GFI’s consultation response to the FCA’s Our Future Mission
FCA Our Future Mission Consultation Response
- At present value, up to USD 13.8 trillion of manageable global assets are considered at risk in the event of a worst-case climate scenario. In even the most optimistic assessment (the assumption that existing mitigation targets are met in their entirety worldwide), climate value at risk has been calculated at approximately USD 2 trillion. Such is the potential threat to systemic integrity that we believe enhancing climate-related financial disclosure, addressing associated market failures, and challenging service providers to incorporate environmental foresight within their accounting, client advice and product design procedures should sit “at the heart of financial conduct regulation” in the years ahead. The City of London’s Green Finance Initiative therefore strongly recommends that mitigation of climate-related financial risks be included within the FCA’s Future Mission.
- Specifically, the FCA should incorporate investigation into physical, liability and transition risk (broadly defined as ‘climate risk’) within the “new challenges” it identifies and seeks to be clearer about. Policymakers, central banks and supranational authorities have already signaled to market actors the prudential imperative of redressing a “tragedy of the horizons” and of the corresponding need to “scale-up” green finance. Coordinated regulatory engagement will thus be crucial to address implied threats to the FCA’s core objectives (will or does climate risk impair the integrity, orderly functioning and “sustainable growth” of UK markets? Do consumers have access to sufficient climate-related information to make informed, long-term decisions and prevent miselling?), and to demark the limits between conduct regulation, prudential oversight and public policy in meeting these challenges.
- It is not suggested that these issues be addressed in a single consultation or review. Assessing and mitigating climate-related financial risk should be considered an ongoing commitment in line with the complex and evolving interplay between environmental degradation, mitigation policy and financial stability. Targeted activities could be considered to address pressing concerns (are regulated firms in breach of their obligation to consumers by failing to address the long-term impact of climate change on portfolios? Would transparency and price discovery be enhanced by amending UK Listing Authority disclosure, prospectus and/or listing requirements in line with the recommendations of the FSB Task Force on Climate-related Financial Disclosure?), and to outline FCA contemplation of climate risk considering its potential individual, cumulative and systemic impact. Confirmation of a watching brief and commitment to investigate, monitor and, where necessary, ‘nudge’ or intervene in relation to these risks would also be welcome.
- The FCA might also bring to bear its experience of addressing similar twenty-first century market issues, as outlined in Our Future Mission. These include consideration of long-term product design (i.e. mitigating present bias, exploring risk metrics and ensuring consumers are equipped to make informed long-term decisions) and adapting to technological change (cultivating innovation whilst maintaining market integrity). The FCA could also consider exploring climate risk and/or green finance within existing work programmes, e.g. holding a ‘sprint’ event in relation to green product labeling and consumer protection; reviewing whether its Asset Management Market Study could be expanded to address investment consultants’ assessment and communication of ESG (environmental, social and governance) issues “as a potential driver of [effective] competition and a growing unmet investment industry need”.
- We at the GFI firmly believe climate-related risk falls within the FCA’s regulatory responsibility in addition to being a broader public policy concern. The threat of financial crisis in relation to stranded asset risk has already been deemed “very real” by UK regulators. Environmental externalities have been labeled “the world’s biggest market failure”, and the potential impact of unmitigated climate change “could be transmitted through pension funds, share prices, premiums and loans”. Due diligence is subsequently being performed by pioneering institutions, and the value of non- and climate aligned assets may rise and fall accordingly. But the growing body of literature devoted to climate-related systemic risk indicates the potential challenge is more deeply embedded in current financial conduct than can be easily and swiftly rectified. To ensure a controlled transition toward a low-carbon economy and to mitigate potentially extreme future financial scenarios or extraordinary market interventions, it is proposed that the FCA engage with policymakers, peer institutions and market practitioners on the issue of climate risk and include its consideration within the Future Mission.
To see the FCA’s full report please click here
Dated: 26 January 2017