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FCA proposes climate risk reporting duty for asset managers

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The UK’s financial services regulator is considering whether to require asset managers and other financial services firms to report publicly on how they manage climate risks.

Noting the work done by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), the regulator said there was “an opportunity for us to build on the work of the TCFD to help organisations, including firms, manage the transition to a low-carbon economy and encourage the financial services industry to consider the impact of climate change”.

The Financial Conduct Authority (FCA) indicated that, for an asset manager, the public reporting requirement could involve it preparing a report about how it managed the risk to long-term investments “such as pension assets” created by climate change.

In a discussion paper published yesterday, the FCA sought views on requiring financial services firms to report on climate risks, and on what type of information could be included in such a report.

“Climate change presents a disruptive and potentially irreversible threat to the planet,” said Andrew Bailey, chief executive at the FCA.

“The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.”

The regulator also sought input in relation to the burgeoning area of green finance, where it noted there were no “universally agreed common, minimum standards and guiding principles” for measuring performance and impact.

Bailey said: “The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fair way that meets users’ needs.”

The FCA also sought views in relation to the information that companies provide to investors about the financial impacts of climate change.

“We intend to explore whether greater encouragement is needed to ensure issuers give investors appropriate information, and whether issuers require further clarity over what is expected of them,” it said.

ESG rule changes consultation for DC pensions

Meanwhile, the FCA reiterated plans to consult on climate change-related rules for contract-based defined contribution (DC) pension schemes in the first quarter of 2019.

The rule changes would require independent governance committees (IGCs) to report their firms’ policies on evaluating environmental, social and corporate governance (ESG) considerations, including climate change; how they took account of members’ ethical and other concerns; and stewardship.

The regulator also indicated it would consult on related guidance for providers of the DC schemes it regulates. The guidance would clarify how providers should consider financial factors – such as ESG and climate change risks and opportunities – and non-financial factors, such as responding to members’ ethical concerns when making investment decisions.

The FCA first set out these plans in June in a response to recommendations from the Law Commission. It has previously been criticised by politicians in the UK parliament’s Environmental Audit Committee and by campaign groups for not doing enough to clarify contract-based DC schemes’ duties with respect to climate change and other ESG matters.

In its discussion paper this week the FCA said climate change “is no longer an ‘ethical’ concern, but a practical consideration for the UK pension industry”.

Climate change, it said, was “a material factor in the financial performance of pension funds” because of the long time horizons of their investments.

The Department for Work and Pensions recently introduced legislation strengthening ESG-related requirements for trust-based occupational pension schemes.

The FCA’s discussion paper was published on the same day that the Prudential Regulation Authority published a consultation on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. The two regulators are setting up a Climate Financial Risk Forum, which aims to help the financial sector manage the financial risks from climate change and support innovation for financial products and services in green finance.

The FCA’s discussion paper can be found here.

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