TCFD For Asset Managers 2024 Lessons Learned

The deadline for the latest cohort of firms in scope for FCA mandatory TCFD reporting is now past. So what have we learned and where do we go from here, particularly for those falling in scope next year?

We’ve heard of a number of challenges faced by managers in scope for the first time, and were able to help our clients overcome these. Below we have shared some of these hurdles and our top tips for TCFD reporting.

Applying TCFD to Alternatives

The TCFD framework was originally designed for corporates and although additional guidance has been provided for asset managers, it isn’t always directly applicable for certain investment strategies. For example, global macro funds can struggle to assess the risks and impacts of climate change to their investment strategy given their limited exposure to corporate entities.

On the flip side, some firms were pleasantly surprised to discover existing approaches embedded into investment processes already addressed some of the TCFD recommendations such as climate risk management - simply identified by asking them the right questions. For example, the demand for commodities such as copper and lithium can be linked to the demand for products such as EVs, solar panels etc., and thus strongly impacted by the pace of climate-related regulation and policy. Or considering how extreme weather might impact agricultural commodity prices, as well as natural gas and crude oil prices, is indeed a climate-related risk assessment.

Data

Data remains a significant challenge, especially in private markets and for certain asset classes. Some managers were told by their legacy data providers that their investments in derivatives, currencies, commodities and certain asset backed securities were simply not covered. While the FCA provides limited guidance (and concessions) in such circumstances, it is also worded in a way that strongly suggests firms “must” provide such information, leaving some unsure when they might be allowed to leave out certain disclosures and when they absolutely must provide them.

This picture is improving though; over the last couple of years we have seen the emergence of specialist data providers who use various approaches to fill data gaps and have been invaluable to our clients.  As TCFD reporting becomes commonplace we expect this to get easier, though we strongly advise our clients to prepare early; identify the sources of data required to report, and get them integrated as soon as possible so that the reporting process goes smoothly.

Report Presentation

Early movers into TCFD included those that were in scope earlier, responded to investor pressure, or reported in relation to another initiative such as PRI. This group used their report as an opportunity to publicly market their approach to managing climate risks and opportunities, combined with other sustainability reporting, with a glossy report including graphics and visuals. 

More recent TCFD reporters tended to opt for a pared back approach, meeting but not exceeding the regulatory requirements and viewing it as more of a compliance exercise.  While this may be due to firms becoming comfortable with the framework and the requirements, we see TCFD reporting as an opportunity for promotion and would strongly encourage participants to make it a document worth reading. A glossy report is only marginally more effort than the regulatory minimum.

Conclusion

TCFD is swiftly becoming a standardised framework across various jurisdictions including the FCA and SEC, and is referred to in frameworks like the PRI and ISSB, to create consistent and standardized disclosures of climate information. Over time this will create a wealth of information to support investors in their decision-making. Although there can be challenges for certain investment strategies and asset classes, Danesmead ESG have great experience in fully supporting their clients on this journey.

If your investors are asking for TCFD reporting, or you will be in scope next year, or would simply like to know more, please get in touch to find out more about our TCFD reporting service. We advise starting early and planning well for your TCFD reporting.