Climate change response: Raise your game, open your books

The UK’s Financial Conduct Authority is continuing to set the regulatory pace when it comes to pressing the financial sector to respond to the multiple threats from climate change. Together with the Bank of England, it is urging UK firms to respond to the need to assess the risks they face and be more transparent about them.

The latest move this week saw the FCA publish the responses it received to its October 2018 discussion paper Climate Change and Green Finance, together with a series of proposals for action. In a week when many financial institutions in the City of London found themselves targets of Extinction Rebellion protesters the FCA’s announcements are a further reminder of the urgency of facing up to the challenges posed by climate change.

Link to FCA response and proposals

The FCA is urging all UK listed companies to disclose their risks from climate change from next year – two years ahead of the schedule outlined by the government – and has set out its priorities. These include issuers’ climate change disclosures, regulated firms’ integration of climate change risk and opportunities into their decision-making and consumers’ access to green financial products and services. It also made it clear that it is alive to the growing criticism of the sector for “greenwashing”.

It has set out the key actions it will take in each of these areas, including:

  • consulting on new rules to improve climate-related disclosures by certain firms and clarifying existing obligations;
  • finalising rule changes requiring independent governance committees (IGCs) to oversee and report on firms’ environmental, social and governance (ESG) and stewardship policies, as well as introducing separate rule changes to facilitate investment in patient capital opportunities;
  • publishing a feedback statement in response to a joint discussion paper with the Financial Reporting Council (FRC) on stewardship setting out actions to address the most significant barriers to effective stewardship:
  • challenging firms where it sees potential greenwashing, clarifying its expectations around consumers’ access to green financial products and taking appropriate action to prevent consumers being misled.

In launching its latest proposals, Andrew Bailey, chief executive of the FCA said:

“We have an important role to play in creating an environment where firms can manage the risks from moving to a greener economy and capture the opportunities to benefit consumers.

“This feedback statement is the next step in our drive to provide clarity for firms and consumers about how our work will help support the response to the climate challenge and the development of the green finance market”.

The FCA says it will also continue to contribute to several collaborative initiatives, including the Government-led cross-regulator taskforce on disclosures and the Climate Financial Risk Forum, which it established with the Prudential Regulation Authority earlier this year.

This announcement follows hard on the heels of out-going Bank of England Governor Mark Carney setting out his own ambitious targets to the United Nations Climate Action Summit in New York at the end of last month.

He told the global audience: “To bring climate risks and resilience into the heart of financial decision making, climate disclosure must become comprehensive; climate risk management must be transformed, and sustainable investing must go mainstream”.

Disclosure was a prominent theme in his speech to the summit: “The next step is to make these disclosures mandatory. The UK and EU have already signalled their intents.

“It’s time for every country to get involved because the world won’t get to net zero if the financial sector doesn’t know how our companies are responding. In order to watch we must be able to see.

“Over the next two years, the current process of disclosure by the users of capital, reaction by the suppliers of capital, and adjustment of these standards will be critical to ensure that the TCFD [Task Force on Climate-related Financial Disclosures] standards are as comparable, efficient and as decision-useful as possible”, said Carney.

He also upped the pressure on the financial sector to take investing in sustainability seriously, saying this means supporting all companies that are working to transition into green companies, and that investment strategies such as “tilt strategies” (which overweigh, or tilt towards, high environmental, social and governance stocks) and “momentum strategies” (which focus on companies that have improved their ESG rating) need to become core strategies for all financial institutions.

Mr Carney called for all providers of capital – banks, insurers, asset managers – and other national regulators– to improve their understanding and management of climate-related financial risks. He explained that the Bank of England has recently set out its own expectations for the governance, management and disclosure of these risks by banks and insurers, and that the Bank will be the first regulator to stress test its financial system against different climate scenarios.