The Financial Conduct Authority (FCA) recently published a feedback statement on climate change. The FCA's proposals focus on two areas:
- improving climate change reporting (see our earlier blog) and improving standards; and
- disclosures in relation to green financial products and services.
The FCA's initial findings show that the sustainable label is applied to a very wide range of products, raising concerns that products are being "greenwashed" irrespective of their environmental impact. While noting the challenges of identifying genuinely green activities, respondents welcomed the introduction of internationally-agreed standards.
The FCA stated its intention to issue guidance following consideration of the proposals of the European Commission's Sustainable Finance Action Plan (SFAP). SFAP is working to develop sustainable finance benchmarks, new sustainability disclosure requirements and a taxonomy to define what an environmentally sustainable economic activity is. In the Green Finance Strategy, published by the UK government in July 2019, the government stated its commitment to match the SFAP objectives irrespective of the outcome of the UK's withdrawal from the EU.
In the meantime, amendments are also being made to key pieces of EU financial regulation, including the Markets in Financial Instruments Directive (MiFID) and the Insurance Distribution Directive (IDD). These changes are relevant to institutional investors, asset managers, investment advisers and other intermediaries, requiring them to consider sustainability risks in their activities.
Sustainable thinking is also creeping into domestic guidance, for example, the FCA's Policy Statement 19/4, which encouraged funds to set out in key information documents whether they pursue environmental, social or other non-financial objectives and how they do so in practice.
The statement is a useful reminder for firms, whether they see themselves as operating in the green finance space or not, of the direction of travel. Requirements to consider and report on non-financial risks and objectives are gradually entering the mainstream in ways which will touch a wide range of firms.
Climate change itself, and the legislative response to combatting climate change, is having a significant impact on the UK economy and on financial services markets.