Climate change and sustainable finance

Climate change and other environmental, social and governance (ESG) matters are increasingly central to the activities of listed companies, regulated firms and consumers. Find out more about our work on ESG.

Financial services and markets have an important role to play in the transition to a more sustainable future. The pressure is also increasing on business to be more purposeful and responsible. 

We aim to make sure that our regulatory approach creates an environment in which market participants can manage the risks from moving to a more sustainable economy and capture opportunities to benefit consumers.  

Our ESG strategy is based on 5 themes. These build on the priorities set out in our feedback statement FS19/6

  • Transparency – promoting transparency on climate change and wider sustainability along the value chain 
  • Trustbuilding trust and integrity in ESG-labelled instruments, products and the supporting ecosystem 
  • Toolsworking with others to enhance industry capabilities and support firms’ management of climate-related and wider sustainability risks, opportunities and impacts 
  • Transitionsupporting the role of finance in delivering a market-led transition to a more sustainable economy 
  • Teamdeveloping strategies, organisational structures, resources and tools to support the integration of ESG into our activities 

The Chancellor’s remit letter to us in March 2021 stated that we should consider the Government’s commitment to achieve a net-zero economy by 2050 when we work to advance our objectives and perform our functions as a regulator. Our strategy sets out how we plan to do this.

Read more about our work so far.

Transparency

Task Force on Climate-related Financial Disclosures (TCFD) 

The TCFD was set up by the Financial Stability Board in 2015 to identify the market’s climate-related information needs and develop a set of climate-related disclosure recommendations.  

The TCFD’s final report, published in June 2017, sets out 11 recommended disclosures under 4 pillars:  

  • governance 
  • strategy 
  • risk management 
  • metrics and targets 

The Government endorsed the TCFD’s recommendations in 2017 and made their implementation a central part of the 2019 Green Finance Strategy. In November 2020, a cross-Whitehall and regulator taskforce (including the FCA) published an Interim Report and Roadmap, setting out a strategy towards mandatory TCFD-aligned disclosures by 2025.

Consistent with the Roadmap, in December 2020 we finalised new disclosure rules for companies with a UK premium listing and, in December 2021, we:

  • extended the application of our TCFD-aligned Listing Rule for premium-listed commercial companies to a wider scope of listed issuers
  • introduced TCFD-aligned disclosure requirements for asset managers and asset owners (including life insurers and FCA-regulated pension providers)

Find out more about climate-related reporting requirements for listed companies and financial services firms. 

International reporting standards

We have been influencing international efforts towards a common international corporate reporting standard for sustainability disclosures.

To make sure we leverage existing industry capabilities, we’re promoting a solution that builds on the TCFD’s recommendations and other existing frameworks.

We co-chair a workstream on sustainability reporting under the International Organization of Securities Commissions' (IOSCO) Sustainable Finance Taskforce. In a report released in June 2021, IOSCO set out the outcomes of this work so far. The report elaborated on IOSCO’s vision for an International Sustainability Standards Board (ISSB) to sit alongside the International Accounting Standards Board under the International Financial Reporting Standards (IFRS) Foundation. 

Consistent with this vision, the IFRS Foundation launched the ISSB at the United Nations Climate Change Conference (COP26). This is a significant development. It's the first step towards developing a global baseline corporate reporting standard on climate change and sustainability matters, integrated with financial reporting standards under the IFRS Foundation’s robust governance structure.

When the ISSB was first proposed by the IFRS Foundation in 2020, we responded to the consultation supporting the initiative and also issued a supportive joint statement along with the Government and other UK financial regulators.

Jointly with other UK authorities, we are committed to adopting the ISSB’s standards. The Government's recent Roadmap to Sustainable Investing confirmed that the ISSB's standards would form the 'backbone' of whole-of-economy Sustainability Disclosure Requirements (see 'Trust'). We will work with the Financial Reporting Council (FRC) and others to establish and implement an appropriate oversight and enforcement mechanism for disclosures against the new standards.

