UK proposes to simplify product-level climate disclosures

The UK government is proposing to simplify product-level climate disclosure rules to reduce undue burden on firms.

The Financial Conduct Authority (FCA), which regulates the financial services industry in the UK, estimates investment firms could save around £20 million ($41.6m) a year by replacing detailed product-level reports based on the Task Force on Climate-related Financial Disclosures (TCFD) with simpler, more targeted information.

"As part of being a smarter, more proportionate regulator, we're cutting complexity in our rules for asset managers, while keeping the focus on clear, useful information for investors," FCA director of wholesale buy-side Michelle Beck said.

"These proposals will make it easier for firms to communicate with their customers in ways that genuinely inform and engage them."

It is seeking views from asset managers, asset owners, trade bodies, and consumer groups to ensure the proposed rules work in practice and support growth.

In its review, FCA found that TCFD product reports were getting low engagement from retail investors while institutional investors can typically engage directly with firms to meet their specific information needs.

The FCA found while the rules have improved firms' awareness of climate risks, product-level reports are often seen as too complex by investors and not widely used.

"Firms thought that TCFD reporting has generally been helpful for raising awareness of climate risks in the market. However, they don't consider product-level TCFD reporting to be a useful climate risk management tool as they have their own ways of identifying and monitoring climate risks," FCA said.

"More broadly, firms encouraged us to consider international competitiveness given the cost of producing the reports and that investment products domiciled in other jurisdictions are not subject to these requirements."

FCA said the changes aim to give investors clearer insight into how climate risks, such as floods, storms and other extreme weather events, could affect investment performance, while reducing unnecessary costs to firms.