Law, policy and regulation

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Law, policy and regulation is evolving to manage climate change risk. This typically takes place in a national framework, although international networks promote knowledge-sharing and best practice.

The UK’s Climate Change Act 2008 became law over ten years ago. In June 2019 the UK passed net zero legislation committing the UK to a legally binding target of net zero emissions by 2050.

The UK’s Committee on Climate Change is an independent statutory body established under the Climate Change Act 2008. Its purpose is to advise the UK on emissions targets and to report to parliament on progress made in reducing greenhouse gas emissions and preparing for, and adapting to, the impacts of climate change.

France also has significant climate legislation, which extends into the financial sector. The French Sustainable Investment Forum (FIR,) has produced an Article173 Handbook. In New Zealand the Climate Change Response (Zero Carbon) Amendment Act 2019 sets out how a country highly dependent on agriculture is tackling climate change. National legislation reflects local circumstances. Whereas a lot of the focus in the UK has been on decarbonising energy, the agricultural sector is a prime focus for New Zealand.

Government support extends to education. The Green Finance Education Charter is a commitment from chartered and professional bodies (including the IFoA) to integrate green finance and sustainability into their core curricula, new qualifications, and the continued professional development of their members.

The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) brings together a growing number of national central banks and financial regulators. At the time of writing, the US is notable for its absence. NGFS has published a number of reports, and climate scenario modelling is an early focus of its work. For example, you can find the NFGS paper on environmental risk analysis on the NGFS website.

There is a growing trend in climate change litigation. The Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy have published Global trends in climate change litigation 2020 snapshot. Thomson Reuters Practical Law covers climate law. It is a commercial subscription service and actuaries could reasonably expect their legal departments to have access to it.

The environmental charity ClientEarth is active in using the law to reach climate goals. There is currently a case before the Australian courts (NSD1333/2018) in which a member of a pension fund is seeking confirmation from the trustees that they have taken specific actions to support their public statements on the risks of climate change. In the UK a pension fund member took a complaint to The Pensions Ombudsman that the fund would not provide all the information he had requested relating to how the fund was taking into consideration the potential risks of climate change.

In the UK the four principal financial regulators are developing their approach to the management of climate risk. This commenced publicly with the then-Governor of the Bank of England Mark Carney’s speech Breaking the tragedy of the horizon - climate change and financial stability in September 2015. The Bank of England Climate change page is a gateway to a number of resources including the 2015 insurance report and:

The UK government published its Green finance strategy in 2019.

The Prudential Regulatory Authority (PRA), part of the Bank of England, published its Consultation on its proposals for stress testing the financial stability implications of climate change in December 2019. This involves a Biennial Exploratory Scenario (BES) exercise. Although not formally a stress test, the objective of BES is to test the resilience of the largest banks and insurers to the physical and transition risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk.

In March 2020 the FCA issued consultation paper CP20/3 Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations. In October a Letter from the FCA to the Minister for Pensions and Financial Inclusion set out the FCA’s plans to implement consistent climate-related disclosure requirements for asset managers and FCA-regulated pension schemes, and also references the cross-Whitehall/cross-regulator climate taskforce.

The PRA and FCA co-convened the Climate Financial Risk Forum (CFRF), an industry forum that seeks to build capacity and share best practice across financial regulators and industry to advance the sector’s responses to the financial risks from climate change. In June 2020 CFRF published an extensive guide together with a summary Climate Financial Risk Forum Guide 2020.

In February 2020 the Financial Reporting Council (FRC) announced a review to assess company and auditor responses to climate change. More recently, the FRC published A Matter of Principles: The Future of Corporate Reporting.

The Pensions Regulator in the UK will be responsible for enforcing regulations yet to be issued for consultation, which will flow from the Pensions Bill currently before Parliament when enacted. Parts of the Bill deal with climate matters. The Bill should complete its passage through parliament in the autumn of 2020. In August 2020 the DWP published a consultation Taking action on climate risk: improving governance and reporting by occupational pension schemes. This consultation proposes TCFD making reporting mandatory for large pension schemes. It is also the government’s intention that scenario analysis will increasingly be seen as best practice in the strategic risk management of climate change. The consultation proposes that trustees will use two scenarios on a best efforts basis.

UK parliamentary Select Committees are considering climate issues. In 2018 the House of Commons Environmental Audit Committee held a Green Finance inquiry. This resulted in two reports, and the Committee also sent a letter to the UK’s 25 largest pension funds seeking information on how they were tackling climate change. The Committee published their response to this information. The Treasury Select Committee held a Decarbonisation and Green Finance inquiry over 2020.

In preparing for COP26, the UK has appointed Nigel Topping as UK Climate Champion, working alongside the Chile High-Level Champion from COP25.

The EU has been developing the overlapping areas of climate and sustainability policy and regulation for some years. The EU Taxonomy is a classification tool aimed at investors, companies and financial institutions to define environmental performance of economic activities across a wide range of industries, and sets requirements that corporate activities must meet to be considered sustainable.

The Principles for Responsible Investment’s (PRI) EU Sustainable Finance Taxonomy is one place to start. This Finextra briefing EU adopts green taxonomy gives a June 2020 update on the adoption by the EU parliament of the Taxonomy Regulation. An internet search will deliver many commercial providers offering analysis, advice and services around the taxonomy.

In Ireland the government published the Climate Action Plan in 2019. An LSE Grantham report Governance of climate change policy: A case study of South Africa states “South Africa has put in place one of the most elaborate and consultative climate governance systems observable among developing and emerging economies.” Columbia University’s School of International and Public Affairs has published an extensive Guide to Chinese Climate Policy_2019. The IEA has published China’s Emissions Trading Scheme, as China introduces a national ETS in 2020.