From the Periphery, to the Boardroom: The FCA’s Strategic Focus is on Developing Sustainability Expectations for Asset Managers, Life Insurers, and FCA-Regulated Pension Providers

In recent years, the Financial Conduct Authority (FCA) has taken significant steps to make Environmental, Social, and Governance (ESG) issues a priority. The regulator has also confirmed its ambition to provide detail and granularity on its long-term objectives, priorities, success measures, and performance indicators under each of the E, S, and G dimensions.

The fundamental concepts that underpin ESG are not new, providing an overarching framework through which stakeholders can consider a company’s impact and dependencies on the environment and society, guided by the quality and robustness of good corporate governance. The standards related to ESG, however, are currently a patchwork endeavour, growing ever more complex, as the conversation moves from the periphery to the boardroom.

 

The FCA’s ESG Strategic Priorities

Consistent with its statutory objectives, the FCA is targeting potential harm to market integrity and consumers as companies and firms adapt to the unfolding ESG landscape. The 2021-22 FCA Business Plan highlights a range of ESG-related outcomes it wants to achieve, including high-quality climate and wider sustainability-related disclosures for in-scope firms. The FCA has also appointed a new director of ESG with a mandate to embed ESG considerations across the organisation.

The latest FCA ESG Strategy also describes key actions across five themes, including the rollout of appropriate oversight, supervision, and enforcement mechanisms to improve the quality of disclosures.

The ESG Sourcebook

On 17 December 2021, the FCA published final rules for ESG disclosures by asset managers, life insurers, and FCA-regulated pension providers, in a series of ongoing enhancements to climate-related disclosure requirements. The rules take effect through a new ESG sourcebook in the FCA Handbook. Although the sourcebook relates mainly to climate-related disclosures, the FCA anticipates that it will expand the resource to cover wider ESG topics over time. Requirements in the ESG sourcebook for in-scope firms include:

  • Preparing and publishing a Task Force on Climate-Related Financial Disclosures (TCFD) entity   report by 30 June of each calendar year.
  • Preparing and publishing a TCFD product   report by 30 June of each calendar year1.
  • Ensuring the disclosures are consistent with the TCFD Recommendations and Recommended Disclosures and reflect relevant sections of the TCFD Annex.
  • Using proxy data or assumptions to address gaps in underlying data and methodological challenges unless this would render the resulting disclosure/s misleading.

The guidance confirms that firms should appropriately explain any limitations on their ability to make the required disclosures and the steps being taken to address those limitations.

What are the key actions in scope   firms should take now?

  1. Confirm your comply date, which is determined by categorisation and Assets under Management.
  2. Assess your data strategy to ensure you have enabled access to, and assurance of, the necessary data to make the required disclosures.
  3. Identify climate-related reporting gaps and how your current reporting aligns to TCFD recommendations.

There will be further statements and policies released by the FCA, Financial Reporting Council, and other UK regulators with respect to ESG reporting. Firms should consider enhancing their ESG programmes proportionate to the nature, size, and complexity of their business, in anticipation of the UK’s commitment to mandatory TCFD-aligned disclosure obligations across the UK economy by 2025.

Clearly defining your ESG goals, aligning them to your purpose and strategy, and tracking progress over time, is essential for sustainable value creation. Guidehouse can help you comply with ESG standards and regulations, including TCFD disclosures, evaluation of risk controls, benchmarking governance practices, and educating leadership on new frameworks and developments.


1 The TCFD has developed a framework to help public companies and other organisations more effectively disclose climate-related risks and opportunities through their existing reporting processes.

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