The Financial Conduct Authority (FCA) is proposing a climate-related financial disclosure regime to increase transparency and “enable clients and consumers to make considered choices”.
The move is the latest step in the regulator pushing the financial services industry to be more climate-aware and to reflect that in the way it operates the products offered.
The FCA said it expected some firms would need to make additional investments and adjust their business to meet the requirements, but it believed the wider market benefits would outweigh the costs.
“We intend to reduce potential harm such as clients engaging firms that do not adequately manage climate-related risks and opportunities, and consumers buying unsuitable products,” the FCA said.
It added: “By introducing our proposals, we would be creating a regulatory framework that aims to ensure in-scope financial services firms contribute to wider government aims to achieve a net-zero economy by 2050.”
The measures would apply to life insurers, asset managers and FCA-regulated pension providers and cover 98% of assets under management in the UK market and held by UK asset owners, representing £12.1trn in assets managed in the UK.
There are two key elements of the proposals which these firms will be required to fulfil:
- Entity-level disclosures. Firms would be required to publish, annually, an entity-level Taskforce on Climate-related Financial Disclosures (TCFD) report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers.
- Product or portfolio-level disclosures. Firms would be required to produce annually a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.
Global benefits and lower-carbon economy
The FCA noted that given the global nature of many in-scope firms’ asset management and administration business, the proposals were likely to benefit clients’ and consumers’ decision-making internationally.
It also hoped better transparency about how firms were addressing climate-related assets would help markets price them more accurately and lead to a smoother transition to a lower-carbon economy.
Overall it said it was seeking to achieve three outcomes from the proposed reporting changes:
- Better outcomes for clients and consumers. Greater transparency about how firms are managing climate-related risks and opportunities in their investment decisions will help clients and consumers take those factors into account when granting investment mandates and selecting products. It will also enable them to hold their providers to account.
- Deeper consideration of climate-related risks and opportunities by in-scope firms. Our proposals will promote a structured approach to considering climate-related risks and opportunities by in-scope firms, improving investment outcomes for clients and consumers. This should also encourage an ecosystem of service providers to develop and deliver analytical tools, data, guidance and thought leadership.
- Coordinated information flow along the investment chain. The appropriate pricing of risks and efficient allocation of capital depends on all parties along the investment chain providing decision-useful information to one another. Our proposals aim to support firms sharing onward information on how they are taking climate-related risks and opportunities into account in the management of investments on behalf of clients and consumers. Clients may also require climate-related information to help fulfil their own regulatory obligations.
Vital financial services plays a leading role
Alongside these proposals, the FCA is also seeking views on other topical environmental, social and governance (ESG) issues in capital markets, including on green and sustainable debt markets and the increasingly prominent role of ESG data and rating providers.
These consultations are open until 10 September and the FCA intends to confirm its final policy on climate-related disclosures before the end of 2021.
The regulator will separately consider views on the capital markets consultation, with a view to publishing feedback in the first half of 2022.
Sheldon Mills, executive director of consumer and competition at the FCA, (pictured) said: “The climate change challenge affects the whole of society. It is vital that the financial services sector plays a leading role in addressing this challenge.
“Managing the risks of climate change and transitioning to a cleaner and less carbon-intensive economy will require high quality information on how climate-related risks and opportunities are being managed throughout the investment chain.
“However, climate-related disclosures do not yet meet investors’ and market participants’ needs. The new rules will help markets, investors and ultimately consumers better understand the impact of climate change and make more informed decisions.”