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What Must UK Asset Management Firms Do to Get TCFD Ready in 2023?

Troy Mortimer, Pallavi Konwar, Chloe Frampton

Introduction

In December 2022 the FCA published the latest version of its ESG Handbook, which transposes Policy Statement PS21/24 into regulation. These final rules and guidance for asset managers and asset owners are aimed at bringing consistency to climate-related disclosures through implementation of the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).

The TCFD-aligned disclosure obligations require in-scope firms to provide:

  • Entity-Level disclosures for each in-scope TCFD entity: an annual TCFD entity report published in a prominent place on the main website of the firm, setting out how the firm takes climate-related matters into account in managing or administering investments on behalf of clients and customers
  • Product or Portfolio Level disclosures: product disclosures including a core set of climate-related metrics on the firm’s products and portfolios made in a prominent place on the main website, or made on request to certain eligible institutional clients.

The disclosures are focused around the four key areas of Governance, Strategy, Risk Management and Metrics & Targets, including undertaking climate-related scenario analysis and setting targets for managing climate-related risks and opportunities.

TCFD-Disclosures for Asset Managers and Asset Owners

The rules came into effect from 1 January 2022 for the largest firms with more than £50bn in AUM (or £25bn assets under administration for asset owners). The first set of reports for these firms is due by 30 June 2023, reflecting the 2022 calendar year. Firms with assets greater than £5 billion (with such thresholds to be reviewed after three years of disclosures) will be subject to the new rules from 1 January 2023, with reports for calendar year 2023 due by 30 June 2024.

Expected Challenges to Meeting the New TCFD Reporting Requirements

Asset owners and asset managers are likely to face a multitude of challenges as they look to design and rollout the internal TCFD readiness programme to meet the upcoming reporting deadlines for their in-scope entities and products. A few of the greatest risks and challenges include:

  • Underestimating the impact of TCFD on the firm’s operating model: TCFD-disclosures will impact every function within an organization, including how firms interact with clients, gather and utilise data, embed climate-related data into firm and product level strategy, and create scalable, on-demand reporting to its clients.
  • Sourcing appropriate data and undertaking meaningful qualitative and quantitative climate scenario analysis: under the regulation firms will need to conduct climate impact analysis under orderly, disorderly and “hot house” scenarios. Whilst qualitative scenario analysis approaches will be required for all products, additional quantitative scenario analysis will be required for products with high or concentrated exposures to carbon intensive sectors. This will be a step change for some firms as they seek to source suitable climate-related emissions data on which to undertake climate-related scenario analysis and interpret results for investors.
  • Increasing expectations on how managers demonstrate effective climate risk management: The regulation also encourages other types of climate reporting such as climate VaR and implied temperature ratings as mechanisms to help interpret and manage climate risk within portfolios.
  • Achieving efficiencies with other ongoing ESG-related regulation: Many firms have already spent and continue to spend significant time and effort to meet the SFDR Level 2 requirements, which came into effect on 1st January 2023. With TCFD requirements now coming into the spotlight, and SDR on the horizon, firms need to be clear on how they can leverage existing efforts undertaken to meet SFDR (whilst being cognizant of differences and emerging regulatory requirements).

So what must firms do to get TCFD-ready?

As firms begin to ramp up their TCFD readiness programme, asset managers and asset owners need to be able to answer several key questions:

Q1. Who is responsible for our climate strategy at ExCo level and do we have the right governance structure in place to provide effective decision-making on climate-related regulatory requirements including TCFD?

Q2.  Which legal entities and products will be most impacted by the regulation and how will we manage this impact?

Q3. Do we have the right data governance and strategy in place to assess Scope 1, 2 and 3 emissions at entity and product level?

Q4. Do we have the right indicators and metrics to ensure that we are appropriately identifying, measuring, managing and monitoring climate risks?

Q5. How are the results of any qualitative and climate scenario analysis being fed into business strategy and planning, as well as risk management across the firm?

Q6. How will TCFD requirements impact our clients and are we ready to discuss our TCFD results with them? 

How Alpha Can Help

Alpha has strong capabilities and deep expertise across ESG and Responsible Investing. If you would like our help to support you in answering any of the above questions in meeting your climate and TCFD-disclosure requirements, or indeed any other areas within ESG and sustainability, please reach out to us here.

About the Authors

Troy Mortimer
Director

Troy is a Director in Alpha’s ESG and Responsible Investment practice with over 20 years of experience. Prior to joining Alpha, Troy led the KPMG UK Sustainability and Responsible Investment practice. Troy has worked across all aspects of the asset management and wealth management industries covering both traditional and alternative asset classes including PE, RE and infrastructure assets. He specializes in supporting asset managers and asset owners develop and integrate environmental, social and governance (ESG) practices across all aspects of their operating model and adhere to local and international sustainable finance regulation/frameworks.

Pallavi Konwar
Manager

Pallavi is a SME and Manager in Alpha’s ESG and Responsible Investment practice. Her areas of expertise include sustainable investing, illiquid assets and risk management of such assets, including managing climate risk. Prior to joining Alpha, Pallavi worked at PwC where she led investment and risk-related projects for asset owners and championed integration of ESG/sustainability within institutional portfolios. She has advised a variety of clients including asset managers, insurers and banks on investment strategies, structuring complex assets, developing risk frameworks, and enhancing climate risk management and integration of ESG factors within investment and risk frameworks.

Chloe Frampton
Manager

Chloe is a Manager at Alpha and part of our ESG & Responsible Investment Practice, specialising in climate and environmental themes. Since joining Alpha in 2018 she has worked on numerous projects across our Operations, Product and ESG & Responsible Investment Practices, from operating model design and provider selection to ESG regulatory assessment and implementation.

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