The FCA’s report outlines steps it has seen the industry take to mitigate the risks climate change presents and identifies areas, such as retail investments and mortgages, where more needs to be done. 

It also examines how the industry is making commitments to reach net-zero.

The paper noted that ESG equity funds saw net inflows of £995m in the UK in July 2021 alone and expected this to continue.

The FCA has also received a “high volume” of applications for fund authorisation with an ESG focus.

“ESG products take many forms, involve different strategies, and often use complex terminology,” the report noted.

“Commercial and ESG considerations do not always align, so we need to make sure that consumers can trust information about ESG products. 

“It is essential that products marketed with a sustainability and ESG focus are described accurately, and any assertions made about their goals are reasonable and substantiated.” 

Nikhil Rathi, CEO at the FCA, said: “To successfully transition to a net-zero economy requires not only that firms adapt and innovate, but that we regulators do too.

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“That is why we are leading the effort to ensure there are consistent, trusted standards for disclosure investors can rely on. 

“It is also why we are developing a strategy for how the FCA will push industry, using all our regulatory tools, to ensure we can meet the climate change challenge.”

The PRA’s report highlights the risks from climate change to the regulator’s objectives and its response to them, including how climate-related financial risks affect the firms it regulates, its work to support and drive improvements in firms’ capabilities to manage these risks effectively, and its consideration of what further policy action may be necessary. 

In April 2019, the PRA issued supervisory expectations for the management of climate-related financial risks and, in July 2020, set a deadline for them to be embedded as far as possible by the end of 2021. 

The PRA’s report concludes that firms have made tangible progress against these expectations, however some firms are materially more advanced than others, and there is still much further to go. 

It stated that it will actively supervise to ensure firms meet expectations, with firms needing to demonstrate a good understanding and management of climate-related financial risks on an ongoing basis. 

“Climate change and the transition to net-zero emissions will affect our planet, economy, and our financial system,” commented Sam Woods, deputy governor for prudential regulation and CEO at the PRA.

“As a prudential regulator, it is our job to ensure the financial institutions we regulate are prepared for these changes and able to play their part in supporting the transition. 

“Our Climate Adaptation Report sets out how we are going about this, what progress firms have made, and what further work there is to do — from making climate change a core part of our supervisory approach to exploring the relevance of climate change to the regulatory capital framework. 

“I look forward to the PRA continuing this important work.”

The TPR’s Climate Change Adaptation Report can be found here, while the FRC’s will be published later this year.