The climate crisis has been on the agenda of financial bodies for some time now. What was once seen as almost a ‘charitable’ cause is now considered one of the most challenging issues facing financial industries today, and into the future.
While many may have worried that climate-related measures had been pushed aside in the face of challenges presented by Covid-19, speeches by the Governor of the Bank of England (BoE) and CEO of the Financial Conduct Authority (FCA) – at the London Green Horizon Summit – show that climate change remains high on the regulatory agenda. As the FCA announces new rules and guidance to come into force in January 2021, CUBE dissects the speeches from industry leaders to establish what the future may hold for climate change and finance.
Climate change has not been forgotten
Both Nikhil Rathi, CEO of the FCA, and Andrew Bailey, Governor of the BoE, noted that, while coronavirus has posed unexpected challenges for financial institutions, we “cannot lose sight of the climate crisis”. Finance, of course, plays a key role in the need to accelerate the transition to cleaner energy and a less-carbon intensive economy. Effective climate-related regulation from financial regulators has an important role to play.
In his address, newly appointed BoE Governor, Bailey, suggested that Covid-19 has proven that we have an economy and a society that is readily able to adapt. This is a comfort, he said, as it shows that the task posed by climate change is an achievable one; one that society and the financial industry can adapt to. Climate change is to a certain extent predictable, we are aware of the risks in advance and are able to identify where those risks will develop. We can start managing them ahead of time. Bailey goes on to note, however, that “climate change is bigger and far more complex to manage” than any challenge posed by financial crisis or the pandemic.
Building resilience: BoE to launch climate stress test in June 2021
The BoE aims to build a UK financial system that is both resilient to the risks posed by climate change and supporting of the transition to a net-zero economy. With that in mind, Bailey announced that it will launch a climate stress test exercise in June 2021, and expects all banks and insurers to meet its supervisory expectations surrounding climate risks by the end of 2021.
Regulation has a key role to play: FCA sets out new rules for 2021
In his speech to the Summit, Rathi noted that the FCA has three priorities when it comes to tackling the climate crisis, all of which produce new obligations and rules for financial institutions:
1. Transparency: new rules to ensure clear, climate-related disclosure
Transparency is an issue at the forefront of climate-change related activity; can investors, advisors and consumers be expected to make positive climate decisions if the information provided is unclear?
The FCA has acknowledged this in their proposed new Listing Rule, which will require prominent listed companies to make clear, effective disclosures about how climate change is affecting their business. The Consultation on the rule closed in October, and the FCA used the Summit as an opportunity announce that the new rule will be implemented on 1 January 2021. The Listing Rule will follow a ‘comply or explain’ model, with which the FCA will generally expect companies to comply, or explain why where they are not able – if, for instance, they need more time to manage data.
Moreover, the FCA has revealed it will release proposed Taskforce on Climate-related Financial Disclosures (TCFD) implementation measures for asset managers, life insurers and FCA-regulated pension providers. These rules should be fully implemented within the largest firms by 2022, in a bid to support a clear flow of information along the investment chain.
2. Trust: establishing principles to build trust in green products
The FCA has seen record numbers of uptake in sustainable financial action across 2020. Flows into such funds in the third quarter of the year are reported to have exceeded 50 billion Euro, amounting to 40% of all European fund sales. With this in mind, the FCA is taking steps to ensure that such sustainable products and investment flows can be trusted. The Regulator has developed a set of principles to help firms ensure that disclosures are ‘fair, clear and not misleading’, especially where they submit new, green products for authorisation. The FCA will be discussing these principles with the industry in the coming months and aims to finish them in the new year.
3. Tools: providing the necessary guides to assist firms in climate-related finance
In fast-moving space close collaboration between regulators and industry is crucial to drive best practice. In 2019, the FCA in collaboration with the PRA created the Climate Financial Risk Forum which, in June this year, published an industry guide that assists firms in assessing and reporting on their climate-related financial risks. In the next year, the Forum will look to build on the recommendations set out in the guide.
Climate change and environmental, societal and governance (ESG) factors have been creeping up the financial agenda for some time now, though many assumed such issues would be put on hold while the industry endeavoured to manage the challenges presented by Covid-19. The speeches given by both Bailey and Rathi will allay the fears of many – climate change is not off the agenda.
CUBE is thrilled to see that the climate remains central to the evolving financial landscape. However, following a turbulent year for many financial institutions, it will be interesting to see how they cope with new rules and regulatory obligations rolled out as soon as January 2021 – and with a stress test in June. Climate change can’t be put on pause, however, and firms should look to comply as soon as practicable… or have a good reason why they can’t.