FCA issues guidance on climate risks

The Financial Conduct Authority (FCA) has issued guidance to the industry on managing climate change-related financial risks.

The Climate Financial Risk Forum (CFRF) has published the first specific industry-by-industry advice to help firms address climate-related risk, providing practical recommendations to firms of all sizes and across industry sectors on disclosure of climate-related financial risks, effective risk management, scenario analysis and opportunities for innovation in the interest of consumers.

The CFRF was established in March 2019 by the FCA and Prudential Regulation Authority (PRA) as part of and effort to place climate change as an important pillar in their strategic objectives.

The objective of the guide is to help firms understand the risks that arise from climate change, and to provide support on how to integrate these risks into their strategy and decision-making processes.

The guide provides advice in four key areas:

Risk management: By appropriately embedding climate-related financial risk into its governance and risk management processes, firms can make informed business decisions and improve their resilience.

Scenario analysis: By appropriately modelling and considering a range of possible scenarios, a firm can better understand and manage future risks today, whilst capturing opportunities to support the transition to a net-zero carbon economy.

Disclosures: By making effective climate-related financial disclosures, a firm can improve transparency thereby helping the market appropriately assess the true future value of assets.

Innovation: By developing novel products, services, policies and approaches, a firm can adapt its business to respond to the potential impacts of climate change, benefit consumers and deliver the change required to meet climate goals.

Announcing the publication of the guide, The PRA and the FCA said that they acknowledged that the financial services sector is facing significant challenges as a consequence of the pandemic, but explained that while COVID-19 represents a present risk, minimising the future risks from climate change “requires action now”.

Sheldon Mills, the FCA co-chair of the CFRF and interim executive director of strategy and competition, said: "Climate change represents an unprecedented challenge to the planet, and the financial services industry has a significant role to play if we are to meet the UK’s target of net zero by 2050.

”The CFRF is a positive example of collaboration between regulators and industry to find common ways to overcome barriers to meeting this challenge.”

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