FCA mulls carbon rating rules

It comes as MPs challenged the financial watchdog and the Bank of England on their plans to help consumers navigate financial products from a "sustainability and climate risk perspective". 

In recent letters sent to both Andrew Bailey and Mark Carney, published today (March 10), chairman of the Treasury committee Mel Stride asked whether implementing an environmental rating system on financial products was a viable option to help consumers understand their carbon footprint. 

This would be similar to the Energy Performance Certificate rating on a property, which ranks buildings in terms of energy efficiency. 

Mr Stride said: "Clarity for consumers on the carbon footprint and climate risk of financial products is severely lacking. Both the Bank and the FCA have stressed the need to improve this.

"In the previous parliament, the committee was told that many auto-enrolment pension default funds are subject to a ‘climate lottery’.

"The great variance in how well investments are protected from climate risk could leave savers and pension holders out of pocket."

The committee chairman said further action was needed to help consumers navigate the market and suggested labels clearly signalling the sustainability of a product "may be a good start". 

Clarity for consumers on the carbon footprint and climate risk of financial products is severely lacking...Mel Stride

In response watchdog boss Mr Bailey admitted firms' current disclosures left clients unclear on how their savings, pensions and investments impacted the environment. 

Mr Bailey said: "For example, listed issuers’ climate-related financial disclosures, which form the basis for the product-level information about the environmental characteristics of a product, are often inconsistent and insufficient."

He added: "We want to ensure that consumers have access to genuinely sustainable finance products and services and receive appropriate information and advice to help inform their investment decisions.

"This work will include considering whether additional actions, guidance or rules are necessary to achieve this and to promote good governance of the design and delivery of sustainable products and services."

Mr Bailey said the FCA would publish the findings of its current work on sustainable retail investment products in the summer. 

The FCA chief executive said the watchdog had powers to introduce rules requiring firms to disclose a "simple, comparable and consumer-friendly" carbon-footprint visual rating system. 

But he added: "As measures and proposals evolve, we would need to undertake further diagnostic work to consider whether there would be any barriers to specific approaches.

"If our existing statutory remit and/or powers prevented us from taking action, then we would raise this directly with relevant governmental departments and the committee, and through our annual perimeter report."

Sustainability isn’t something that only big pension funds and asset managers are thinking about...Chris Hulatt

Chris Hulatt, co-founder of Octopus Group, said: "Calculating and comparing the true carbon footprint of different products isn’t necessarily straightforward, but there’s no doubt that this is the right direction of travel for the industry, and I would think that the demand from consumers is only going to increase."

But Mr Hulatt said sustainability was not something only big pension funds and asset managers were thinking about.

He added: "It’s very much a bottom up trend as everyday investors now care much more about where their money is invested.

"Renewables in particular have attracted significant new investment in recent years as people want to know they are making a real impact."

Environmental, social and governance (ESG) investing takes into account ethical factors alongside financial markers in the decision-making process and has become more commonplace in the global investment space in recent years.

But greenwashing — a phenomenon of growing concern in the financial sector, which sees firms market products and investments to appear more sustainable and ethical than they really are — has been a thorn in the side of the responsible investment movement.

Last year the FCA promised to challenge firms it deemed to be greenwashing products in a move to protect consumers from being misled over the sustainability of their investments, saying it would remain an active area of focus in its "supervisory and policy work".

rachel.mortimer@ft.com 

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