are the TCFD recommendations?

There are 11 recommendations, each structured around the following pillars:

  • governance;
  • strategy;
  • risk management; and
  • metrics and targets.

These pillars have since been utilised in the construction of other disclosure regimes, such the International Sustainability Standards Board’s first two IFRS Sustainability Disclosure Standards, the Taskforce on Nature-related Financial Disclosures (TNFD) and the climate reporting platform CDP.

Which firms are subject to the FCA’s mandatory rules?

The rules apply to all FCA-regulated managers and asset owners including:

  • portfolio managers;
  • UCITS management companies and self-managed UCITS funds;
  • full-scope UK AIFMs;
  • small authorized UK AIFMs;
  • life insurers; and
  • FCA regulated pension providers.

The disclosure obligations do not apply to asset managers which have less than £5 billion ($6.1 billion) of AuM, calculated over a three year rolling average. The FCA expects that the rules will apply to 98% of the AuM of the UK asset management industry.

Relevant to private equity fund managers, those UK FCA-authorized private equity firms providing investment recommendations to their general partner situated offshore or to non-UK investment managers are in-scope despite not having ultimate investment discretion over the fund. The meaning of “portfolio management” has been extended to include activities consisting of advising in relation to investments or managing investments on a recurring or ongoing basis.

The rules do not apply to overseas firms accessing the UK by way of the temporary permissions regime.

What type of products are in scope?

The rules apply at entity-level and product level.

Entity level

This is an annual TCFD report on how the firm is taking into account climate-related risks and opportunities in managing and administering investments on behalf of clients.

The report must be published on the firm’s website, in a prominent place, covering all assets managed by the firm. This includes those assets that have been delegated to third-party managers. These should be consistent with the four themes on which the TCFD recommendations are based.

If a firm has set particular climate-related targets, detailed disclosures must be made including targets, KPIs and how they have measured their progress towards those targets. An explanation as to why a firm has not set any targets is required where no targets have been set.

Product level

As at entity level, an annual report for each in-scope product with portfolio level disclosure is required to be published on the firm’s website in a prominent place. The content of the report must cover climate-related disclosures comprising the core set of climate-related metrics as follows:

  • scope 1 and 2 greenhouse gas emissions;
  • scope 3 greenhouse gas (disclosure for Scope 3 is delayed until June 30, 2024);
  • total carbon emissions;
  • carbon footprint; and
  • weighted average carbon intensity.

Firms are expected to supplement those mandatory metrics with the below metrics on a ‘best efforts’ basis with metrics such as Climate Value-at-Risk, information on how the metrics are interpreted and associated limitations and other metrics that the firm considers would be helpful for investor decision-making.

There is no specified format and firms are able to choose their own reference periods for reporting purposes provided the time scales are met.

What are the time scales?

Asset managers with greater than £50 billion ($61 billion) of AuM the rules first applied from January 1, 2022 with the deadline for publishing their first report on June 30, 2023 and on demand disclosures started on July 1, 2023.

Asset managers with AuM of less than £50 billion the FCA’s rules were deferred until January 1, 2023, with first reports not being required until June 30, 2024 and on demand disclosures starting on July 1, 2024.

Is it mandatory?

Yes, for all UK asset managers that are in-scope, the reporting requirements are mandatory and must be complied with.

The rules do not however apply to non-UK firms. This includes non-UK firms which market products and services cross-border into the UK or EU firms which are currently in the Temporary Permission Regime. There is no exception however for UK firms operating exclusively as sub-investment managers to their international affiliates.

What are some of the challenges relating to TCFD reporting?

Whilst the obvious challenges of meeting deadlines are ever present, further challenges include the difficulty in explaining the rationale behind not including certain data or targets. The FCA has clarified it will not require firms to disclose information if data gaps cannot be addressed, however firms must explain where and why they have not disclosed certain data and what steps are being taking to address this. This could prove to be a difficult task if such data gaps are unknown or unintentional.

An important requirement of TCFD reporting is scenario analysis. This requires the analysis of portfolios in light of certain future hypothetical climate scenarios. Despite tools being available for this exercise, this can be a challenging part of a TCFD report.

Additionally, as climate policies adapt, targets change, climate modelling changes and science improves. Ensuring data is accurately reported and compiled into the report is often a costly and time-consuming operation.

What next?

Policies and procedures for data collection and climate governance structures will be enhanced, in preparation for both TCFD reporting as well as the myriad of other mandatory ESG reporting requirements coming through into law.

  • From 2024 the International Financial Reporting Standards Foundation (IFRS) will take over the monitoring of the progress of climate-related disclosures from the TCFD.
  • The UK government has announcement that it will be adopting the International Sustainability Standards Board’s (ISSB) standards, which are based on the TCFD recommendations. The ISSB’s first standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and IFRS S2 Climate-related Disclosures were issued in June 2023.
  • Later in 2023, it is expected that the FCA will publish its final Sustainability Disclosure Requirements (SDRs).
  • Although there is no clear date by which firms should expect the UK’s green taxonomy an update is also expected later in 2023.
  • The UK’s Transition Plan Taskforce launched its Disclosure Framework in October 2023 to assist firms in preparing transition plans, which are expected to become mandatory in due course.
  • The 2023 TCFD status report was issued in October. It found that more progress is needed. Whilst for the fiscal year 2022 reporting period 58% of reporting companies disclosed in line with at least five of the 11 recommendations, only 4% of companies disclosed in line with all 11 recommendations. Based on a review of publicly available reports, nearly 70% of the top 50 asset managers disclosed in line with at least five of the recommended disclosures.

As well as keeping up to date with the evolving landscape of upcoming regulations, firms with AuM exceeding £5 billion ($6.1 billion) will be working hard to meet the deadline for publication of their TCFD report by June 30, 2024.

Rachel Richardson is head of ESG and Nick Aird is an associate and advises on a broad range of debt finance transactions at Macfarlanes.