New climate reporting rules to be extended by UK financial regulator

The UK financial regulator has outlined plans to extend climate reporting requirements to most UK listed companies as well as domestic asset managers, in an attempt to meet growing investor demand for disclosure.

The Financial Conduct Authority said it wanted the reporting requirements, which ask companies to disclose the risks they face from climate change, to eventually cover “98 per cent” of both assets under management in the UK market and those held by domestic money managers. It wants them to apply to standard as well as premium UK-listed companies.

“Climate-related disclosures do not yet meet investors’ and market participants’ needs,” a problem that the new rules seek to help solve, said Sheldon Mills, executive director of consumer and competition at the FCA, when launching a consultation on the proposals on Tuesday.

The FCA has already asked all premium-listed companies to report their climate-related risks in line with the Task Force on Climate-related Financial Disclosures, a project spearheaded by former Bank of England governor Mark Carney, from this year. 

Major asset managers, including BlackRock and Aviva Investors, have also asked companies to disclose their climate risks based on the framework. Aviva said this year it would divest from companies that failed to make adequate efforts to prepare for a low-carbon economy, including through climate reporting. 

Last year the government said that from 2025 climate risk assessments would be mandatory across the UK, including for listed companies, large private companies, pension schemes, insurance companies and banks.

Under the FCA’s proposed rules, companies, money managers, life insurers and pension providers would be required to explain how they take into account climate-related risks, both physical threats and those linked to potential regulatory changes. They would have to outline in a consistent and comparable way what impacts those risks could have.

Life insurers and FCA-regulated pension providers would also be captured by the rules.

Money managers with “higher exposure” to carbon intensive sectors, which the FCA did not define, should outline how their assets would be affected under an “orderly” and “disorderly” transition to net zero emissions, and in a “hothouse world” scenario.

The FCA proposed on Tuesday that the rules come into force for standard listed companies from 2022, with the first disclosures published in 2023. For asset managers and owners the rules would be introduced on a phased basis, coming into force for the largest firms in 2022 and extended to the remainder in 2023.

Firms with less than £5bn in assets under management would be exempt, due to the potentially “high” costs of disclosing the information, the FCA said.

The regulator said it expected the new requirements to cost asset managers about £200m in “one-off” compliance fees, and £115m in annual costs. For listed companies, aggregate initial and ongoing annual costs were likely to be £39m and £16m, respectively.

“This is a clear signal from the financial regulator that climate-related disclosures need to improve. A more standardised approach would represent a big step forward and help roll out a wider reaching programme of disclosure across the financial services market,” said Gareth Mee, UK sustainable finance consulting leader at EY.

The FCA also highlighted on Tuesday the plethora of third party sustainability metrics providers, such as those that give “environmental, social and governance” scores, and said there was a “lack of transparency of methodologies and interpretability of ratings”.

In a second consultation, it invited views on the issues that arise from the increasingly prominent role of ESG data providers, flagging the potential “conflict of interest” when companies pay third parties to verify the credentials of their green or sustainable bonds.