Climate change: can regulators ride the wave for finance?

It’s been a busy few weeks for UK financial organizations and ESG, with both the Financial Conduct Authority (FCA) and the Bank of England (BoE) publishing plans aimed to tackle the ever-growing, formidable force that is climate change.

Following hot on the heels of the G7 summit, both regulators have struck while the iron’s hot to firmly cement the UK’s commitment to sustainable finance.

On 17 June, the BoE published its second annual climate disclosure report, which explores the Bank’s climate change strategy, the governance structures it has in place, and information on how it is measuring and managing climate-related risks.

The Bank has committed to reducing carbon emissions from its physical operations to net-zero by 2050 (at the latest) and this report goes some way to explain the progress that it has made towards that goal. In particular, it continues to build its approach to climate disclosure, following a structure and framework recommended by the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosures (TCFD).

Meanwhile, the FCA has unveiled plans to extend its climate-related disclosure rules. In a speech by the FCA’s CEO, Nikhil Rathi, which was swiftly followed by a press release, the FCA announced that it will be consulting on measures to:

• Extend the application of its Taskforce on Climate-related Financial Disclosures (TCFD)-aligned listing rule for premium commercial companies to issuers of standard listed equity shares; and
• Introduce TCFD-aligned disclosure requirements for asset managers, life insurers and FCA-regulated pension providers, with a focus on the information needs of clients and consumers.

The FCA’s proposals mark their first, substantive policy developments for the UK asset management and asset owner sectors since the end of the Brexit transition period. Following on from the UK’s departure from the EU, the FCA’s proposals have been designed with international consistency in mind.

International consistency is much-needed, though seldom created. More of a prophecy than a reality, there is a long history of financial regulators working independently on interconnected issues. The end goal is often the same – protect data privacy, regulate cryptoasssets, solve climate-change – but the individual regulatory processes, and indeed the regulations, are rarely consistent. Instead, a regulatory minefield arises, with compliance officers forced to dodge regulatory overlaps, jurisdictional subversions, and uncertainty about which rule takes precedence.

It will be music to the ears of many, then, that the FCA is regulating – or consulting to regulate – with “international consistency” in mind. This is especially encouraging given Nikhil Rathi’s comments that the FCA is working under the International Organization of Securities Commissions (IOSCO) Sustainable Finance Taskforce to “set a common baseline of reporting standards.”

In a recent speech, US’ Securities and Exchange Commission Commissioner, Elad Roisman, admitted to having “reservations” around “prescriptive, line-item disclosure requirements in this space”. One reason for this is a lack of standardisation, which is “very hard to do”. While many may not agree with Roisman’s sentiment around ESG disclosures, it is certainly true that standardisation is no mean feat. This is especially true of climate-change and sustainable finance, where ‘good practice’ can be subjective, depending on how tough a stance one is willing to take.

The ultimate goal for both the BoE and the FCA, as with all disclosure rules, is that it will encourage future investment in sustainable assets. With knowledge comes power; the more information investors receive, the more empowered they are to make savvy financial decisions that will invariably mitigate the risks presented by climate change.

CUBE comment

Over the last few years, we have seen the discourse around ESG and sustainable finance change. In the last few months, we have seen an influx of governmental, financial, and societal commitments to overcoming climate-change. In the last week we have seen two prominent UK regulators unveil further disclosure requirements.

What does this mean for financial organizations – especially the compliance team? It means that change is afoot, which will inevitably manifest itself in a swathe of new regulations, new obligations and new guidance. As ever, those who will prosper will be those that have effectively harnessed a solution – preferable rooted in artificial intelligence – to anticipate, analyze and implement those changes. As with the ever-shifting tides of climate change, those that fail to adapt or evolve, are those that will be left behind.

The FCA’s consultation will run until 10 September 2021, with the FCA looking to confirm final policy measures before the end of 2021.