FCA urged to ‘swiftly’ update sustainability disclosure rules

The UK regulator’s plans to consider how asset managers can streamline sustainability reporting has been welcomed by investors, with some claiming reporting in line with the Taskforce for Climate-related Financial Disclosures (TCFD) rules as something that is “clearly broken”. 

In early August, the Financial Conduct Authority (FCA) said it had consulted with the investment market on how sustainability disclosure rules had been working. It found firms had increased their consideration of climate risk and integrated this into investment decision making, and had been more transparent with clients regarding the challenges surrounding this regarding the availability of data and consistency in methodologies. 

However, while some climate disclosure information was helpful for institutional investors, it was found to be in parts too complex for retail investors. The feedback said there were opportunities for more simplified reporting and in particular highlighted TCFD rules as “too granular”, which limited comparability between firms’ reports. Some larger asset management firms were required to report in line with TCFD in 2021, but in 2023 it was announced the International Sustainability Standards Board (ISSB) will take over the monitoring of companies’ progress on climate-related disclosures.

In light of the recent findings on sustainability disclosures, the FCA said its next steps will be to simplify disclosure requirements, and “ease unnecessary burdens on firms”. It also wants to improve on how useful reporting is for clients’ decisions and build on the work of the Sustainability Disclosure Requirements (SDR) to build trust and reduce greenwashing. Further, it wants to consider how to promote alignment with international standards. 

A statement said: “This work is a natural progression in sustainability reporting and reflects our priorities to support growth and be a smarter regulator. It also supports our wider work to streamline the regulatory regime for asset managers.

“As we take it forwards, we will consider sustainability reporting as a whole. This includes SDR, the ongoing endorsement of the ISSB standards (known as UK Sustainability Reporting Standards), and developments on transition plans. We will continue to work closely with the government and regulatory counterparts to support consistent outcomes along the investment chain.

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

Oscar Warwick Thompson, head of policy and regulatory affairs at UKSIF, urged for swift confirmation of the path ahead. 

“We are pleased to see the review recognise the need for clarity regarding the future trajectory of these disclosures and the importance of simplification to promote understanding among different client groups,” he said. 

“It’s now crucial that the government moves swiftly ahead with the adoption of the UK Sustainability Reporting Standards (SRS). As part of this, we would like to see confirmation in the coming months of a shift from TCFD-aligned reporting to ISSB (International Sustainability Standards Board) aligned reporting across the UK economy, with clear time frames set out for different actors.”

Julia Dreblow, SRI Services and Fund EcoMarket founder, added the “international alignment aspect is vital”. 

“Investment markets are by nature international and interconnected and climate related challenges are clearly material –  which is why TCFD, ISSB, S1 and S2 matter.

“However, ensuring these documents – or versions of them – are read and put to practical use is also important.”

Meanwhile, Paris Jordan, head of responsible investing at Charles Stanley, also said the announcement was welcome but called for target dates to be put in place: “We encourage the streamlining of all sustainability reporting (from SDR through to ISSB and transition planning). This should be a positive step for companies and consumers alike.

“Simplifying reporting and providing more digestible and decision-useful information will be a positive outcome, and we eagerly await more concrete timelines for implementation.”

Flawed climate logic risks undermining TCFD reporting

In another nod to it being time for a simplifying of disclosure rules, head of responsible investment at Quilter Ido Eisenberg has flagged there are very few positive outcomes of TCFD reporting – it has forced firms to engage with the climate metrics and exposures embedded in their products, but they are now are now grappling with what these metrics actually mean for their portfolios and whether they can be meaningfully integrated into investment and risk processes. 

“Immersing in the data should bring clarity. But the more time spent with it, the more dissonant it feels. The underlying models the industry is using to assess climate risk appear fundamentally flawed.”

He said on a basic level some of the most commonly used models suggest portfolios suffer the greatest losses in a scenario where global warming is limited to 1.5°C, which is the scenario governments and corporates are meant to be aiming for. However, the models can show relatively benign impacts in a 3°C scenario, despite overwhelming scientific consensus that such a temperature rise would trigger systemic collapse across ecosystems, economies and societies. 

See also: In conversation with the TCFD: ‘It seemed the right time to wind down’

“If TCFD is meant to help assess climate risk in portfolios, then something is clearly broken,” he added. 

To help protect investment assets over the long term, then tools must be sharpened, Eisenberg said, making the following suggestions: 

“First, physical risk assessments need to improve. Current models often fail to capture the complexity, granularity, and urgency of climate-related threats. Industry must demand better models from providers, incorporating second-order impacts, potential tipping points, and generate more near-term outputs that are genuinely decision-useful. Investors don’t operate on 100-year time horizons so need insights relevant to the next five to ten years to incorporate into their investment and risk analyses. 

“Second, responsible investment teams must work more closely with their internal stakeholders to embed this improved, material data into investment processes and portfolio oversight. This is no longer a “tragedy of the horizons” – climate change is already disrupting supply chains, damaging crops, and reshaping geopolitical dynamics. These risks are not theoretical or distant and thus are already impacting asset values. This needs to be reflected in valuations and risk metrics in order to drive engagement with portfolio companies and managers.

‘Third, for indirect investors such as ourselves, we have both the responsibility and the leverage to challenge investment managers on how they’re integrating climate risk into their decision-making and oversight processes. This isn’t just about asking questions, it’s about setting a higher baseline of expectations and holding managers to it.”