Following a multi-firm review of sustainability reporting, the FCA has announced that it is considering how to streamline and enhance the UK's sustainability reporting framework by simplifying disclosures, easing unnecessary compliance burdens, improving the decision-usefulness of reporting and promoting international alignment.
The FCA's review found that whilst climate disclosures have improved transparency and assisted firms to assess climate change as a material risk, they are too complex for retail investors and aspects are too granular.
The FCA intends to look at sustainability reporting as a whole. That includes the existing requirement for certain firms to produce climate reports compliant with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, and the sustainability disclosure requirements (SDR). The FCA also states that it will work closely with the United Kingdom government and regulatory counterparts as new rules are developed in this area to "support consistent outcomes along the investment chain". This will be relevant, for example, to the proposed UK sustainability reporting standards that are expected to adopt the ISSB standards for UK corporates, as well as developments on transition plans.
As a first step, the FCA has provided guidance on how the reporting requirements under TCFD and SDR interact. The guidance notes that asset management firms can, but are not required to, align the TCFD and SDR reporting periods. This would make it more feasible for firms to publish a single report addressing both the TCFD and SDR entity report requirements.
This is welcome, but we hope the FCA will adopt a holistic approach and also take into consideration continuing issues regarding the availability of data needed to make required disclosures, the potential for differences in the calculation methodologies and approach to data gaps adopted by data providers and firms, and the upcoming regulatory regime for ESG ratings providers.
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