TCFD reporting considerations for Asset Owners and Asset Managers | Deloitte UK has been saved
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The Taskforce for Climate-related Financial Disclosures (TCFD) Status Report’s recent survey of asset managers’ and asset owners’ reporting practices found that 44% of asset managers and 22% of asset owners do not conduct climate change scenario analysis. This means that they may not have analysed the potential physical and transition risks from climate change in the short, medium, and long term.
From June 2023, investment firms with assets under management of over £50 billion will be required to publish their first TCFD reports. However, the 2022 TCFD Status report shows that, in respect of firms who have published TCFD disclosures already, there are several areas to be improved upon to produce disclosures that fully comply with the Task Forces’ recommendations. For example, without scenario analysis disclosure, investors may not be presented with information that would allow them to understand the range of potential financial impacts on their investments from climate change.
Compared to other sectors where TCFD data can be largely sourced in-house, both asset managers and asset owners must rely on data from multiple parties (e.g., managers, investees, beneficiaries, and third-party vendors). From a UK regulatory perspective, whilst the FCA acknowledges this can cause data gaps and methodological challenges, the regulator expects firms to transparently explain any limitations in their ability to disclose in accordance with the TCFD recommendations and their plans for addressing those limitations.
As per the FCA’s policy statement (21/24) , mandatory TCFD-aligned disclosures for in-scope asset managers and owners are expected to be published on an annual basis by 30 June 2023 for periods beginning after 1 January 2022. The first phase applies to firms with assets under management of greater than £50bn and asset owners with greater than £25bn (on a 3 year rolling average basis). The second phase applies to firms above a £5bn threshold and TCFD-aligned disclosures are required by 30 June 2024 for periods beginning after 1 January 2023. Disclosures are expected at an entity-level and at a product or portfolio-level, adding extra complexity compared to other sectors. It is important that firms review their compliance responsibilities and implement a programme to prepare for disclosure where needed.
Firms not in-scope due to their size may still be required to make climate-related financial disclosures if they are publicly quoted companies, large private companies, or LLPs according to requirements from the Department for Business, Energy and Industrial Strategy (BEIS).
As noted in the FCA’s ESG sourcebook (Release 23, October 2022), any investment product that meets the definition of a ‘TCFD product’ (such as authorized funds and pension schemes) would require a TCFD product report. This involves reporting climate-related metrics at the product-level, such as weighted average carbon intensity with accompanying contextualized information. The FCA expects additional disclosures where a product’s disclosures materially deviate from or are inconsistent with the firm’s overarching TCFD entity report.
The guidance also mentions that clients are entitled to request TCFD product reports on-demand. This entitlement alone would require firms to have the systems and relevant controls in place to produce this data at the relevant calculation date, which is likely to require notable investment to deliver.
TCFD’s 2022 Status report included the results of a survey conducted on the reporting practices of asset owners and asset managers against the 11 recommended TCFD disclosures. Only 19% of the asset managers surveyed report on ‘Resilience of strategy under different climate-related scenarios’, on par with the banking sector, but in contrast to 45% of asset owners and 25% of insurers. Similarly, only 25% of asset managers surveyed report on ‘Climate-related targets’, compared to 58% of asset owners, 31% of banks and 33% of insurers. For TCFD disclosures to provide meaningful information for investors, the scope of reporting needs to broaden particularly in these highlighted areas.
Scenario analysis can guide a firm’s strategic conversations about the future impact of climate change and provide investors with the data to quantify and assess climate-related risk and opportunities in their investments. Scenario analysis is important to assess climate change impacts on investment portfolios and strategies.
For asset managers, disclosures on the resilience of investment strategies in relation to different climate change scenarios explain how investment strategies might change in response to climate-related risks and opportunities, as well as the potential impacts on financial performance and financial position. The Task Force recommends the use of several scenarios and understands that this will be a qualitative exercise for most organisations currently.
In line with TCFD recommendations, scenario analyses should ideally repeat annually with increasing coverage and complexity and assess risk and opportunities from a short, medium, and long-term horizon.
The survey found that for metrics and targets, a key challenge faced by asset owners was obtaining sufficient information from investments and portfolio companies. The Taskforce puts the onus on asset owners who ‘’sit at the top of the investment chain’’ to enhance their own climate-related financial disclosures and encourage better disclosures across the investment chain – down to asset managers and investees.
Of the asset managers surveyed, 65% highlighted data availability (from investees), internal capacity and methodological challenges when reporting climate-related metrics and targets. To remedy this, asset managers should actively engage with investees and review the provision of good quality climate-related information as part of the investment screening criteria. This not only helps from a disclosure perspective, but also to ensure ongoing monitoring of investments against client mandates.
When setting climate-related targets, consideration should be given to TCFD cross-industry metrics, as well as other regulatory drivers such as the proposed sustainability disclosure requirements (SDR) and International Sustainability Standards Board (ISSB) disclosures. Climate-related targets should include a description of calculation methodology, time frame, KPIs and assumptions used. If targets have not been set, the reason should be explained in TCFD reporting.
Asset managers need to develop product-level disclosures which, depending on data and reporting maturity, can be a significant body of work and may require significant investment to embed. Asset owners will be requesting such data and consolidating it, and the clock is ticking towards the first phase of compliance next year. Issues in data quality or reporting across the investment chain, ultimately affects the asset owners’ disclosures - underlining the importance of establishing a robust control and reporting framework, that can adapt to change and remain transparent. Certain metrics such as financed emissions for investment managers (within Scope 3 category 15) rely on the quality of disclosure of greenhouse gas emissions by investee companies. Thus, demanding higher quality data from investee companies enables investment managers to pass on the benefits of this enhanced information to their clients (asset owners) and beneficiaries (capital providers).
By improving data maturity and internal controls around reporting, organisations become better placed to get their data ‘assurance ready’, providing a greater level of comfort to investors on the credibility of their data and reporting.
Steve is the Head of ESG Assurance in our Audit and Assurance practice for our UK and North and South Europe partnership. Steve is a chartered accountant and has extensive experience in audit, internal audit and regulatory implementation programs. He has worked with a wide range of companies across all major industries, having developed a thorough technical understanding of products and control practices for non-financial risk management. Steve has significant experience in partnering engagements for the provision of ISAE 3000 / 3410 independent assurance over sustainability information and in relation to the sufficiency of design and operating effectiveness of processes and controls to report on non-financial information.
Morgan is a director in our ESG Audit and Assurance Group. He has directed multiple ISAE 3000 assurance engagements for a variety of listed companies and has provided climate change risk subject matter expertise for FTSE 100 audits and recent IPOs. Morgan has extensive knowledge of ESG, climate risk, TCFD, green bonds and greenhouse gas measurement. He has overseen hundreds of assurance engagements of sustainability data and is a technical expert in sustainability reporting and green finance.
Christopher is a senior manager in our sustainability Audit and Assurance practice and a sustainability specialist with more than 10 years' experience in Environmental, Social and Governance (ESG) strategy development, ESG Due Diligence and Environmental and Social Impact Assessment (ESIA). He has experience of auditing, assessing and assuring against international sustainability standards including the IFC Performance Standards, Equator Principles, SASB, TCFD etc.) as well as national and international regulations. Chris has extensive experience of leading sustainability engagements across many industry sectors, including financial services, waste, oil and gas, mining, rail, pharmaceutical, aerospace and higher education.
Mary Moyalan is an assistant manager within ESG Assurance at Deloitte London. She has a background in accounting and has experience in various regulatory assurance projects with financial services clients. She is also a qualified member of the Association of Chartered Certified Accountants (ACCA U.K) and a qualified management accountant (CMA U.S).