UK Climate Disclosure Rules – Questions and Answers for Asset Managers | Proskauer Rose LLP

As mentioned in our last information notethe UK Financial Conduct Authority (CIF) published its final rules and guidelines (the “Rules”) setting out requirements for a new climate-related disclosure regime for certain asset managers and advisers as well as certain “asset owners” (i.e. regulated life insurers and pension providers by the FCA) in December last year. The rules, which were published in the policy statement (PS21/24) are aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

Who do the rules apply to?

The rules will only apply to companies authorized by the FCA and which carry out “activities within the scope of the TCFD”. This is broadly divided into two categories:

  1. Asset Managers – which covers:
    1. The companies that manage investments (this would include portfolio management under the Markets in Financial Instruments Directive (MiFID) such as onshore in the UK;
    2. Companies engaged in private equity or other private market activities consisting either of investment advice on a recurring or continuous basis under an agreement whose main purpose is to invest in securities (this could include a company licensed in the UK which provides investment advice to a fund manager);
    3. UK AIFMs managing Alternative Investment Funds (AIFs); and
    4. UK UCITS management companies managing a UK UCITS.
  2. Asset Owners – which covers:
    1. pure life insurers or reinsurers that provide insurance-based investment products or operate personal pension plans or SIPPS (with respect to SIPPs containing insurance-based investment products provided by company); and
    2. other asset owners (other than pure insurers or reinsurers) who operate a personal pension plan (excluding certain types of SIPPs) or a stakeholder pension plan.

As explained in the “When do they apply?” section, the new requirements will only apply to companies that exceed certain thresholds for funds under management or administration.

Are non-UK companies affected?

As noted above, the rules have a direct impact on firms authorized by the UK FCA and therefore do not apply to non-UK managers who manage AIFs marketed in the UK in the same way as the rules of the EU on Sustainable Finance Disclosure (SFDR) includes executives outside the EU. However, the FCA said it was giving more thought to how foreign funds marketed in the UK should be treated under the upcoming sustainability disclosure requirements (SDR). As a result, it is possible that the scope of the Rules will apply in the future to non-UK asset managers marketing their funds in the UK under the NPPR.

When do they apply?

The rules began to apply from January 1 this year for the largest companies with over £50bn of assets under management (or £25bn of assets under administration for business owners). assets) and are implemented within a new environmental, social and governance framework (ESG) sourcebook contained in the FCA Handbook. The first set of reports for these companies will be due by June 30, 2023, reflecting calendar year 2022.

The remaining companies, with assets above £5bn (this threshold to be reviewed after three years of disclosure), will be subject to the new rules from 1 January 2023, the first set of annual reports for the year calendar ending in 2023 being due by June 30, 2024.

What are the requirements?

The new regime will require covered companies to report on an annual basis to:

  • Entity Level
    • an annual report of the TCFD entity published in a prominent place on the company’s main website indicating how the company takes into account climate-related issues in the management or administration of investments on behalf of the customers and consumers;
    • the content of the report should be consistent with the recommendations of the TCFD with the required information on (i) the governance of climate risks and opportunities; (ii) strategy (including scenario analysis) regarding the same; (iii) risk management related to climate risks; and (iv) the measures and targets used to assess and manage climate risks and opportunities. Companies that have set a climate-related goal must provide detailed information about their goal, the KPIs and how they measure progress. Where companies have not set such targets, they should explain why this is the case; and
    • In addition, the entity-level report must include a statement signed by a member of senior management of the company, confirming that all information (including that which is the subject of a reference to other group entities or third parties) comply with FCA disclosure requirements.
  • At product level
    • disclosures to be made (including a core set of climate-related measures) that are closely aligned with the adverse impact measures of the EU SFDR principle. Information must appear on Company products and portfolios, must be made public in a prominent place on the main Company website, and included or referenced in appropriate customer communication or made upon request to certain customers institutional; and
    • product information must also be made available to customers upon request, where customers need it for their own climate-related financial disclosure obligations under any applicable law. The rules will require firms to provide a report to clients at a single point of reference consistent with public disclosures, or on a date agreed between the client and the firm, in a “reasonable” format.

Any other UK ESG requirements on the horizon?

In October last year, the British government presented its strategy to achieve other sustainable investing goals that align with its strategy to achieve the UK’s net zero carbon emissions target by 2050.

Further proposals were made in November 2021 with the publication by the FCA of its discussion paper (DP21/4) on sustainability disclosure requirements and investment labels. The key aspect of the product labeling system will see a new product classification and labeling system in which products will be designated as ‘unsustainable’, ‘responsible’, ‘in transition’, ‘aligned’ or ‘products’. impact”. Products must meet the criteria of ‘in transition’, ‘aligned’ or ‘impact’ products to be labeled as ‘sustainable’, while products with lower ESG ambitions can be labeled as ‘responsible’. The table below outlines the FCA’s proposed labeling regime for financial products:

The product level sustainability information offered applies at a level more targeted at a retail consumer base and includes an additional, more detailed layer in cases where the product is aimed at professional investors.

Broader, customer-focused disclosures

The broader, client-focused disclosures proposed in the RFP include the following:

  • investment product labels;
  • the purpose of the product, including specific sustainability goals;
  • the investment strategy pursued to achieve the objectives, including the sustainability objectives;
  • proportion of assets allocated to sustainable investments (including alignment with UK taxonomy);
  • investor stewardship approach; and
  • broader sustainability performance measures.

Additional Information for Institutional Investors

The proposals contained the following additional product-level information for professional investors:

  • information on data sources, limitations, data quality, etc. ;
  • provide additional support for relevant narrative, including background and historical information;
  • more information on UK taxonomy alignment; and
  • benchmarking and performance information.

At this stage, the FCA is still considering whether the prescribed disclosure templates should be used, as is the case under the SFDR. The FCA said it intended to publish a consultation in the second quarter of 2022 on proposed rules to implement the new SFDR framework.

UK companies affected by the rules should start putting implementation plans in place, review all available relevant data and should consider how gaps will be filled to make relevant disclosures. Businesses will need to dedicate resources to ensure they are able to comply with the various rules that have started to apply or will apply to them in the future.

The impact on non-UK businesses will be monitored and reported by Proskauer as we learn more about the FCA’s approach.

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Michael J. Birnbaum