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As set out in our earlier OnPoint, “Is Brexit Green?”,1 the UK has adopted a different approach to regulating ESG in the asset management sector compared to the EU by not “on-shoring” the EU’s Sustainable Finance Disclosure Regulation (“SFDR”) and focussing specifically on the recommendations of the Task Force for Climate-related Financial Disclosures (the “TCFD”) and its associated report (the “TCFD Report”).
In June 2021, the FCA published Consultation Paper CP21/17 (the “CP”) setting out proposals for enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers.2
On 17 December 2021, the FCA published Policy Statement PS21/24 (the “PS”),3 finalising the disclosure rules set out in the CP. These rules are now in force and are set out in a new ESG Sourcebook of the Business Standards section of the FCA Handbook of Rules and Guidance (“ESG Sourcebook”).
In this OnPoint, we look in detail at any changes between the rules proposed in the CP and the final rules in the PS, and set out some practical considerations and observations on how in-scope firms should comply with these new rules.
Whilst there has been no change between the CP and the PS in terms of the firms and products in scope, the FCA has emphasised that “portfolio management” has an extended meaning in the context of private equity and specifically captures private equity firms providing investment advice on a recurring or ongoing basis, although not “ad-hoc” advice.
The final definition of “portfolio management” is:
“a service provided to a client including:
Under the final rules set out in the PS and now in force in the ESG Sourcebook, an asset manager will be exempt from the disclosure requirements if it has less than £5 billion in assets under management (“AuM”) on a three-year rolling average, to be assessed annually, with respect to its business activities relating to “in-scope” services.4 There is, however, no further guidance on when this annual assessment must take place.
The FCA will review the £5 billion AuM exemption threshold after three years of disclosures.
The rules in the PS and ESG Sourcebook relating to disclosures to be made in respect of the firm providing portfolio management are unchanged from those in the CP.
Firms should note that the disclosures required under these rules, the four recommendations and the eleven recommended disclosures within the TCFD Report, are only cross-referred to in the ESG Sourcebook, rather than set out in full. This means that in-scope firms will still need to access the TCFD Report itself to determine the required contents of these disclosures. 5
The timing of the publication of the TCFD entity report, and where the report is to be disclosed, are unchanged from that proposed in the CP – publication is annual, by 30 June each calendar year and must be in a prominent place on the firm’s main website.
Product and portfolio-level disclosure
The content of the disclosure
For the main part, the final rules in the PS and ESG Sourcebook relating to disclosures to be made in respect of the products being managed are unchanged from those in the CP. The five key disclosures remain:
However, the FCA has amended its rules to clarify that it will not require firms to disclose information (e.g., in relation to metrics or quantitative scenario analysis) if data gaps or methodological challenges cannot be addressed through the use of proxies and assumptions, or if to do so would result in disclosures that are misleading.
In these circumstances, the applicable rules require firms to explain where and why they have not been able to disclose the relevant information, as well as the steps they will take to improve the completeness and the quality of such disclosure.
Publication of the disclosure
The final rules in the PS and ESG Sourcebook are largely unchanged from those in the CP, although the rules now clarify the circumstances where public disclosures would not be appropriate. Specifically public disclosure is not required by:
In this context, product or portfolio-level disclosures must be made available upon request to clients that need the information to satisfy their own (or their clients’ or customers’) climate-related financial disclosure obligations (‘on demand’ disclosures).
The final rules amend the ‘on demand’ rule to enable clients to request a product-level climate disclosure at a single reference point consistent with public disclosures, or at a date mutually agreed between the client and the firm. Firms must also provide the data in a “reasonable” format, considering the needs of the client.
The timing of the new rules coming into force is unchanged from the CP and is set out below.
1 January 2022: Rules in force for asset managers with AuM of more than £50 billion.
30 June 2023: Publication deadline for first disclosures to be made by firms in scope for the first phase. Subsequent disclosures made by 30 June each calendar year.
Firms may change the reporting period in subsequent years provided that there is no period of time that is not covered by the firm’s TCFD entity reports (e.g., by issuing an interim report if necessary) and that the entity reports are published by 30 June each calendar year.
Firms required to publish disclosures on their website must then include (or cross-reference to) these website disclosures in the client communication (e.g. the half-yearly report for an authorised fund) which is published most closely after the 30 June reporting deadline.
In the case of ‘on demand’ disclosures to institutional clients, firms must provide the requested information from 1 July 2023.
1 January 2023: from this date, the phase 1 Rules take effect for firms above the proposed £5 billion threshold for asset managers.
30 June 2024: Publication deadline for first disclosures to be made for firms in scope of second phase. Subsequent disclosures made by 30 June each calendar year thereafter.
In the case of ‘on demand’ disclosures to institutional clients, firms must provide the requested information from 1 July 2024.
1) “Is Brexit green?” OnPoint is available here.
2) “FCA Consultation on Enhancing Climate-Related Disclosures by UK Asset Managers” OnPoint is available here.
3) PS 21/24 is available here.
4) Services that are “in-scope” for this purpose are:
5) The four recommendations and the eleven recommended disclosures set out in Figure 4 of Section C of the TCFD Final Report are available here.