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The impact of the FCA climate-related disclosure rules on funds and investors

The FCA has been considering the implementation of new climate-related disclosure rules for asset managers and some other FCA-regulated firms.

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Published 13 December 2021

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  • Private Equity

The FCA has been considering the implementation of new climate-related disclosure rules for asset managers and some other FCA-regulated firms. Valentina Falicheva, an associate in our Corporate and Commercial team discusses the proposals, what the new rules mean in practice and whether the disclosures will prove to be too much of a burden for asset managers. Below is a short summary of an article first written for Private Equity News. Read the full article here.

In practice, the new rules envisage that larger firms will be required to produce their first entity-level disclosures by 30 June 2023, while smaller firms will have to provide their first entity-level disclosures by 30 June 2024. For many this might seem a relatively short period of time within which to prepare. Despite this initial challenge the British Private Equity and Venture Capital Association (BVCA) already endorsed the FCA’s plan to implement a standardised approach based on TCFD-based disclosure recommendations.

Although a common framework is highly desirable, in order to be proportionate to the firms the proposed rules would need to take into account the specifics of different types of businesses and asset classes / instruments across the sector. This could be quite difficult to implement, and may no doubt cause some “teething” problems. A good example would be the nature of investments by PE/VC funds. These funds often invest in smaller unlisted SMEs, whose entry into a PE/VC portfolio would typically be their first encounter with climate-related reporting requirements, meaning that although PE/VC firms are in a strong position to drive improved climate risk management and reporting standards, the new rules should recognise the data limitations in relation to such smaller private companies. Therefore, further clarifications from the FCA are needed in relation to the disclosure obligations of affected market participants.

It is also important to consider how investors should balance climate disclosure requirements with the need to deploy capital effectively. In relation to private equity managers, in particular, the changing structure of any PE/VC fund portfolio presents certain challenges to the cost/benefit analysis. No doubt, enhanced disclosure requirements centred around climate change, and the concomitant increased burden of regulation will increase the cost of returns. All in all, we hope that the soon to be introduced enhanced climate-related disclosures will strongly consider the results of the consultation on this topic. Whilst this is a very significant and welcomed step forward, the requirement and the administrative burden should remain reasonable and proportionate.

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Shorter Reads

The impact of the FCA climate-related disclosure rules on funds and investors

The FCA has been considering the implementation of new climate-related disclosure rules for asset managers and some other FCA-regulated firms.

Published 13 December 2021

Associated sectors / services

Authors

The FCA has been considering the implementation of new climate-related disclosure rules for asset managers and some other FCA-regulated firms. Valentina Falicheva, an associate in our Corporate and Commercial team discusses the proposals, what the new rules mean in practice and whether the disclosures will prove to be too much of a burden for asset managers. Below is a short summary of an article first written for Private Equity News. Read the full article here.

In practice, the new rules envisage that larger firms will be required to produce their first entity-level disclosures by 30 June 2023, while smaller firms will have to provide their first entity-level disclosures by 30 June 2024. For many this might seem a relatively short period of time within which to prepare. Despite this initial challenge the British Private Equity and Venture Capital Association (BVCA) already endorsed the FCA’s plan to implement a standardised approach based on TCFD-based disclosure recommendations.

Although a common framework is highly desirable, in order to be proportionate to the firms the proposed rules would need to take into account the specifics of different types of businesses and asset classes / instruments across the sector. This could be quite difficult to implement, and may no doubt cause some “teething” problems. A good example would be the nature of investments by PE/VC funds. These funds often invest in smaller unlisted SMEs, whose entry into a PE/VC portfolio would typically be their first encounter with climate-related reporting requirements, meaning that although PE/VC firms are in a strong position to drive improved climate risk management and reporting standards, the new rules should recognise the data limitations in relation to such smaller private companies. Therefore, further clarifications from the FCA are needed in relation to the disclosure obligations of affected market participants.

It is also important to consider how investors should balance climate disclosure requirements with the need to deploy capital effectively. In relation to private equity managers, in particular, the changing structure of any PE/VC fund portfolio presents certain challenges to the cost/benefit analysis. No doubt, enhanced disclosure requirements centred around climate change, and the concomitant increased burden of regulation will increase the cost of returns. All in all, we hope that the soon to be introduced enhanced climate-related disclosures will strongly consider the results of the consultation on this topic. Whilst this is a very significant and welcomed step forward, the requirement and the administrative burden should remain reasonable and proportionate.

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