Navigating the ESG landscape: What lies ahead for asset managers in the coming year?
“There are simply too many items on my reading list” tends to be the go-to catch phrase for anyone working in sustainable finance – and it’s no exaggeration. In the past three years we’ve witnessed a huge uptick in sustainability-related acronyms, technical terms, working papers, consultation papers, regulations and general content.
2023 was no exception: the EU’s Sustainable Finance Regulation (SFDR) might be completely overhauled and here’s multiple consultations to prove it, the UK had its own go with the publication of the Sustainability Disclosure Regulation (SDR) and investment labels regime, and the world seems to be aligning with a common reporting framework (finally!) under the realm of ISSB - with future Taskforce for Nature-related Financial Disclosures (TNFD) inspired expansions awaiting.
In this blog we break down what’s coming down the pipeline for UK asset managers in the ESG space, to help keep you on top of that ever-growing reading list!
Continued focus on climate and reporting
Smaller UK asset managers will be delivering their first Taskforce for Climate-related Financial Disclosures (TCFD) entity- and product-level reports for the first time this June. With the main challenge coming from the data availability of some asset classes - multi-asset, fixed income, or private equity -, firms will need to align their reporting with both the regulatory requirements and TCFD guidance to be compliant with the FCA’s rules. The expectation for this first disclosure round will be to meet these standards, but more mature practices during the 2024 reporting period would result in firms truly integrating climate-risk in their business strategy. We see plenty of room for improvement on interpreting quantitative outputs from scenario analysis and integrating them into actual decision-making at product and firm level.
Following this line of thought, listed asset managers may need to start to think about broader sustainability disclosures and specifically transition plans to credibly back their net zero commitments. Concerning the former, the FCA expects to launch a consultation on the expansion of the TCFD rules to cover general sustainability topics in line with ISSB standards IFRS S1 & IFRS S2 during 2024. Regarding the later, the FCA will also include a specific provision on its expectations for listed firms’ transition plan disclosures. With net zero targets being widespread, the regulator seeks to find evidence of tangible actions listed entities are taking to meet them. We expect the Transition Planning Taskforce framework to be a relevant tool in this line of work.
Improving Diversity, Equality and Inclusion and encouraging healthier cultures
DEI will be a continued focus point in 2024. The FCA is expected to publish a Policy Statement in H2 2024 focusing on mandatory reporting requirements on D&I data for larger firms, as well as target setting and policy and strategy development. The Policy Statement will also finalise the formal embedding of non-financial misconduct across existing conduct rules, fit and proper assessments and suitability threshold conditions.
Roll-out of the new Sustainability Disclosure Requirements (SDR) and Investment Labels
The FCA’s anti-greenwashing rule and SDR regime will both go live during 2024. Looking firstly at the greenwashing rule, we recently published a blog entry examining the interlinkages between the greenwashing rule and firms’ obligations linked to the Consumer Duty. In a nutshell, the FCA wants to make sure that any claims in relation to your products are fair, clear, and not misleading. You must be able to back any of them with robust evidence and note that the rule covers all forms of communication, from imagery used on websites to more targeted marketing materials. This is core part of the overall SDR regime where the ability to provide robust, credible evidence related to any sustainability claims regarding a firm’s products and services is essential.
In addition, asset managers will need to make sure they have adequate governance structures in place with skilled individuals overseeing their labelled product’s progress towards achieving sustainability objectives. The specific nature of the FCA’s requirements will mandate for strong engagement strategies, actionable escalation plans and active progress to meet explicit and measurable objectives, all evidenced through different forms of periodic reporting.
Once again, this year brings a considerable number of challenges. If the landscape feels daunting, we’d love to have a chance to discuss how your firm can best approach, prioritise or reassess its commitments and obligations towards sustainability and ensure you have the right mechanisms, oversight and reporting in place to evidence compliance. Let us know if you want to chat!
