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The Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), The Pensions Regulator (TPR) and the Financial Reporting Council (FRC) have issued their latest reports on climate change adaptation, and how they plan to put pressure on financial institutions to take the issue seriously.
As global diplomats descend on Glasgow for the United Nations Climate Conference (COP26), the FCA, PRA, TPR and FRC have set out how climate change affects their respective responsibilities and the actions they, and the financial sector, are taking in response to it.
COP26, which is taking place in Scotland between October 31 and November 12, is expected to see international leaders commit to making strong policy commitments regarding climate change.
The reports come at the same time as HM Treasury (HMT) announced that it would enshrine mandatory climate disclosures for the largest companies in law.
This will mean that the UK is the first G20 country to make it mandatory for its largest businesses to disclose their climate-related risks and opportunities, in line with the Task Force on Climate-Related Financial Disclosures recommendations.
These new rules are set to come into force from April of next year.
In its respective report, the FCA has stated that it is pleased with the progress that has been made by the entities that it regulates. However, the financial supervisor has also outlined areas where it believes improvements need to be made. This includes mortgages and retail investments.
“To successfully transition to a net-zero economy requires not only that firms adapt and innovate, but that we regulators do too,” said Nikhil Rathi, chief executive of the FCA.
This is why the regulator is leading the effort to ensure there are consistent, trusted standards for disclosure that investors can rely on, he explained. “It is also why we are developing a strategy for how the FCA will push industry, using all our regulatory tools, to ensure we can meet the climate change challenge.”
Managing climate-change risks key focus for PRA
The PRA also set out what it regards as the biggest challenges in its individual report.
This includes how climate-related financial risks affect the firms it regulates, work to support and drive improvements in firms’ capabilities to manage these risks effectively, and consideration of what further policy action may be necessary.
“Climate change and the transition to net-zero emissions will affect our planet, our economy and our financial system,” said Sam Woods, chief executive at the PRA. “As a prudential regulator, it is our job to ensure the financial institutions we regulate are prepared for these changes and able to play their part in supporting the transition.”
It was the PRA that issued the world’s first supervisory expectations for the management of climate-related financial risks in April 2019. In July 2020, it set a deadline for them to be embedded as far as possible by the end of 2021.
The report concludes that firms have made good progress in getting up to standard with these expectations.
However, some firms are materially more advanced than others, with the PRA summarising that there is still much further to go.
The supervisory authority has said that it will continue to actively supervise in 2022 to ensure that firms meet expectations, with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis.
For example, the PRA used its report to highlight that it will consider using its full supervisory and regulatory toolkit to provide the necessary assurance or remediation where appropriate.
Moreover, it sets out the latest thinking on the relationship between climate change and the regulatory capital framework, pointing out that capital is a key part of its supervisory and regulatory toolkit.
“Whilst we observe that it is not the right tool to address the underlying causes of climate change (greenhouse gas emissions), it should help provide resilience against its consequences (financial risks),” the PRA said.
The regulator already expects firms to hold capital against material climate-related financial risks, but in light of the report’s findings, it confirmed that it will be undertaking further work.
“This work will help determine whether changes to the design, use or calibration of the regulatory capital framework may also be needed to ensure resilience against these risks,” the PRA said, adding that it will provide an update on the approach in 2022 following a call for further research, as well as a conference on climate change and capital requirements.
Payments industry push for net zero
The PSR, which oversees companies, including Mastercard and Visa, was approached by VIXIO to make a statement regarding climate change, in particular as it is not one of the regulators required to submit a transition report.
However, as of the time of publication, it had been unable to comment.
This is not to say, however, that the issue of climate change has not yet reached the payments industry. In conjunction with COP26, Mastercard unveiled an acceleration of its net-zero timeline by a decade, from 2050 to 2040.
This is something that has already been committed to by rival Visa in April this year, who also struck up a partnership with the Cambridge Institute for Sustainability Leadership this year to spearhead its drive toward more sustainable payments.
Mastercard is also scaling its sustainable solutions to customers across Europe and Latin America.
This includes partnerships with banks such as Banco de Costa Rica, ekko, Gránit Bank and Sberbank, which have all signed on to adopt the Mastercard Carbon Calculator, which was made in collaboration with Swedish fintech Doconomy.
In September, the card scheme also launched its Sustainability Innovation Hub in Stockholm, Sweden, in support of the EU’s Green New Deal — a set of environmentally friendly policy initiatives that have been spearheaded by the current political leadership at the European Commission.
These include Taxonomy for Sustainable Finance, which incentivises banks to provide credit to industries that are green, and the Sustainable Finance Disclosure Regulation, which became effective as of March this year, and aims to make the sustainability profile of funds more comparable and better understood by end-investors.
In the US, the Financial Stability Oversight Council released a new report last week which significantly identified climate change as an emerging and increasing threat to US financial stability for the first time.
