Going green: the FCA’s developing approach

Speech by Christopher Woolard, Executive Director of Strategy and Competition, delivered at the FCA’s Innovating for a Greener Great Britain event, London.

Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Event: FCA’s Innovating for a Greener Great Britain event, London
Delivered: 19 October 2018
Note: this is the speech as drafted and may differ from the delivered version

Highlights

  • Our job is to make markets for financial services work well. Part of that is ensuring that financial services are adequately prepared to cope with the changes on the horizon.
  • We want to ensure that firms not only respond to the challenges climate change poses, but also make the most of the opportunities it presents.
  • We have set out in our discussion paper how these changes might affect the FCA’s work and we would welcome your views on this.

Just this morning I recycled my newspaper; had a coffee in my reusable cup; came to work on public transport and arrived in our environmentally friendly building. Not a bad effort, but I know I should do more. Many of you will feel the same.

“It is becoming ever more apparent that swift, decisive action is an economic imperative.”

As citizens, we know what we should do. We know that through small individual decisions, day by day, person by person, multiplied millions of times, we can all play our part.

The role for commercial businesses is also becoming clearer. Companies are increasingly aware of how climate change will affect them, and how to respond. And it is becoming ever more apparent that swift, decisive action is an economic imperative. Only last week at the Annual Meeting of the IMF and World Bank, Jim Yong Kim, President of the World Bank said, when it comes to climate change, “we have far less time than we thought – and far less urgency than we need”.

But as a regulator it isn’t always that simple. We have a strategic objective to ensure financial markets function well. And we have a clearly articulated Mission which enshrines our aim to deliver for consumers in a way that maximises value for money. But the words ‘climate change’ and ‘green’ do not explicitly appear in any of the 321 pages of the legislation that created the FCA.

The green boom

That’s why we published our paper on climate change earlier this week, and indeed, why are we all here today.

“The words ‘climate change’ and ‘green’ do not explicitly appear in any of the 321 pages of the legislation that created the FCA.”

When we look to the future, we see a financial services market that could be transformed both by climate change itself and the transition to a low carbon economy.

We’ve seen a huge growth in the demand for green financial services products. There are now over 70 green bonds listed on the London Stock Exchange, raising more than $22 bn in 7 currencies. Thirty-eight green companies have raised $10 bn in London. And in the retail sector we’ve recently seen the introduction of the UK’s first green mortgage. Research and surveys looking at financial decision-making amongst Millennials and Generation Z suggest that this demand will only increase.

Beyond the growth spurt we’re seeing in green products, we also have to consider the impact of climate change on investments, and on all intermediaries in the investment chain.

But what might good look like? Investors being able to invest with confidence in green finance. A clear understanding, or taxonomy, of what green means. No greenwashing or mis-labelling. A way of measuring the effectiveness of the ‘green’ aspect of the product, as well as the financial return. Investors pricing in climate change risk. And, more broadly, an awareness amongst practitioners of how their business decisions may obstruct the path towards low carbon investment. This isn’t a matter of asking the industry to be altruistic, but about how long-term risk is priced. It’s also a major opportunity for UK asset managers to win international business based on the highest standards.

This is a serious undertaking, and there’s a lot at stake. Financial losses from disorderly or volatile adjustments to the value of listed and unlisted securities.  Consumers investing in misleading products. Increases in insurance claims where providers have not adequately managed their risks. Major global events impacting on the value of investments, affecting pensions, savings and other direct investment products. The impact of meeting the Paris Agreement on individual households. The list goes on.

Our role

“Whichever way we look at this, it’s clear that climate change will result in significant changes for the financial services sector.”

That’s where we at the FCA comes in. Our job is to make markets for financial services work well. Part of that is ensuring that financial services are adequately prepared to cope with the changes on the horizon.

We’re doing this in a number of ways.

Following the Law Commission’s recommendations, we have announced our intention to consult on rule changes requiring Independent Governance Committees (IGCs) to report on firms' policies towards evaluating environmental, social and governance (ESG) considerations, including climate change.

And we’re keen to support financial services in playing a positive role in global climate change efforts.We are also looking at how we can ensure that asset managers are able to make informed decisions about the climate risks faced by the companies they invest in. This means they can inform investors in their funds of the environmental impact of their investments.

Global problem, global solution

But this is just the beginning of our journey. As we continue to build our knowledge and expertise in this area, we will develop and refine our approach. This is where we need your input.

I mentioned the Discussion Paper we published earlier this week. It outlines:

  • how the different impacts of climate change could fit with the FCA’s long and short-term objectives
  • some of the opportunities and risks the transition to a low-carbon economy presents in the UK’s financial services markets, and
  • the specific action we will take in the near term to ensure that markets function well and deliver good outcomes for consumers.
“We want to ensure that firms not only respond to the challenges climate change poses, but also make the most of the opportunities it presents.”

We would welcome your views on this by 19 January 2019.

As well as hearing your views, we’re coordinating with colleagues across the country, and indeed across the world, working closely with domestic and international regulators to understand the specific areas where we might intervene.

In line with this, we will establish a new FCA-PRA Climate Risk Forum alongside colleagues at the Bank of England, to help consider climate-related financial risks, share best practice and provide intellectual leadership in this emerging field. We are inviting views from all interested stakeholders on the key issues you feel we need to work on as part of this forum.

Green innovation today

We want to ensure that firms not only respond to the challenges climate change poses, but also make the most of the opportunities it presents.

Many of the firms here today are already doing just that. From equipping financial service professionals with the tools to manage climate-related risks, to developing retail products that incentivise consumers to adopt more climate-friendly behaviours – when it comes to innovation, the opportunities are vast.

Since its inception, FCA Innovate has supported firms seeking to provide innovative financial products and services in green finance and ethical investing.  And we see plenty of opportunities to further support innovative models in this space.

Throughout today we will:

  • explain how FCA Innovate and our regulatory sandbox can support firms seeking to develop innovative models
  • be able to hear from companies who have already developed green finance products and services, and
  • discuss and debate challenges and opportunities facing the green finance market

We really appreciate everyone being here today and I’m sure the variety of people and backgrounds present – from industry experts to innovative firms, academics to government officials – will make for a lively discussion.