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The role of financial markets in tackling the climate crisis is important

The role of financial markets in tackling the climate crisis is important

Financial markets have a role to play in tackling the climate crisis

Illustration by Dan Murrell

We at Money MarketingDaily updates and comments on climate change and environmental, socio- and governance (ESG), issues will keep you informed.

Even as I write this column, I’ve seen two notifications pop up in the corner of my screen: a survey about clients’ thoughts on ESG, and a warning against the dangers of greenwashing.

In the short time I’ve been in my role, the quantity of these seems to have jumped. While this may be simply because more press officers have become aware I work for MM, I believe it’s symptomatic of something else.

We need more information on how performance would be measured, and the standards that would be enforced.

The climate crisis has been a major topic of conversation for the past decade. This once-secretive issue, which was only known by the extreme Left, has become a major threat to the world’s future. Even Boris Johnson, the prime minister, admits it.

The 26th Conference of the Parties (Cop26), which was widely dubbed “the finance Cop”, concluded mid-November with a new global deal called the Glasgow Climate Pact.

This stresses the urgency of “enhancing ambition and action” in relation to mitigation, adaptation and finance in this “critical decade” to address the gaps in the Paris Agreement.

Facilitating the shift

The conference was an opportunity to highlight the role of financial markets in the facilitation of the net-zero transition.

These markets are slowly but surely realizing the importance of their role in tackling this most urgent issue. ESG factors are being increasingly considered by these markets in their operations, products, and services.

This is a good thing, but it can also lead to investor harm if regulations are not updated to reflect them.

The Financial Conduct Authority has begun to increase its focus on climate change adaptation and mitigation. In its climate adaptation report, published in October, it vowed to ask “probing questions” to ensure the financial services industry was doing its bit in the fight against climate change.

I urge advisers to respond to the regulator’s consultation to ensure the new requirements work for them

The regulator also published a November discussion paper, which looked at ways the industry could encourage investors to make ESG issues a central part of their investment decisions.

It insists that, in order to make informed decisions, investors must be provided with “sufficient, consistent information” to help compare similar products.

“This includes information on how product manufacturers are managing sustainability risks, opportunities and impacts across both their organisations and the products they manage, as well as details of the sustainability characteristics of individual investments,” it says.

Transparency is key to sustainability disclosures

Information

Although the paper focuses on investment management, the FCA insists financial advisers will also have an “important role” in providing consumers with sufficient information to assess which products meet their needs.

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The regulator will, “in due course”, explore the best approach to introducing requirements for financial advisers to consider sustainability matters in their investment advice.

It is encouraging to see that the regulator is focusing on these important issues. However, it is necessary to provide more details about how performance would have been measured and the standards that would be enforced.

The conference was an opportunity to highlight the role of financial markets for facilitating the net zero shift.

Transparency will be key in sustainability disclosures. And this is unlikely to come from self-assessment — which relies too heavily on interpretation and leaves the gate open for greenwashing.

Companies will be held responsible, regardless of whether sustainability standards fall under the purview of an existing body or are taken onboard by a new entity.

I would urge financial advisers, and anyone else with an interest in financial markets, to respond to the regulator’s consultation to ensure the new requirements work for them, whatever form they take.

Lois Vallely, chief reporter. Contact her at: lois.vallely@moneymarketing.co.uk


This article was featured in the December issue of MM. Click the image below to see the digital magazine in its entirety.

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