FCA published its climate change adaptation report
What has happened?
In October 2021 the FCA published its climate change adaptation report.
What do you need to do?
The FCA’s adaptation report sets out the steps that the FCA has seen the industry take to mitigate the risks climate change presents, and it identifies areas, such as retail investments and mortgages, where more needs to be done. Additionally, the report examines how the industry is making commitments to reach carbon net zero. The FCA is keen to see these commitments put into action, backed up by appropriate governance and transition plans that will turn pledges into reality.
The FCA 2021/22 Business Plan set out a series of outcomes to be achieved for Environmental, Social and Governance (ESG) issues. It has also appointed a new Director of ESG, who reports directly to the FCA CEO, with a mandate to embed ESG considerations across the organisation.
To help achieve these outcomes, the FCA is refreshing its ESG strategy, which it will publish this autumn. This will expand on a previous strategy and will cover the following points of focus;
- Transparency: Promoting good and consistent disclosures along the investment chain.
- Trust: Ensuring that the market delivers sustainable finance instruments and products that genuinely meet investors’ sustainability preferences and are seen to do so.
- Tools: Government, regulators and industry working collaboratively to share experience, develop consistent guidance and tools and provide mutual support to confront the challenges of climate change.
- Transition: Developing a role in supporting a market-led transition to a more sustainable future.
- Team: Embedding climate and other sustainability considerations within the way the FCA functions.
The FCA is embedding ESG considerations across everything it does with an aim to effect faster change. This includes supervisory practices and the authorisations processes. The FCA has undertaken to engage with firms on greenwashing and climate-related disclosure rules, as well as increasing engagement on issues such as how they are managing climate risks and their plans for transitioning to carbon net zero.
In addition, the latest cohort of the Digital Sandbox Pilot is focused on sustainability and climate change; the FCA has worked with the City of London Corporation and the industry to develop a set of use cases focused on ESG data and disclosures, and it will be working with successful applicants from November to support their development of solutions, as well as running a further Green FinTech Challenge focused on new products and services to speed the transition to a carbon net zero economy.
In this report the FCA has considered the main financial risks and harms, including insurance underwriting risk, credit risk, financial market risk and operational risk. In addition, it sets out its view on how the industry is transitioning to carbon net zero and how capital is being mobilised to tackle climate change. The FCA is keen to see firms’ commitments backed up by appropriate governance and the adoption of coherent transition plans, supported by targets and metrics that allow firms and others to monitor progress.
Retail investments
The sustainable investment sector has been experiencing an unprecedented demand for ESG products. This reflects a market that is adapting at pace to climate-related changes, albeit driven by consumers’ needs and preferences more than by direct physical events.
However, this raises several issues about how the industry and other stakeholders adapt, which revolve primarily around transparency and disclosures.
The risk of greenwashing may be particularly relevant for retail investors in the fund management sector. Reflecting this, the FCA set out its concerns about the quality of ESG fund applications in a letter to the Chairs of authorised fund managers in July 2021. This letter made clear that the FCA expects the quality of ESG-related fund applications to improve and it also emphasised the importance of clear and accurate ongoing disclosures to consumers where funds make ESG-related claims.
The FCA has developed a set of guiding principles for the design, delivery and disclosure of retail ESG/sustainable funds, which was included in the letter. These principles aim to help consumers make more informed choices.
How can we help you?
If you’d like to know more about how we can help you with your ESG, sustainable finance or climate change arrangements, or with any other regulatory compliance issues, our expert team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.