FCA to ‘streamline’ sustainability reporting framework

The Financial Conduct Authority (FCA) plans to streamline its sustainability reporting framework in response to feedback.

The UK regulator introduced rules for asset managers, contract-based pension providers and insurers back in 2021, based on recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).

This week, it published an overview of current sentiment towards the regime, concluding that the rules “have increased firms’ consideration of climate risks and supported their integration into firms’ decision-making”.

However, of the 77 fund reports it reviewed, only half complied with the requirement to disclose the impact of three climate scenarios.

This was in part because investors found it challenging to provide quantitative data to support such forward-looking disclosures, according to the FCA.

Need for streamlining

Among the trade associations and financial institutions that were canvassed during the exercise, there were calls for a lighter regime, with some believing the current TCFD rules were “too granular”.

“They saw opportunities to simplify reporting, particularly given their broader sustainability disclosure obligations,” the FCA stated, adding that many asset managers are covered by multiple requirements.

The UK government is currently consulting on how it should develop a new national reporting framework based on output from the International Sustainability Standards Board (ISSB).

The FCA is expected to replace its TCFD rules with Sustainability Reporting Standards (SRS) aligned with the framework.

“Firms were aware of the broader direction of travel towards the ISSB standards, globally and in the UK,” said the FCA. “So, they asked us to clarify the future of our TCFD rules.”

The regulator has already updated its sustainability reporting webpage to clarify how firms in scope of both the TCFD rules and the Sustainability Disclosure Requirements can report efficiently.

“In light of our findings, we are also considering how to streamline and enhance our sustainability reporting framework,” it said.

This work includes exploring how to “simplify disclosure requirements and ease unnecessary burdens on firms” and promote international alignment.

“As we take it forward, we will consider sustainability reporting as a whole,” said the FCA, noting the role of climate transition plans.

Last month, The Pensions Regulator (TPR) announced it would develop a template for pension funds to disclose transition plans.

Since 2021 certain occupational trust-based pension plans have also had to produce TCFD-based reports, and the government consultation on ISSB adoption stated that the Department for Work and Pensions will review the underlying regulations this year, building on evidence provided by TPR. 

Meanwhile, the Financial Reporting Council (FRC) is asking for feedback from the market on how its Sustainability Disclosure Technical Advisory Committee, which advises the government on its adoption of the ISSB standards, should respond to proposed updates to sector-specific rules, known as the SASB standards.

The survey is open until 29 August and the FRC will host an online roundtable on the proposals on 2 September.

Faith Ward, chief responsible investment officer at Brunel Pension Partnership, has urged investors to submit feedback to the FRC and participate in other ongoing sustainability reporting consultations.

The FCA said it would “work closely” with its fellow regulators and the UK government to ensure its output was coherent with other work being done along the investment chain.

“We also plan to engage further with industry to guide our next steps.”

The UK Sustainable Investment and Finance Association, UKSIF, welcomed the FCA review, saying the main findings aligned with investor views.

“It’s now crucial that the government moves swiftly ahead with the adoption of the SRS,” said the body’s head of policy and regulatory affairs, Oscar Warwick Thompson.

“As part of this, we would like to see confirmation in the coming months of a shift from TCFD-aligned reporting to ISSB-aligned reporting across the UK economy, with clear time frames set out for different actors.”

EFRAG and TNFD consultations

In other developments, the EU’s advisory body EFRAG launched a consultation on plans to streamline the European Sustainability Reporting Standards last week.

It proposes a 57% reduction in mandatory indicators, and 68% if voluntary indicators are included. Feedback is being sought until 20 September.

And the Taskforce on Nature-related Financial Disclosures (TNFD) has this week issued a discussion paper on the challenges investors face in identifying, assessing, and disclosing nature-related dependencies and impacts at the portfolio level.

The paper sets out “preliminary reflections on metric development and parallels with greenhouse gas disclosure practices, particularly around proxy-based approaches and financed emissions”.

Feedback on metric priorities, methodological approaches and practice data solutions is welcome until November. It will inform future TNFD guidance.

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