The UK's Financial Conduct Authority has plans to improve climate-related disclosures by listed issuers. The proposals stand to have a limited direct effect on investment managers but, as is often the case these days, the FCA points to changes in the pipeline, changes needed to encourage asset managers to provide reporting on the climate-impact of the investments in their portfolios.

The proposals are to be found in to be found in CP20/3, whose long title is Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations.

Green shoots

The FCA believes that if issuers tell the public more about how climate-related risks and opportunities might affect issuers of listed securities, investors will probably allocate capital more effectively and help the country on its way towards a low-carbon economy. The regulator's plan is to ask issuers of UK premium-listed companies to comply with the wishes of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures or explain why they do not. The FSB first published its preferences on the subject in 2017. The FCA does not want this to apply to open-ended or close-ended investment companies. It proposes to bring the new rules into effect for accounting periods that begin on or after 1 January 2021. In the parlance of the London Stock Exchange, a 'premium-listed' (formerly a 'premier-listed') company is expected to meet the UK’s highest standards of regulation and corporate governance.

Green fields

The FSB’s recommendations aim to help investors spot companies that pose the heftiest 'climate risks' and eschew them in favour of ones that are well prepared for them and are taking action to offset them. Those recommendations fall into four thematic areas: governance; strategy; risk management; and metrics/targets.

Green patches

A status report that the FSB's aforementioned task force published in June suggested that, although more and more issuers were falling voluntarily into line with its recommendations, still only around a third of the ones it knew about were doing so. The FCA’s own research supported a study by a team at the London School of Economics that examined premium-listed British issuers’ disclosures. This showed that plenty of firms were not heeding the recommendations, with the figures ranging from 27% to a peak of 47% of companies making climate-related disclosures of the kind that the FSB wanted. The FCA thinks that regulatory intervention will help accelerate good practice on a proportionate ‘comply or explain’ basis.

Green shields

The FSB's task force also expects various things of asset managers and asset owners, which it thinks should influence the organisations in which they invest to publish better climate-related financial disclosures. The idea was to help these firms' clients and beneficiaries to improve their understanding of the performance of their assets, to consider the risks that they run with their investments and to make more informed choices when investing. The FSB thinks that asset managers and asset owners should use their existing means of financial reporting to their clients and beneficiaries, wherever relevant and feasible. Among these things, they ought to disclose data about the greenhouse gas emissions that their investment portfolios represent. However, none of these recommendations has so far made its way into the FCA’s requirements for segregated portfolio management reporting.

Green-faced gremlins

So much for conduct and principle causing people to change. Faced with one of the most significant problems of the age - the need to move to a low-carbon economy - the majority of issuers continue to provide pitiful disclosures. Now the FCA must throw the stick of shame away and encourage compliance.

In parallel, the FCA is also considering how best to instruct regulated firms, including asset managers, to make better climate-related disclosures. It is co-ordinating its efforts with the Government and other regulators and is also taking the EU's pronouncements on disclosure into account. The FCA currently encourages voluntary disclosure in line with the FSB's ideas for asset managers. Last year it collaborated with the Bank of England's Prudential Regulation Authority to set up the Climate Financial Risk Forum. With the help of this, it is planning further steps to promote best practice and persuade regulated firms to make these disclosures.

Green growth

The FCA wants to assess the effectiveness of the new disclsures. To this end, it proposes to hold a 'supervisory dialogue' with asset managers about the usefulness of issuers’ disclosures and to contribute to the design of investment products and something to which it refers as 'effective stewardship.'

Green light

The FCA’s latest edition of Sector Views, published last month, indicates that the public increasingly expects asset managers to act as 'responsible stewards,' pandering to a growing interest in responsible investment through environmental, social and governance (ESG) funds and/or green funds. This is probably a good indication of the priorities that it is going to set out in its annual business plan, which normally comes out in the spring of each year.

* Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk