The Financial Conduct Authority (FCA) has published a discussion paper on climate change, saying its effects and the associated transition to a low carbon economy may have a major impact on financial markets and on products that serve those markets
The discussion paper sets out how the impacts of climate change are relevant to the FCA’s statutory objectives of protecting consumers, protecting market integrity and promoting competition.
In it, the FCA asks for submissions on four areas in which it considers a greater regulatory focus is warranted. These are climate change and pensions - ensuring that those making investment decisions take account of risks including climate change; enabling competition and market growth for green finance; ensuring that disclosures in capital markets appropriately give adequate information to investors of the financial impacts of climate change; and the scope for the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks.
Andrew Bailey, chief executive at the FCA said: ‘Climate change presents a disruptive and potentially irreversible threat to the planet. The impact of climate change on financial markets is uncertain but legal frameworks - at a global, European and UK level - have already begun to adapt to reflect a move to a low carbon economy.
‘The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fairway which meets users’ needs.’
In tandem, the Prudential Regulation Authority (PRA) has published a consultation paper on a draft supervisory statement (SS) which sets out expectations regarding firms’ approaches to managing the financial risks from climate change.
These centre on how managing the far-reaching and foreseeable risks from climate change requires a strategic approach which considers how actions today affect future financial risks. The supervisory statement is relevant to all UK insurers, banks, building societies and PRA-designated investment firms.
The regulator says firms are enhancing their approaches to managing these risks, but more need to take a forward-looking, strategic approach if financial risks are to be minimised.
The SS sets out proposed expectations in respect of the embedding of firm’s management of financial risks arising from climate risk in a number of areas, including governance, risk management, scenario analysis, and disclosure.
To co-ordinate action and share best practice, the PRA and FCA are setting up a Climate Financial Risk Forum. It is designed to help the financial sector manage the financial risks from climate change and support innovation for financial products and services in green finance.
The forum will involve representatives from industry as well as technical experts and other stakeholders. The PRA and FCA expect to finalise membership of the forum by the end of November, having a first meeting in early 2019.
The FCA is seeking feedback on the questions set out in its discussion paper by a deadline of 31 January 2019. The consultation period for the PRA’s SS ends on 15 January 2019.
Report by Pat Sweet