Financial regulator’s response to climate risk “troubling”

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The Financial Reporting Council’s response to a consultation from an international group that promotes financial stability shows the UK regulator does not appreciate the magnitude of the financial risks from climate change (climate risk), ClientEarth has said.

The regulator’s response to recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) is a worrying indication of its attitude to its role in enforcing climate risk reporting rules.

This stance is at odds with other key financial regulators in the UK and elsewhere. The Governor of the Bank of England, Mark Carney, recognises that investors currently don’t have the information they need to respond to the challenge of climate change. This must change if financial markets are going to do what they are supposed to: allocate capital to manage risks and seize new opportunities.

The signs coming from the FRC in this response are troubling. They suggest the regulator – when it comes to climate risk – is not effectively ensuring high quality reporting to foster investment. This is the very purpose of the FRC’s oversight role.

The FRC’s reluctance to step in and take on its responsibilities leaves an enforcement gap – which will impact negatively on investors. It is not the role of investors to police reporting to the market – that is the regulator’s job. The response suggests that, even with these recommendations in place, the FRC will fail to effectively regulate the market when it comes to climate risk disclosure.

Climate risk complaint remains outstanding

The response is further evidence that the FRC is not providing effective oversight. In August last year, ClientEarth reported Cairn Energy PLC and SOCO International Plc to the regulator for failing to report climate risk. Over six months later, the matter has still not reached resolution.

In its response, the FRC suggests that some companies will not engage because the recommendations are too ‘onerous’ or that they will lead to ‘disproportionate focus on one risk’.

But companies are already legally obliged to report on material risks – which in many cases will include climate risk – and these recommendations could help them to do that effectively.

That the FRC chooses to emphasise the voluntary nature of the recommendations and the need for incremental improvements in reporting seems at odds with its mission to promote better reporting.

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