Green Horizon Summit: Rising to the Climate Challenge

Speaker: Nikhil Rathi, CEO
Event: Online conference hosted by the City of London
Delivered: 9 November 2020
Note: this is the speech as drafted and may differ from the delivered version

Highlights

• Finance has a key role to play in the transition to cleaner and less carbon-intensive economy.
• Good regulation has an important role to play in this transition. We want to help market participants manage the risks from moving to a low carbon economy while capturing opportunities to benefit consumers.
• To achieve these goals we are focused on improving transparency for market participants and consumers; building trust in sustainable finance products; and ensuring we provide the right regulatory tools support firms.
• From 1 January we are introducing rules requiring premium listed companies to make better disclosures about how climate change affects their business, consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). We will also consult in the first half of 2021 on extending the scope of these rules and also on introducing TCFD obligations for asset managers, life insurers and pension providers.

Those of us in the UK find ourselves at the start of another national lockdown. And across the world the pandemic continues to impact the lives – and livelihoods –  of billions of people.

But while we deal with the crisis immediately surrounding us, we cannot lose sight of the climate crisis ahead. That the last five years are the hottest on record only serves to underline the scale of the climate challenge. To tackle it, we need to accelerate the transition to cleaner energy and a less carbon-intensive economy. 

Finance will play a central role in that transition. And good financial regulation, internationally coordinated, will be key to facilitating it.

The FCA, wants to help market participants manage the risks from moving to a low carbon economy – while also capturing opportunities to benefit consumers.

We want green and sustainable finance to be at the heart of the continued growth of London as a global financial centre. And we stand ready to support the UK Government to fulfil its commitment to at least match the ambition of the EU Sustainable Finance Action Plan in the UK. 

Our work to achieve these goals is underpinned by three themes that are shaping our regulatory priorities as we rise to the climate challenge. 

The first is transparency. 

Market participants rely on high quality information to inform asset pricing, risk management and capital allocation. And consumers need clear disclosures from firms so they can choose the right products. 

We have already seen how quickly climate-related and other sustainability risks can crystallise – and how big a financial impact they can have. For example, Storms Ciara and Dennis earlier this year cost the UK insurance sector over £360m. While each individual storm may not be unusual, there is evidence of a human contribution to increased extreme weather around the globe.

That’s why one of our key priorities has been to promote good disclosures right along the investment chain. We recently proposed a new Listing Rule which would require our most prominent listed companies to make better disclosures about how climate change is affecting their business. And to make these disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures, the TCFD. This will cover two-thirds of the market capitalisation of equities on the UK Official List – that’s 1.9 trillion pounds. 

Our consultation closed last month. Feedback has generally been positive and I can confirm that we intend to introduce this rule for reporting periods beginning 1 January next year. Our full Policy Statement and final rules will follow by the end of the year. 

Our rule will be introduced on a 'comply or explain' basis. We generally expect companies to be able to comply. However, we understand that some may need more time to deal with data, analytical or modelling challenges. 
And this is just the start. We will follow this up in the first half of next year with proposals to extend the rule to a wider scope of listed issuers. We will also consider further tightening the rule, moving from 'comply or explain' to mandatory disclosure.

Also in the first half of next year we will release proposed TCFD implementation measures for asset managers, life insurers and FCA-regulated pension providers. We aim to bring in rules for the largest firms by 2022. This will further support information flow along the investment chain.

In developing our approach, we are working with other regulators and the Government through a TCFD Taskforce. This was set up after the Government’s Green Finance Strategy was released last year and the interim report will be published later today. 

Implementing the TCFD’s recommendations in the UK is just the first step. It must be complemented by more detailed climate and sustainability reporting standards that promote consistency and comparability. 

That is why the FCA is co-chairing a workstream on disclosures under IOSCO’s Sustainable Finance Task Force. With IOSCO, we are working with others to drive international progress in this area. 

We strongly support plans for a new Sustainability Standards Board[1] recently proposed by the Trustees of the IFRS Foundation. 

Building on TCFD and a harmonisation initiative[2] by an alliance of leading standard-setters, this can deliver a common international standard, within a tried and tested governance model that promotes the public interest. 
Our second theme is around trust. 

This year we have seen record inflows into sustainable investment products and record issuance of social and sustainable bonds. According to Morningstar, flows into such funds in the third quarter exceeded 50 billion Euro for the second successive quarter. This represented 40 per cent of all European fund sales. At the same time, sustainable equity funds gathered 82% more new money than traditional equity funds.

As this market grows we want to ensure that consumers can trust sustainable products. To do this firms need to be clear on their obligations around the design, delivery and disclosure of sustainable products. And consumers should receive the right information and advice. 

In the funds space, we have been considering measures to combat potential ‘greenwashing’. 

We have developed a set of principles to help firms interpret existing rules requiring that disclosures are ‘fair, clear and not misleading’, including when they submit new products to us for authorisation. 

Better disclosures will, in turn, help consumers understand and compare the products they are offered. We will shortly start discussing these principles with industry with a view to finalising them in the new year. 

And later this year we plan to run some consumer experiments to help us better understand what information influences consumers’ choices in sustainable products.

This will help us refine our disclosure rules and guidance to meet consumers’ needs. 

And - finally our third theme is looking at tools. 

In this fast-moving space, close collaboration between regulators and industry is crucial to drive best practice and support the transition to net zero. 

Last year we established the Climate Financial Risk Forum – jointly with the PRA. The Forum brings together senior financial sector representatives to share their experiences in managing climate-related risks and opportunities. 

Back in June the Forum published an industry guide. This helps firms assess and report on their climate-related financial risks. 

Over the next year the Forum is looking to refine and build on the recommendations in the guide. Some thematic work on metrics, data and methodologies is also planned.

As the market develops further - and current pressures arising from the pandemic recede - we expect to deepen our sustainable finance strategy. 

Working together I am confident that we can rise to the challenges and opportunities climate change presents.