In our work with IOSCO, we are also examining the framework for audit and assurance of sustainability reporting. 

Trust

Sustainability Disclosure Requirements (SDR) and sustainable investment labels

The Government’s Roadmap to Sustainable Investing, published in October 2021, sets out plans to introduce new SDR, building on the UK’s TCFD implementation. We will be responsible for implementing elements of the SDR.

The objectives of the SDR include building trust in the market for ESG and sustainable investment products, and helping combat potential 'greenwashing' by requiring firms to back up the ESG claims they make.

SDR will include both entity-level and product-level disclosures by asset managers and asset owners. It will take the TCFD’s 4 pillars as a starting point, broaden the scope beyond climate change to cover other sustainability-related financial information, and integrate requirements linked to the forthcoming UK Green Taxonomy. 

We are considering introducing 2 layers of disclosure: 

  • a concise and accessible consumer-facing layer of disclosure that includes key ESG-related information to help consumers make informed decisions
  • more detailed underlying entity- and product-level disclosures, aimed primarily at institutional investors and other stakeholders 

Supported by these disclosures, SDR will also introduce a sustainability classification and labelling system for investment products. The labels will give consumers a 'snapshot' of the sustainability characteristics of a given product, helping them navigate the increasingly complex ESG investment landscape. 

In November 2021, we published a Discussion Paper on SDR and investment labels (DP21/4), seeking feedback on key policy design issues, ahead of consultation in Spring 2022.

Alongside the DP, we established a Disclosures and Labels Advisory Group (DLAG) composed of industry experts and consumer representatives. The group will give us feedback, technical advice and constructive challenge as our work develops. Find out more under the Terms of Reference.

Sustainable investment funds

When a fund is submitted for authorisation, we review its strategy, investor documentation and model portfolios. As the sustainable investment market evolves rapidly, we think it’s important to clarify how existing rules apply. 

We have, therefore, developed a set of guiding principles to help clarify our expectations for the design, delivery and disclosure of retail responsible and sustainable funds, both as applications are submitted for authorisation and on an ongoing basis

In July 2021, we included our guiding principles in a letter to the chairs of authorised fund managers (AFMs).  

The guiding principles were informed by consumer behavioural research, also published in July 2021, on how consumers approach their investment decisions in this space. 

ESG topics in capital markets

As industry participants more fully integrate ESG into their activities and expand their ESG-focused product offerings, they are increasingly reliant on third-party ESG data services, as well as ESG ratings and benchmark indices. So, it’s important that these services are delivered in a fair, effective and transparent way.

We took the opportunity in our consultation on TCFD-aligned disclosures (CP21/18) to gather views on select ESG topics in capital markets, including on green and sustainable debt markets and the increasingly prominent role of ESG data and rating providers. We have, in parallel, contributed to IOSCO’s work on ESG data and ratings. We are currently analysing responses and will feed back by mid-2022. 

The Government similarly noted, in its Roadmap to Sustainable Investing, that it's important that providers deliver ESG data and ratings transparently, and that they have strong governance and management of conflicts of interests. The Government is therefore considering bringing these firms into the scope of our authorisation and regulation. 

Tools

Climate Financial Risk Forum 

In 2019, we established the Climate Financial Risk Forum (CFRF) with the Prudential Regulation Authority (PRA). 

The CFRF brings together senior financial sector representatives to share their experiences in managing climate-related risks and opportunities, and helps build capabilities and capacity across the industry. 

In 2020, the CFRF published industry guidance materials on disclosure, risk management, scenario analysis and innovation. In October 2021, the CFRF launched a further series of publications, including guidance and tools to help accelerate firms' capability-building. 

Sustainability and innovation

We are undertaking a programme of work using our innovation services to assist firms and regulators to overcome some of the challenges that the transition to net zero will raise, by supporting the development of new approaches and solutions in the area of sustainability and climate change.

These services allow us to engage with and support innovative solutions at various stages of their development. This includes the initial ideation and proof of concept stage through our TechSprint programme, the further development and validation of proof concepts to demonstrate market value through our Digital Sandbox pilot, and the testing of innovative propositions in the market with real consumers through our regulatory sandbox.

