In June, the UK’s regulatory framework for ESG reporting took a significant step forward when the FCA published its consultation, CP21/17, Enhancing climate-related disclosures by asset managers, life insurers, and FCA-regulated pension providers.
This is important for the real estate industry as fund managers fall within the definition of asset managers. Life insurance companies and pension funds are also important investors in real estate as an asset class. The FCA consultation follows on from a roadmap towards mandatory climate-related disclosures across the UK economy by 2025, aligned with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), which the Government had published in November 2020. The June consultation sets out how this will apply to the various parts of the financial services sector mentioned. It runs until 10 September.
The UK had originally indicated that it would apply the European Union’s equivalent legislation, the Sustainable Finance Disclosure Regulation (SFDR), but then changed tack a year ago. Real estate fund managers, and others affected, have been waiting to see what would emerge.
From a real estate perspective, the fundamental issue with the proposals in CP21/17 is that, as with the original EU SFDR proposals, the rules require metrics to be published that measure against benchmarks that are not relevant to real estate as an asset class. In the case of the SFDR, extensive industry lobbying resulted in proposals for real estate specific measurements, albeit that they are still somewhat flawed. Unlike the SFDR, the proposals in CP21/17 offer more scope for proposing substitute benchmarks. As an accountant, there is little to beat the thrill of a new metric to calculate, but it is important that there is broad acceptance that it is a useful measure. Determining what might be a suitable substitute benchmark against which to measure sustainability performance for real estate will be the main focus for industry trade bodies over the next few weeks. The Association of Real Estate Funds (AREF), INREV (the European organisation for institutional investors in real estate funds) and the Investment Property Forum (IPF) are holding a webinar on the consultation and proposed responses on 1 September.
AREF has extended the invitation to ICAEW members, who can register by contacting them through their email address.
Disclosures under the proposed rules are required for the investment firm as a whole (entity level disclosure), and for the funds or investment portfolios (product or portfolio-level disclosure). Further complication is added as some firms are likely to end up reporting under both UK and EU frameworks due to their funds or investors.
Before everyone panics, it is worth noting that the requirements only apply to the larger investment managers. The first phase is for asset managers with assets under management (AuM) of over £50 billion and applies from 1 January 2022. Phase 2, which applies a year later, is for firms with AuM of over £5 billion. The new rules will not apply to firms with AuM of under £5 billion on a rolling, three-year basis.
ICAEW will be running a webinar on this topic and ESG for real estate more generally on 20 October.
*The views expressed are the author’s and not ICAEW