As UK financial regulators, we are focused on making sure that the risks from climate change and the opportunities from the transition to a net-zero economy are being identified and proactively managed across the financial sector. Doing so creates opportunities for UK companies and consumers, as well as helping address climate change.
We welcome the Government’s invitation under the Climate Change Act 2008[1] to publish Climate Change Adaptation Reports. Our reports set out how climate change affects our respective responsibilities and the actions we, and the financial sector, are taking in response to it.
Climate Change Adaptation Reports
Financial Conduct Authority (FCA): In the FCA’s report[2], we set out the steps we have seen the industry take to mitigate the risks climate change presents and we identify areas, such as retail investments and mortgages, where more needs to be done. Our assessment comes within the context of our developing strategic approach to climate change issues. This will see climate considerations embedded in everything we do, from how we operate, to our policy choices, to how we supervise and enforce against firms. Additionally, our report examines how the industry is making commitments to reach net-zero. We are keen to see these commitments put into action, backed up by appropriate governance and transition plans that will turn pledges into reality.
Prudential Regulation Authority (PRA): In the PRA’s report[3], we set out the risks from climate change to our objectives and our response to them. This includes how climate-related financial risks affect the firms we regulate, our work to support and drive improvements in firms’ capabilities to manage these risks effectively, and our consideration of what further policy action may be necessary.
The PRA issued the world’s first supervisory expectations for the management of climate-related financial risks in April 2019, and in July 2020 set a deadline for them to be embedded as far as possible by the end of 2021. The report published today concludes that firms have made tangible progress against these expectations. However, some firms are materially more advanced than others, and there is still much further to go. As we move into 2022, the PRA will actively supervise to ensure firms meet expectations, with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis. In the report we highlight that we will consider the use of our full supervisory and regulatory toolkit to provide the necessary assurance or remediation where appropriate.
The report also sets out our latest thinking on the relationship between climate change and the regulatory capital framework. Capital is a key part of our 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 already expects firms to hold capital against material climate-related financial risks, but in light of the report’s findings, we 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. We will provide an update on our approach in 2022 following a call for further research and a conference on climate change and capital requirements.
The Pensions Regulator (TPR): In the TPR’s report[4], we will publish guidance clarifying what we will look for from schemes as they assess, manage and prepare to report on climate-related risk and opportunities. We will continue work with our regulated community to ensure our guidance is clear and easily adopted. To support trustees in meeting their duties, our proposed new code of practice will include several climate change modules. The draft proposals include a requirement that they assess climate-related risks and opportunities as part of their system of internal controls. We will work with the Department for Work and Pensions to share best practice in climate risk reporting.
Comments from the CEOs of the FCA, FRC, PRA and TPR
Nikhil Rathi, CEO of the Financial Conduct Authority:
'To successfully transition to a net-zero economy requires not only that firms adapt and innovate, but that we regulators do too. That is why we are leading the effort to ensure there are consistent, trusted standards for disclosure investors can rely on. 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. Our work in partnership with the PRA, TPR and FRC is a vital part of that effort.'
Sam Woods, Deputy Governor for Prudential Regulation, and CEO of the Prudential Regulation Authority:
'Climate change and the transition to net-zero emissions will affect our planet, our economy and our financial system. 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. Our Climate Adaptation Report sets out how we are going about this, what progress firms have made, and what further work there is to do – from making climate change a core part of our supervisory approach to exploring the relevance of climate change to the regulatory capital framework. I look forward to the PRA continuing this important work.'
Charles Counsell, CEO of The Pensions Regulator:
'The pension industry still has much work to do to build resilience and assess climate-related risks and opportunities. Our adaption report acknowledges that more still needs to be done, but also recognises that practices are evolving, and trustees – and savers – are more engaged with the need to consider climate factors. We remain convinced that a landscape of resilient pensions schemes that protect savings from climate risk is entirely within reach.'
Sir Jon Thompson, CEO of the Financial Reporting Council:
'There is clearly a great deal of focus both on how companies report the impact of their activities on the environment and wider environmental and social challenges to which companies must respond. Companies, auditors, actuaries, investors and others also face a changing regulatory environment and reporting and business activities need to adapt to meet these demands. To do this, a range of challenges need to be addressed to ensure that we build an effective framework fit for the future.
'The FRC encourages companies to report using the TCFD and SASB frameworks and supports the development of global standards for sustainability reporting by the IFRS Foundation. Whilst a lot of good work has happened, there is more to do. Through the cross FRC ESG Climate Group we will develop our strategy on ESG and manage our external and internal focus. Earlier this year we issued our ESG Statement of Intent which sets out some challenges in respect of ESG reporting and outlines the FRC's further actions.'
Notes to Editors
FCA Climate Change Adaptation Report[2]
PRA Climate Change Adaptation Report 2021 - Climate-related financial risk management and the role of capital requirements[3]
TPR Climate Change Adaptation Report[4]
FRC Climate Change Adaptation Report - to be published later this year