This is Third Generation Environmentalism (E3G)’s response to the consultation from the Financial Conduct Authority (FCA) on enhancing climate-related disclosures by asset managers, life insurers, and FCA-regulated pension providers.
E3G is pleased to note and provide feedback on the FCA’s proposals on introducing climate-related financial disclosure rules and guidance in alignment with the Roadmap published by the HM Government in late 20201 , which set out a pathway towards mandatory climate-related disclosures across the UK economy by 2025. Our feedback in this response is focused on the FCA’s consultation on the rules and guidance for asset managers, life insurers, and FCA-regulated pension providers (CP21/17).
The most recent remit letter to the FCA from the UK’s Chancellor of the Exchequer underscores the need for the FCA to give consideration to HM Government’s commitment to reach net zero emissions by 20502 . This is important not only in the framing of these proposals, as referenced in the consultation itself, but in the granular detail of what is being proposed and the associated governance and enforcement mechanisms.
The recent consultation from the Taskforce on Climate-Related Financial Disclosures (TCFD) on proposed updates to its recommendations and guidance on metrics, targets and transition plans represents a key moment in the evolution of climate-related financial disclosures. With the voluntary uptake of TCFD across the world and the moves to make TCFD-aligned reporting mandatory, for example the G7 announcement made earlier in 20214 , inclusion of transition plans presents an opportunity to broaden and strengthen the disclosures made by corporates and financial institutions at scale. Success, however, is contingent on how effectively such recommendations are enacted and, where appropriate, enforced.
To that end, we are pleased to see that in the FCA’s proposal this proposed TCFD guidance is included in scope—however, as we fed back directly to TCFD during its consultation process, there are several key areas where proposals need to be strengthened. Without such strengthening, the ability of financial actors and other stakeholders to make climate-informed decisions will be limited.
The FCA and other UK regulators will be central in ensuring requirements for climate-related disclosures are met robustly across UK financial institutions and corporates. This necessitates ensuring that rules and guidance are aiding rather than lagging the delivery of the UK’s net zero target. Whilst the FCA’s reference to the new guidance on transition plans from the TCFD, i.e., requiring firms to consider the updated versions of the TCFD Final Report and TCFD Annex, is encouraging, we propose strengthening the language to explicitly require the disclosure of transition plans from firms, particularly in terms of firms’ decarbonisation plans. Not doing so could exacerbate systemic financial risks and would be a serious omission by macro-prudential regulators that could undermine the Government’s transition to net-zero.
In the following consultation response, we propose that the FCA strengthen the requirements in the following ways:
- Require in-scope firms to disclose transition plans for aligning with net zero, the goals of the Paris Agreement and a 1.5°C trajectory
- Require detail on implementation approaches such as active ownership and how measures reduce emissions in the world, not only the portfolio.
- Require 5-year interval interim decarbonisation targets to be disclosed as part of transition plans.
A final area where we would like to see further detail on efforts by the FCA is the supervision and enforcement of the proposed requirements. The reference to this within the consultation remains quite high-level for example, “…we expect to conduct supervision in this area in the coming years, both through resolving problems we identify and proactively in line with our Approach to Supervision. We will also consider how best to use data analytics tools to help us assess firms’ implementation of the requirements…”. Providing greater clarity on what this will look like in practice will be essential for compliance from in-scope firms and holding these to account on what is, or is not, being disclosed.