In late December, the FCA issued a Policy Statement titled “Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations”. It is the next phase in a Consultation that started in March 2020, seeking input from companies with a UK premium listing on the subject of “promoting better disclosures about how they are managing climate-related risks and opportunities.” I have no doubt that the vast majority of such companies are well aware of the proposals, will have considered the implications and will have provided feedback if they felt it appropriate to do so. Indeed, 66 companies, investors, asset owners, NGOs and other stakeholders did provide feedback to the FCA.

The reality though is that this is no longer just an issue for larger listed firms. It must become an increasing area of focus for the boards in other UK listed companies and regulated insurance firms.

The FCA have made an explicit statement that they intend to consult on extending the disclosure requirements to a wider scope of listed insurers. Less obviously, they have said that the Policy Statement will also be of interest to all ‘regulated firms’. Munich Re recently issued a report identifying the extent of losses from natural catastrophes in 2020 identifying that damages exceeded the $166 billion incurred in 2019. This evidences the creeping rise which is of such a concern to environmentalists, though many losses were not insured. 2020 is considered overall to be the second warmest year on record, though in some counties the record was breached in 2020.

We already know that the FCA have identified climate change as one of their 6 pieces of cross-cutting work in their 2020/21 Business Plan issued in April 2020. These pieces of work were described as issues “that have a broad market impact.” It does therefore seem to me inevitable that what is currently being rolled out as a reporting requirement for those companies with a UK premium listing, will in due course, become a more significant compliance issue for the boards in all regulated financial services companies. It will not however, just be an issue of reporting. Economic, environmental and social responsibility contains important elements of how firms respond to climate change and there is no better example of this than Lloyd’s recent announcement that it it is winding down the involvement of underwriting members in energy risks which are not environmentally friendly.

We know that the FCA and PRA are both collaborating on the issue of climate-related risks, so it is no surprise that the PRA also made it clear in their ‘Dear CEO’ letter dated 15th December 2020 that “Financial risks arising from climate change” will be one of their supervisory priorities for 2021. PRA regulated firms are already working towards a deadline of the end of 2021 to have embedded their approaches to managing climate -related financial risks whether arising though their investment and/or their underwriting portfolios as well as their own operational impact on the environment and climate change.

The PRA Climate Biennial Exploratory Scenario (CBES) will launch in June 2021 involving a number of UK life and General insurers as well as selected Lloyd’s Managing Agents. It “will focus on sizing risks, rather than assessing capital requirements and will facilitate the identification of gaps in firms’ data and the development of risk management processes.” The results are expected to be published in Q1 2022.

What Does The FCA Policy Statement Say?

The proposed new Listing Requirement (LR) is that UK premium listed companies must certify the extent of compliance with 4 key recommendations made by the Task Force on Climate-Related Financial Disclosures (TCFD). These are not new recommendations – they were first published in April 2017 and reflected both the desire from investors for improved climate-related disclosures and the need for companies to better communicate the information. What is new is the proposed requirement for compliance imposed by the FCA.

The four recommendations are:

• Governance – “Disclose the organisation’s governance around climate-related risks and opportunities.”
• Strategy – “Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.”
• Risk management – “Disclose how the organisation identifies, assesses, and manages climate-related risks.”
• Metrics & targets – “Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.”

It is easy to see how the FCA might begin to consider making these recommendations relevant to regulated firms that are not subject to the UK premium listing obligations.

It is also just as easy to identify that to be able to make these disclosures the relevant firms will have to have in place their strategy and approach to governance and risk management of environmental risks and the potential impact of cimate change.

What Might This Mean For FCA Regulated Firms?

The current proposals are designed to help investors better understand the climate change risks affecting listed companies so that those investors can make better investment decisions. As well as championing the interests of investors, the FCA also work hard to ensure the customers of financial services firms do not come to any harm. I think it is therefore extremely likely that we will at some stage see the FCA shift their focus to the way climate risk affects other aspects of the regulatory work firms are expected to undertake. Certainly the PRA is already in this space and working with firms to ensure that from a prudential point of view firms are creating a strategy and approach to climate change to protect the firms and policyholders from the possibility of failure.

Some immediate issues for firms to consider might include:

• Product governance: might climate-related risks result in your firm manufacturing products that transpire not to be suitable for the needs of customers and or unintentionally provide cover for unexpected environmental losses?
• Governance and oversight: is your risk framework effective at identifying and responding to climate-related risks?
• Culture: Does your firm have a board approved strategy for climate change and a policy on involvement with bbsiiensses which are not environmentally friendly? How is your firm educating its staff about the strategy or these issues more generally? the FCA is clear in its thinking that good culture drives fair outcomes for customers. Does the culture in your firm encourage individuals to focus on positive outcomes that could be affected by climate change?
• Operational resilience: many firms are still at the outset of their work on Operational Resilience. There are many aspects of climate-related risks that could have an impact on operational resilience. How are these being mapped and tested?
• Intelligence and information: the FCA highlighted an intent to look at “Transforming how we work and regulate” in their 2020/21 plan and specifically a key focus on – “Intelligence and information”. It is quite conceivable that we might we see more data requests around climate change and certainly more use of that data by the FCA to consider whether climate-related risks are being adequately identified and managed.

Opportunity is less of an issue from the perspective of the potential for customer harm to arise. But it is one the TCFD consider carefully from a governance perspective, and one that boards might want to give some thought to. What opportunities exist for the firm to offer products or services that might meet emerging needs of consumers?

What Next For Climate Change?

This is an issue that will be increasingly in focus for all financial services firms. Those with the highest profiles may be the ones required to act first, but as we see both the PRA and FCA place more specific focus on the subject, it is clear that it is an issue Boards should be considering – both in its own right and as an issue that has an impact on many other aspects of your regulatory and compliance work. The PRA are already bringing non-listed firms into their work on the subject in the Climate Biennial Exploratory Scenario (CBES) testing starting in June 2021 and the FCA have made it increasingly clear that the expect all regulated firms to be starting to pay specific attention to the broad risks associated with climate change. It is no longer a subject you can afford to dismiss as simply an underwriting factor.

If you would like to discuss any of the regulatory aspects of climate-related risk and the way it might affect your firm, please do speak with myself or a member of the ICSR team.

Kenneth Underhill

Director
Implement Compliance Solutions & Resources