Calls for climate reporting harmony as FCA and DWP rules diverge

The FCA launched a consultation in June into disclosure rules aligned with Task Force on Climate-related Financial Disclosures recommendations. The regulator’s proposals followed those made by the DWP, which will require trustees to report on their schemes’ climate change investment risks by October. 

Two levels of disclosures were laid out in the FCA consultation. The first comprised “entity-level” disclosures, under which companies would be required to report annually on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients, and publish them on its website.

The second consisted of “product” or “portfolio-level” disclosures, which would see companies required to report annually on the individual products or portfolio management services they offer, including a core set of metrics on carbon emissions.

It does not seem right to us that pension funds are required to publish their TCFD reports ahead of asset managers

Will Martindale, Cardano

The FCA regulations were designed to capture most asset managers, as well as life insurers providing insurance-based investment products, trust-based pension schemes, platform providers and self-invested personal pension operators.

Workplace defined contribution and defined benefit schemes were not included, as they fall under the purview of the DWP’s regulations.

Divergence is an issue

However, industry experts have warned in response to the consultation, which closed on Monday, that the proposed FCA and DWP regulations may not exactly align, with the PLSA in particular calling for greater co-ordination between departments.

Concerns were particularly pronounced around the timeline, and the way in which this would interact – or not – with other TCFD initiatives from other departments. 

The current proposals lay out a phased approach, with the rules for the largest companies coming into force from January 2022, with a publication deadline of June 30 2023. These companies include assets managers with more than £50bn in assets under management and providers that have more than £25bn.

The remainder of the companies will see the rules come into force from January 2023, with a publication deadline of June 30 2024.

Joe Dabrowski, deputy director of policy at the PLSA, noted that the differing regulatory focuses from the FCA and the DWP have “created some misalignment of timetables for the reporting of information”, which can be overcome by a “pragmatic approach taken by regulators”.

For example, the first set of climate-related disclosure requirements for the largest occupational pension schemes and authorised master trusts applies from October 1 2021, with TCFD reports to be published within seven months of the scheme year under way on that date, the PLSA stated. 

On the other hand, the deadline for the first TCFD reports to be published by companies regulated by the FCA is June 30 2023.

“The ability of pension scheme trustees to meet their TCFD reporting obligations, as set out in the DWP regulations, is dependent on firms’ ability to provide that data. With the timelines proposed, this may not be readily available for a considerable period of time,” the industry body noted.

Will Martindale, group head of sustainability at Cardano, shares a similar view, writing in its consultation response that the “purpose of TCFD reporting is to address information gaps in investment decision-making”.

He said: “We believe this can best be achieved through the harmonisation and standardisation of reporting requirements, including the timing of reporting requirements, across the intermediation chain, and in particular, from asset manager to asset owner.

“We believe that the largest asset managers should publish their TCFD report by mid-2022, as is the case for the largest UK pension funds,” he continued.

“It does not seem right to us that pension funds are required to publish their TCFD reports ahead of asset managers.”

The PLSA also called for a commitment to review and assess the costs and benefits of the new requirements to be made before they are introduced, as a lack of review of these “will have a detrimental impact on the decision-making of trustees when making investment decisions”.

This commitment should also be made with the DWP’s regulations in mind, it said.

Don’t forget the LGPS

The PLSA also urged the FCA to keep in mind the differences between asset managers, which have business considerations, and in-house investment managers for private sector schemes, and those within Local Government Pension Scheme pools.

The industry body recommended the latter groups “should only be held to comply with similar requirements to those for the private or public sector from DWP/TPR guidance”, and from the Ministry of Housing, Communities and Local Government, its response stated.

Considering all of the above, the PLSA recommended that “the timings of the first round of disclosures be moved up to align more closely with when schemes are being asked – and LGPS funds will be asked – to produce their climate-related disclosures”. 

“So long as asset managers have sufficient time to produce what is being asked of them, it would be helpful for schemes to have access to this information sooner rather than later,” it said.

‘Significant’ data challenges

The PLSA’s response warned of “significant challenges” in the use of proxy data and assumptions to plug data gaps, some of which emerging from the “different range of approaches” to creating proxy data, and others stemming from a lack of data around “non-corporate” investments like real estate and infrastructure.

Dabrowski said: “We are concerned that different views on reporting metrics have been proposed across the two consultations.

“As schemes and investors generally have identified comparable and consistent data as a key issue, we would urge the FCA, the Pensions Regulator and the DWP to find a common set of expectations to ensure the whole of the investment chain is aligned, and can pull in the same direction.”

The PLSA recommended that the FCA adopts the “as far as they are able” approach outlined in the DWP’s regulations, calling on the former to “revisit its proposed scope to ensure it would materially ensure climate-related risks and opportunities are managed”. 

“The DWP statutory guidance notes this and does not expect trustees to be able to readily calculate emissions for derivatives,” it said.

A joint approach for dealing with data limitations would avoid “risks created by making decisions based on inconsistent methodology”, the PLSA continued. 

“While the assumption of proxy data can help inform investment and fund strategies, we would ask that the FCA is clear on expectations, such as provided in the DWP statutory guidance, to avoid any significant impact on the accuracy of reporting results.”

Martindale added: “We support the transparent use of proxies where there are information gaps, particularly in ‘hard-to-reach’ asset classes such as derivatives, hedge funds or private markets, or in geographies where TCFD reporting is less well-established, and where the cost of acquiring the data may be substantial.

“Where gaps are substantial, investors should be incentivised to use their stewardship/engagement rights to seek to close data gaps.

“While our preference would be, in the first instance, to introduce company disclosure, followed by asset manager disclosure, we believe the urgency of climate change warrants the multi-dimensional approached,” he said, concurring with the PLSA on the need for disclosure requirements to be harmonised.