TCFD Reporting - Opportunities for UK Asset Managers and Owners

The FCA’s policy statement PS21/24, states UK based asset managers and owners of a certain size must disclose entity level and product level reports that are consistent with the Task Force on Climate Related Financial Disclosures (TCFD) recommendations and guidelines. The complexity of reporting against these regulations has been challenging for firms who have a large volume of products and has therefore been the subject of various Q&As and clarifications.

Earlier this year, we performed an extensive benchmarking analysis over 66 of the product reports across 12 asset managers and owners, covering a range of asset classes including equities, fixed-income and multi-asset. This blog explores our analysis and highlights the implications and opportunities for firms either gearing up for round two of reporting or preparing for their first submissions.

1. Metrics for Scopes 1 & 2, Total Carbon Emissions, Total Carbon Footprint & Weighted Average Carbon Intensity (WACI) were mostly all present except for in a handful of multi-assets and emerging markets bonds products, which cited data limitations. We identified several ways firms were elevating themselves against their peers, the suggestion being that there is a ‘minimum bar’ being established for what good TCFD Product Reporting looks like when it comes to decision-usefulness for consumers.
2. Despite the FCA’s 2024 transitional provision, 53 per cent of the products we looked at produced Scope 3 (S3) disclosures. In some instances, not much insight (if any) was given to describe the breakdown of their investee’s S3 emissions, or to explain the extent of category coverage between those investees across the product, as such we would question the dependability of such detail. Similarly, around a third of reports disclosed Climate Value-at-Risk (CVaR) or Implied Temperature Rise (ITR) metrics despite many industry participants signalling in the run up to the reporting deadline that potential data limitations would limit their ability to disclose. We saw a number of outcomes in our analysis which suggests that industry participants are still working through fund-level ESG data management and methodological matters with their vendors and sources.
3. Qualitative scenario analysis has been performed more frequently than quantitative, with 30 per cent of the reports we looked at providing neither, despite the rule requirements. There were clear challenges around firms’ patchwork approaches to a) defining carbon intensive sectors, b) confirming whether the product has concentrated exposures to those sectors, and c) including the requisite quantitative disclosures for instances where the product has high and/or concentrated exposures. Due to the lack of clarity within some disclosures provided, there were examples where the consumer would be left to infer certain conclusions, which in our view would undermine the decision-usefulness of any report.
4. The vast majority of managers used MSCI as a vendor, indicating a clear reliance within the industry that could be considered a systemic risk. Nearly half of reports confirmed use of estimates within the data. Across all reports analysed we didn’t see any reference to any due diligence over vendors taking place. We did not detect any material deviation in breadth or depth of reporting between asset managers or asset owners, likely due to convergences on data vendors.
5. The majority of reports had cross-referenced the requisite strategy, risk management & governance disclosures, suggesting that the predominant driver to differentiate these reports was the manager and not the product, however we have questioned the reasonableness of a blanket cross-referencing approach.

Our analysis illustrates that the majority of firms have complied with the FCA’s ESG sourcebook requirements when it comes to product level TCFD-linked disclosures, there remains however many opportunities for firms to differentiate their reports with little effort. We foresee that Market leaders will continue to maintain and produce sufficiently caveated and transparent metrics, as well as operate comprehensive governance frameworks to underpin their TCFD product reports going forward.

If you require precision insights to inform your approach to ensuring compliance with the FCA’s ESG sourcebook requirements, contact us today.