  • Sustainability TechSprint: We hosted a successful Sustainability TechSprint in October 2021 to foster innovative ideas for how we can harness technology to monitor ESG data and disclosures more effectively. Solutions addressed issues ranging from verification of companies' carbon offsetting programmes, to helping develop sustainable investment labels using impact scores.
  • Second Digital Sandbox pilot: an 8 to 10 week programme to provide support to start-ups and innovators in developing and validating working proofs of concept to improve the transparency of ESG-related market disclosures and consumer understanding of the ESG characteristics of the products and providers they are engaging with.
  • Green FinTech Challenge: a package of our firm support services to help start-ups, incumbents and technology providers navigate regulation and support live market testing of new products and services that will aid the transition to a net zero economy. 

Timeline for the 2021/22 programme

  • September 2021 – Application windows for the Digital Sandbox and the Green FinTech Challenge opened
  • October 2021 – Sustainability TechSprint took place
  • November 2021 – Successful applicants to the second Digital Sandbox announced and onboarded
  • January 2022 – The Digital Sandbox testing environment opens to participants
  • Early 2022 – Successful applicants to the Green FinTech Challenge announced

Transition

We support the Government’s direction of travel towards requiring the disclosure of net zero transition plans across the UK economy. We have a role to play in delivering on that ambition. 

We have already proposed to integrate new guidance on transition planning, published by the TCFD in October 2021. We will engage with stakeholders in the first half of 2022 to consider how best to build on this guidance, with a view to promoting credible and effective transition plans that consider the Government’s net zero commitments. 

At COP26, the Government announced that the UK will be the world's first net zero-aligned financial centre. The UK will move towards making it mandatory for institutions across the financial sector to publish robust firm-level transition plans that set out how they will decarbonise as the UK meets its net zero targets. The fact sheet published by the Government provides more information on what this will involve.

Investor stewardship 

Stewardship by asset owners and asset managers involves making informed decisions about where to invest, and proactive oversight of assets once invested.  

Active investor stewardship is, therefore, an important tool to support an effective transition to a net zero economy, and to promote wider sustainability objectives. 

In June 2019, we implemented new rules on shareholder engagement in line with the revised Shareholder Rights Directive (PS19/13). We also set new duties for Independent Governance Committees to consider and report on their firms’ policies on ESG matters and stewardship (PS19/30).  

In January 2019, we published a discussion paper (DP19/1) with the FRC on the regulatory framework for effective stewardship. We set out our conclusions in a later feedback statement (FS19/7), which was published alongside the FRC’s revised UK Stewardship Code 2020.  

We continue to work closely with the FRC, other regulators and industry as firms continue to develop their stewardship strategies. 

More recently, we have been considering how investor engagement and the exercise of existing shareholder rights, such as shareholder resolutions and voting against directors, can be used more effectively to encourage positive ESG outcomes. 

Team

Embedding ESG across the FCA

We are working to integrate ESG considerations across our functions, and are taking steps to embed net zero and wider ESG considerations in all our policy work, as well as our market oversight, supervision, authorisations and enforcement activities.

Reflecting the scale and urgency of the climate challenge, and the explicit requirement to 'have regard' to net zero, climate change will remain a priority. However, we are working to make sure that, as an organisation, we keep pace with the integration of wider environmental and social considerations in economic and financial decisions and financial instruments, products and services. 

This will include, for example: 

  • setting ESG-related expectations at the authorisations gateway
  • incorporating ESG-related questions and criteria in supervisory assessments and engagements
  • building ESG-related elements into enforcement models

Page updates

17/12/2021: Information added PS21/24 and PS21/23
07/12/2021: Link added to PMB 36, TN802.1 and launch of ISSB
03/11/2021: Information added following new strategy.
25/10/2021: Link added Podcast added to right hand navigation.
20/07/2021: Information added Sustainability and innovation, and sustainable investments.
24/06/2021: Information added CP21/17 and CP21/18