A key focus for COP 26 in November was aligning investor behaviour with the ambition in the COP 21 Paris Agreement to limit global warming to 1.5 degrees. Leading in this is the PRI (Principles for Responsible Investment), founded by leading institutional investors in 2006.

The PRI had stated prior to COP 26: “Heading into the COP26, the PRI and partners are working with actors across the institutional investment chain to make credible net zero commitments.” A key element of this is adopting the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). In the UK, regulation is in the pipeline for this.

A Financial Conduct Authority (FCA) consultation, CP21/17: Enhancing climate-related disclosures by asset managers, life insurers, and FCA regulated pension providers closed on 10 September, as did a parallel consultation, CP21/18: Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets. The UK’s Department of Work and Pensions (DWP) has also introduced further provisions to embed TCFD in pension funds, which started to come into effect from 1 October.

Real estate concerns

The proposed FCA rules are a particular concern for the real estate industry, as the provisions are not really designed for real estate as an asset class. 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 challenge is that the UK proposals, and the TCFD recommendations that they follow, were written with investment in securities in mind, particularly listed securities and were broadly unworkable for real estate as an asset class.

Real estate industry responses to the UK consultation have suggested that the FCA (and thus the TCFD) should use an existing real estate methodology for the real estate metrics. The broad consensus is that the most appropriate tool for this is the Carbon Risk Real Estate Monitor (CRREM). As a result of the discussions with the FCA the TCFD secretariat have picked up the proposals and are looking at this as having at least the potential to be the global methodology. 

It is worth noting that the UK requirements under CP 21/17 only apply to the larger investment managers. The first phase is for asset managers with assets under management (AuM) of over £50bn and applies from 1 January 2022. Phase 2, which applies a year later, is for firms with AuM of over £5bn. The new rules will not apply to firms with AuM of under £5bn on a rolling, three-year basis. However, smaller managers may find themselves drawn in if their investors are caught, and once a methodology is established as real estate industry best practice, the pressure will grow on others outside the regulatory perimeter to follow.

ICAEW hosted a free webinar on this topic and ESG for real estate more generally on 20 October. 

• Watch the webinar

Since the webinar, there have been a number of further developments:

• On 21 October,  the DWP in the UK published a consultation “Climate and investment reporting: setting expectations and empowering savers”, which runs until 6 January. Real estate industry bodies will be responding to the consultation;
• On 22 October, the EU published the revised Regulatory Technical Standard (RTS) for the Sustainable Finance Disclosure Regulation (SFDR);
• On 3 November at COP 26, the IFRS Foundation Trustees announced the creation of a new standard-setting board, the International Sustainability Standards Board (ISSB). This is likely to be particularly relevant for ICAEW members.

ICAEW will be organising a follow-up webinar on ESG reporting for real estate early next year.