As expected, the ESG regulatory environment continues to evolve and earlier this week, the FCA released two consultation papers on its new climate-related financial disclosure regime for listed companies and asset managers.

Broadly, the new disclosure rules align ESG disclosures to the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) rather than following the EU’s Sustainable Finance Disclosure Regulation (SFDR). That said, the proposals are similar to the SFDR, in as much as they introduce entity level and product level disclosures.

The entity level disclosures require managers to publish annually a TCFD report on how they take into account climate-related risks and opportunities when managing or administering investments, taking into account governance, strategy (including climate-related scenario risks), risk management and certain carbon metrics and targets.

The product level disclosures will take the form of an annual TCFD product report published on a manager’s website by 30 June of each year (or in some instances it may be able to be made available to investors on request). Managers will be required to disclose a minimum baseline set of consistent, comparable product or portfolio level disclosures around a core set of mandatory carbon emissions and carbon intensity metrics for both UK and non-UK funds it manages and its general portfolio management services. Importantly, there is no suggestion of scaled disclosures for different categories of products or funds (such as dark green, light green or brown) as with the SFDR.

The new rules would apply to all FCA-regulated portfolio managers, AIFMs and UCITS management companies. However, in contrast to the SFDR, managers that have less than £5 billion AUM on a rolling three-year average would not currently be subject to the proposals. The FCA expects that this will cover 98% of the UK asset management market. Interestingly, whilst on the face of it the rules don’t seem to apply to investment advisers, the consultation suggests that it will catch investment advisory activities where substantial investment decisions are based on such advice, which raises questions on the scope.

The new rules would be phased in such that the first disclosures would be required by 30 June 2023 for managers with an AUM of more than £50 billion followed by 30 June 2024 for managers with an AUM of more than £5 billion.

The FCA has invited feedback by September 2021 and expects to publish a policy statement later in 2021.

The FCA seem to have taken a less prescriptive and more proportionate and outcomes-based approach to disclosure compared to the EU. However, for asset managers who are subject to both SFDR and the new UK rules, managing the different regimes (together with any other international standards they may be subject to) will be challenging.