UK Regulator Considers Potential Regulatory Refinements for Climate Change

The U.K. Financial Conduct Authority has published a Discussion Paper on climate change and green finance in which it calls for comment on potential changes to its regulatory approach in these areas. The Discussion Paper sets out specific action that the FCA intends to take in the short term in four focus areas - capital markets disclosures, public reporting requirements, green finance and pensions.

First, the FCA is considering whether the regulatory approach to disclosures by issuers in the capital markets should be amended. In particular, the FCA is asking for comments on: (i) the difficulties that issuers may have in determining materiality of climate-related issues such that a specific disclosure would be warranted; (ii) whether investors would benefit from greater comparability of disclosures; (iii) whether further prescribed requirements on climate-related disclosures should be introduced to facilitate more consistent disclosures by issuers. This final point includes whether the introduction of a "comply or explain" approach to the Task Force on Climate-related Disclosures would facilitate more effective markets.

Second, the FCA is proposing to introduce a requirement for financial institutions to report publicly on how they manage climate-related risks to their customers and operations. Feedback on how firms are currently managing these risks and the transition to a low-carbon economy would assist the FCA in developing the content requirements for the proposed reports. The FCA is also requesting comments on which regulated firms or sectors should fall within scope of the proposed reporting requirement.

Third, the Discussion Paper sets out the FCA's thinking on ways to facilitate the use of innovative models in green finance and ethical investing. One way the FCA suggests that this could be achieved is through the recently established Global Financial Innovation Network. This is a collaboration between eleven financial regulators which aims to facilitate efficient interaction and the potential to scale up new ideas in the FinTech space. Separately, the FCA is setting a Green FinTech Challenge to industry which will call on firms to develop innovative financial products and services to aid the U.K.'s transition to a low carbon economy. Details of how firms can apply to participate in the Challenge will be published on October 19, 2018.

Finally, the FCA confirms in the Discussion Paper that it will present a package of proposals in Q1 2019 covering: (i) how it intends to address the Law Commission's recent recommendations on Pension Funds and Social Investment to implement rule changes requiring Independent Governance Committees to report on their firm's relevant policies; and (ii) proposed guidance for providers of workplace personal pension schemes.

The FCA and the Prudential Regulation Authority will establish a Climate Financial Risk Forum by the end of November 2018. The Forum will comprise representatives from industry, technical experts and other stakeholders and will aim to encourage financial sector approaches to managing the financial risks from climate change as well as support innovation in green finance.

The PRA has also published a consultation relating to climate change. The PRA seeks feedback on a draft Supervisory Statement which sets out its expectations of firms in managing the financial risks from climate change.

The FCA's consultation closes on January 31, 2019.

View the FCA's Discussion Paper.

View details of the PRA's consultation on Managing Financial Risks from Climate Change.

View details of the proposed GFIN.

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