Mandatory TCFD-aligned reporting has already achieved three key things for the industry. It has:
- Put power in the hands of investors and beneficiaries to hold asset managers and asset owners to account: The transparency brought about by the disclosure of entity and product-level reports means that investors and beneficiaries can now question and challenge their asset managers and pension and investment providers on the way they are managing the climate risks on their portfolios and potentially vote with their feet.
- Moved reporting from; “tell-me” to “show-me” evidence-based reporting: Product-level TCFD reporting has focused minds to go beyond the headlines and explain how fund managers are managing the level of climate risk within their funds. We see leaders here providing greater clarity in terms of allocation to high-impact sectors (e.g. % allocation to green bonds) in addition to greater transparency around their voting and engagement activities.
- Allowed comparability of climate data across entities and funds or portfolios: Asset owners now have greater comparability of climate data for their UK-managed investments and can engage constructively with managers on their plans for addressing climate change. More importantly, they now have a mechanism for assessing their own impact on the environment
We have supported several organizations on their TCFD journey supporting them to; to scope and mobilise their projects, manage the delivery of TCFD reporting and enhance their existing operating model. These projects have highlighted some common challenges.
- Applying requirements beyond ‘disclosures’: Many firms focused heavily on the metrics and disclosure requirements without addressing the full scope of the regulation, notably in considering the strategy, governance and risk framework requirements. An effective oversight framework is key to truly embedding climate-related considerations across the operating model.
- Gathering data and having suitable methodologies: Firms continue to struggle with ensuring data reliability and availability at the appropriate level of granularity. Given the varied sources of data which, have varying levels of data completeness, accuracy and quality,it can be a challenging for firms to estimate exposure where there is poor data coverage.
- Defining ownership with clear roles and responsibilities: As this is a new area of reporting that impacts the whole business, firms have struggled to allocate responsibility; with reporting teams and fund managers alike not wanting to take ownership of the overall process. To deliver TCFD reporting effectively, it is essential to have senior owners with assigned roles and responsibilities ‘One-off’ solutions will lead to challenges as clients request more ‘on-demand’ reports and the next reporting cycle rolls in.
So, What’s Next?
Now that the mandatory deadline has been met, firms who reported in the 2023 cycle, should focus on replacing tactical solutions with a robust strategic operating model -this means embedding disclosure into BAU processesby setting appropriate climate risk appetite for the funds based on their strategy or by developing procedures for appropriate measurement and monitoring of this risk within the risk management framework. We are also seeing firms seeking to future proof this, for example, by considering what Sustainable Disclosure Regulation disclosures might look like.
For those firms that will publish their first reports in 2024, we recommend that you mobilise a programme with clear accountability now. Assign a dedicated senior executive as an owner who will be responsible for the delivery of this programme and establish a streamlined governance structure so that decisions can be taken effectively. This is particularly important if you haven’t done a group-level TCFD report before or if there is a high volume of product-level disclosures.
Finally, these disclosures are all about providing transparency to end investors and wider stakeholders. Therefore, firms should take this opportunity to engage with their wider community on their climate strategy and approach, educate them on what that means and evolve their commercial offering to help their clients and beneficiaries meet their needs.
How Can Alpha Help?
Alpha has helped large asset managers and asset owners understand and plan for the business impact of FCA’s TCFD regulation, provided industry insights on best practice and are supporting the build-out of operating models as well as delivery of TCFD disclosures to meet the regulatory requirements for firms.
If you would like to discuss how to improve upon this year’s TCFD reporting, hear more about our initial analysis of TCFD reports in the market or get ready for next year, please reach out to us here and we will be more than happy to continue the conversation.