FCA moves to force firms to disclose climate risk management

The Financial Conduct Authority (FCA) has proposed measures that would force financial services firms to publicly disclose how they manage climate risk, as the regulator takes steps to limit the sector’s contribution to the “disruptive and potentially irreversible threat to the planet” of climate change.

In a consultation paper published on Monday (15 October), the regulator said climate change came under its remit as its consequences will have an impact on capital markets, affecting both the valuation of some products and creating various investor protection issues.

The FCA also noted the growing relevance of ESG to institutional firms such as pension funds.

It follows correspondence in July between the FCA and the government’s Environmental Audit Committee, when the regulator committed to taking action with regard to a host of the committee’s recommendations.

The paper also coincides with action from the Prudential Regulation Authority to force boards of banks and insurers to appoint a senior executive to oversee the management of climate risks.

Specifically, the FCA is seeking the views of market participants on its proposal to introduce a new requirement for financial services firms to report publicly on how they manage climate risks to their customers and operations.

In addition, the regulator wants to “encourage” disclosures by issuers of securities admitted to trading on a regulated market to give investors “appropriate information”, and is consulting on whether issuers require further clarity over what is expected of them.

Earlier in 2018, the Financial Stability Board’s taskforce on climate-related financial disclosures found very few companies disclose the financial impact of climate change on the company or the resilience of their strategies under different climate-related scenarios.

The taskforce said there are risks to the value of longer-term investments if current valuations do not adequately factor in climate-related risks because of insufficient information.

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The FCA said: “As part of exercising stewardship of investee companies, asset managers and other financial services providers will necessarily have to consider the impact on valuation of underlying investments.

“Firms may also take the effect of climate change into account as part of broader considerations of sustainability.

“We want to ensure our regulatory approach creates an environment where financial services firms can adequately manage the market risks from moving to a low carbon economy, but are also able to exploit opportunities to benefit consumers.”

Commenting on the proposals, chief executive of the FCA Andrew Bailey 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.”

He added that the FCA and PRA will be setting up a climate financial risk forum “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 consultation paper is open to comment until 31 January 2019.

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