UK: Lessons from Year 1 TCFD reporting - IA publishes insights & suggested actions for asset managers

The Investment Association (IA) has published a report focusing on key themes and challenges that have emerged from the first round of asset manager reporting, which saw large asset managers report in line with the FSB’s TCFD recommendations and make disclosures at both entity and product level.

Background

The FCA’s PS 21/24 of December 2021 required the largest asset managers (those with AuM of over £50bn) to report in line with the TCFD framework by 30 June 2023. With those asset managers with AuM between £5bn and £50bn due to publish their reports by 30 June 2024, this IA report follows a review of the reports published by firms in June 2023 and is intended to also provide ideas for firms to take away when producing their 2024 reports. The report additionally highlights areas where further FCA guidance would be useful.

Entity level reports

Key findings and areas for future focus include the following:

• Reports differed in their use of qualitative and quantitative reporting – which could impact how decision useful the reports are for investor clients. Firms have indicated that their approach to quantitative reporting in future years will be enhanced, with a view to ensuring greater decision usefulness – and the IA report encourages this.
• Aligning the report with TCFD Recommendations (either explicitly, or by including a separate mapping to the TCFD recommendations) is viewed as best practice (and one seen in the majority of 2023 reports) and is an approach that the IA recommend firms take in their 2024 reporting. 
• Under the FCA rules, firms are permitted to cross-reference their group-level TCFD reports to fulfil their obligations (but need to report on any material differences at entity level). Varying approaches were seen with some entities producing standalone entity reports with no cross-referencing, and others either cross referencing to other existing group reports, or including their entity report within their group report. All such approaches are capable of aligning with the FCA rules, however the IA has identified that it would be helpful for firms relying on existing group reports to ensure that (i) their entity report can either stand alone, or (ii) any cross referencing is practical and effective ( the core aim being to ensure that the reader is capable of locating the information e.g. via appropriate links or page references, and in doing so is in fact able to understand the firm’s approach to climate risks). Cross-referencing is identified as more challenging for firms relying on third party reports.
• Reporting on transition planning was varied (and many firms were either not disclosing any information on approach to transition planning, or were brief in their description) – however given the impending finalisation of TPT sector specific guidelines, this is expected to improve in the coming years. The best examples seen included a dedicated section in the report setting out key targets and milestones (together with strategic actions to deliver on that target). The report highlights that the FCA might expect to see a greater link between individual net zero targets and a firm’s transition plan to meet that target. 
• Usability and accessibility was identified as key – with 30% of reports difficult to locate on a firm’s website. The best examples involved having a dedicated TCFD section on a firm’s website, with one firm linking directly to their report on each page of the website. Readability is highlighted, and examples of good practice include definitions of key terms, or accompanying call out boxes describing the data provided within the report. Consumer testing would enable firms to understand how well consumers receive and understand the firms messaging. 
• Not all reports included a signed compliance statement confirming the report complied with the FCA’s rules – or in some cases, the signed statement did not refer to chapter 2 of the FCA’s ESG sourcebook. This is seen as an easy fix for firms in year 2 of reporting (or for those reporting this year), and one the IA strongly recommend firms to take to avoid any risk that their report does not fully comply with the FCA’s requirements.

Product level and on-demand reporting

Key findings and areas for future focus include the following:

• There is a variation in approaches for product-level reporting, created, the report says, due to a lack of specific guidance in the FCA ESG Sourcebook in key areas (for example definitions of key terms such as “carbon intensive” sectors or “high” or “concentrated” exposure. The issue here is that two near identical products could have very different disclosures due to firms choosing to define key terms differently. 
• There is scope for firms to put more work into scenario modelling and testing inputs to ensure reliability and consistency of outputs.
• The IA identifies that clarity around gaps in data coverage is important in making the reports more decision-useful and readable for clients. The best product reports set out the minimum reliance on data coverage (for example stating that any data coverage under 70% of a fund’s investment should not be relied upon, or that they would not include a disclosure due to this lack of data availability) – such a disclosure would give clarity to clients about why certain information is not disclosed, or why data covers only certain asset types.
• Poor data availability meant that firms were not able to disclose all relevant product level metrics (for example scope 3 emissions or weighted average carbon intensity) – and not all firms included an explanation as to why such disclosures were not included. The IA report calls for firms to outline the steps that they will take to improve the completeness and the quality of their disclosures in the future where there is not full coverage of the FCA’s required metrics. 
• Usability and accessibility is also called out in the product level context – examples for making reports more user friendly include defining complex terms, providing graphics and comparative points. This is necessary to make the reports more decision useful. Consumer testing was also identified here as useful – particularly in light of the consumer duty. 

Looking ahead: resourcing and future proofing

Firms are reminded of the importance of a clear plan for how they will resource completing their reports, both in year one, and as it becomes a BAU activity (whether through a specific TCFD programme team, or part of existing Sustainability, Compliance or Finance teams). Further, as rules are likely to quickly evolve, firms must review how to future proof reporting processes to align with new requirements, including the FCA’s SDRs, the ISSB and the TPT.

You can find the full IA report here