Money managers and retirement plan providers will be required to comply with climate-change disclosure rules under new proposals by the U.K.'s financial watchdog.
The Financial Conduct Authority on Tuesday published proposals on climate-related disclosure rules for public companies and some of the other firms it regulates.
It wants to introduce disclosure requirements to money managers, life insurers and FCA-regulated retirement plan providers that are aligned with existing Task Force on Climate-related Financial Disclosures standards. Starting in October, the largest retirement plans in the U.K. will publish TCFD reports.
"Better information will help clients and consumers make better informed decisions about their investments," an FCA consultation paper said. "This should, in turn, help to enhance competition in the interests of consumers, protect consumers from buying unsuitable products, and drive investment towards greener projects and activities."
The FCA's proposal would cover 98% of assets under management in the U.K. money management market and of assets held by U.K. asset owners, representing £12.1 trillion ($17.1 trillion). The proposals would not cover firms with less than £5 billion in assets relating to relevant activities, the FCA said.
Under its proposal, managers would be required to publish an entry-level TCFD report about how they take climate-related risks and opportunities into account when managing or administering investments. The report would be published annually. Firms would also have to produce an annual baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.
The regulator wants feedback on its consultation by Sept. 10 by completing an online form or via email, with the aim of confirming its final policy on climate-related disclosures before the end of the year.
The FCA is also seeking industry views on the increasingly prominent role of ESG data and rating providers due to concerns over the potential for "harm to market functioning" that might arise from their use by money managers.
There were more than 600 ESG ratings and rankings that existed globally by 2018, the FCA said in a separate consultation paper, with "significant consolidation among the leading ESG rating providers over the past decade."
Money managers that rely on third-party ESG ratings services are expected to have carried out a level of due diligence on their providers — with a reasonable expectation that such due diligence would "extend to considering the fitness for purpose of these services in meeting the asset manager's information needs, and their duty to act in the best interests of their clients."
However, the FCA said that, in the case of ESG ratings, interpretation is inherently challenging, since ESG performance is multidimensional: Each rating provider makes different choices on ESG factors to consider in methodology; different metrics are used to measure performance and are combined in different ways; and ESG ratings are subject to data gaps, the paper said.
The FCA cited research showing a "relatively low" correlation between ESG ratings from different providers, at 0.54 across a sample of six. Among the three largest credit rating agencies, however, the correlation is 0.98.
"Given the different nature of ESG rating services relative to other ESG data services, the potential for harm is likely to be higher for ESG rating provision," the FCA said.