Climate change is now not just an ethical concern, but a “practical consideration for the UK pension industry”, according to the Financial Conduct Authority (FCA).
In its discussion paper released this month (October), the FCA highlighted that those making investment decisions should take account of all financially material risks, including climate change.
The FCA believes that greater regulatory focus is particularly important for the pensions sector, due to the “the long-time horizons of the investments, which makes climate change a material factor”.
FCA chief executive, Andrew Bailey commented: “Climate change presents a disruptive and potentially irreversible threat to the planet. The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.”
Taking into account all financially material risks is key for the investment strategies of workplace personal pension schemes, as consumers are generally defaulted into investments. Over 90 per cent of these schemes’ members rely on the investment decisions regarding their pension savings being made for them.
The FCA will consult on introducing guidance for providers of workplace personal pension schemes, which would clarify how providers should consider financial factors, such as ESG and climate change risks and opportunities.
This is particularly important for pension investments, where the potential impact of climate change related risks is “much more likely”, given the time periods products are held for.
In its discussion paper, the FCA also voiced its commitment to addressing the recommendations of the Law Commission’s report on pension funds and social investment, which was published in June 2018.
In response to the Law Commission’s report, the FCA announced their intention to consult on rule changes requiring independent governance committees to report on their firm’s policies. This includes policies on evaluating ESG considerations, how they take account of members’ ethical concerns and stewardship.
It also highlighted that greater regulatory focus is needed to ensure competition and market growth for “green finance”, ensure that disclosures in capital markets “appropriately give adequate information to investors of the financial impacts of climate change” and to facilitate the introduction of a new requirement for financial services firms to report publicly on how they manage climate risks.
Bailey concluded: “The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fairway which meets users’ needs.”