What is the FCA doing about climate change?

The Financial Conduct Authority (FCA) is the conduct regulator for nearly 60,000 financial services firms and financial markets in the UK. They are responsible for regulating a sector which plays a critical role in the lives of everyone in the UK and without which the modern economy could not function. From children’s ISAs to pensions, direct debits to credit cards, loans to investments – how well financial markets work has a fundamental impact on us all.

Where does climate change fit into the FCA’s plans?

In recent years, the FCA has turned their attention to the role financial services plays in combatting climate change. The FCA wants to help market participants manage the risks of moving to a low carbon economy while capturing opportunities to benefit consumers.

To achieve these goals the FCA is focused on:

• Improving transparency for market participants and consumers;

• Building trust in sustainable finance products; and

• Ensuring they provide the right regulatory tools to support firms.

What has the FCA done so far? 

The FCA is already taking action in the following ways:

1. They are participating in the Government’s Taskforce, announced as part of their Green Finance Strategy, to look at the most effective way of enhancing climate-related disclosures.

2. The Climate Financial Risk Forum (CFRF), co-chaired by the FCA and the Prudential Regulation Authority (PRA), builds capacity and shares best practice across financial regulators and industry to advance the sector’s responses to the financial risks from climate change.

3. They contributed to the European Commission’s Sustainable Finance Action Plan (SFAP), a significant project which will see incoming regulations over several years.

4. They published a Discussion Paper and subsequent feedback statement (FS19/6) on Climate Change and Green Finance, explaining how climate change risks and the transition to a low-carbon economy are relevant to the FCA’s Mission and inviting views on some key issues.

5. They introduced new requirements (PS19/13) to improve shareholder engagement and increase transparency around stewardship.

6. They also introduced new requirements (PS20/17) to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations.

7. They published a Discussion Paper and subsequent feedback statement (FS19/7) jointly with the Financial Reporting Council (FRC) on Building a Regulatory Framework for Effective Stewardship (DP19/01). This work deals with a number of matters relevant to climate change and green finance. In particular, it considers how asset owners and asset managers can most effectively integrate climate change and other environmental, social and governance (ESG) factors into their investment activities.

8. Additionally, they launched the Green FinTech Challenge in 2018 aimed at firms developing innovative solutions that will assist in the UK’s transition to a low carbon economy. Nine firms were successful in their applications and will now benefit from the full Innovate service offering.

What rules exist for financial services firms?

In respect of climate change, driving greater transparency in how firms manage this risk, and what policies are in place to combat the damage being done to society and to the environment, a raft of rules and regulations have been brought in over the past two years. There are plenty more to come but here is a flavour of what exists now: 

• Asset managers and life insurers – Since 10 June 2019, they must disclose and make publicly available their policies on how they engage with each other and the companies they invest in, and how their strategies create long-term value.

• Trust-based pension schemes – Since 1 October 2019, trustees must specify within their Statement of Investment Principles (SIP) their policies in relation to:

  • Financially material considerations (including those relating to ESG, such as climate change);

  • Voting rights; and

  • Engagement activities.

• Workplace pension schemes (Group personal pensions and Group SIPPs) – From 2021, Independent Governance Committees (IGCs) must report on the pension provider’s policies in relation to:

  • ESG financial considerations (including climate change);

  • Non-financial matters (such as ethical considerations);

  • Stewardship; and

  • Other financial considerations.

• UK premium listed companies – From 1 January 2021, the largest companies in the UK will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), and to explain if they have not done so.

• Investment Managers – From 10 March 2021, new disclosure requirements for investment managers with respect to their ESG policies will apply in the EU. New climate-related disclosures will apply to investment managers in the UK under a UK disclosures regime that is expected to be phased in from 2022.

• Financial Advisers – from a date to be confirmed in 2021, Advisers will be required to take the preferences of investors and beneficiaries into account in relation to sustainability and ESG.

Summary

At AV Trinity we believe that making investment decisions with the benefit of the environment in mind is of fundamental importance. Having said that, we will never force our views on to others and we equally believe that having open, honest and informed conversations about an individual’s financial goals and what options are available to meet those goals, is critical to investor success. If you would like to speak with one of our Chartered Financial Planners about how we can help, please get in touch. An initial chat is on us.

This article offers information about investing and should not be taken as personal advice. Remember that investments can go up and down in value, so you could get back less than you put in.