TheFinancialConductAuthority’sAdaptationReportJanuary20252ContentsChapter1ExecutiveSummaryPage3Chapter2IntroductionPage4Chapter3OurremitonclimateadaptationPage5Chapter4AdaptationrisksinthefinancialservicesectorPage7Chapter5Thefinancialserviceindustry’sadaptationresponsePage10Chapter6Barriersandenablerstoadaptation,gapsandadditionalactionthatcouldbetakenPage15Chapter7ConclusionPage22SignupforournewsandpublicationsalertsSeeallourlatestpressreleases,consultationsandspeeches.3Chapter1ExecutiveSummary1.1WehavepreparedthisreportfollowinganinvitationbytheDepartmentforEnvironment,FoodandRuralAffairs(DEFRA)toreportonclimatechangeadaptationchallengesfacedbythefinancialservicesfirmsweregulate.Thisispartofthe4throundofreportingundertheclimateadaptationpower.1.2Wehaveproducedthisreportbasedoninformalengagementwithfinancialservicesfirmsandourunderstandingofmarketdynamics.Itisnotacomprehensiveassessmentandfurther,systematicresearchwouldbeneededtoverifythesefindings.Thisreportisnotintendedtosetoutregulatoryexpectationsforthefirmsweregulate.1.3Webelievethereare3majorissuesaffectingclimatechangeadaptationinthefinancialservicesindustry:•Dataandmodellingtohelpfinancialservicesquantifyandmanageclimaterisks.•Barriersandenablerstoinsuranceunderwritingforclimaterisksandinconsequencelendingandinvestment.•Barriersandenablerstofinancialservicesinallocatingcapitaltoadaptation.1.4Firmsmustalsoprotecttheircriticalinfrastructure,inparticularITsystems,whilemakingsurethatnet-zerotransitionplansconsidernecessaryadaptation.4Chapter2Introduction2.1Usingthedefinitioninthe3rdNationalAdaptationProgramme,'Climateadaptationrelatestoactionsthatprotectusagainsttheimpactsofclimatechange.Thisincludesreactingtothechangeswehaveseenalready,aswellaspreparingforwhatwillhappeninthefuture',thisreportfocuseson:•Riskmanagementadjustmentsthatfinancialservicesfirmsneedtomakeduetoclimatechange.Thisincludeschangestoinsuranceandloanunderwritingpracticeandduediligenceininvestmentmarkets.•Changesmadebyfinancialservicesfirmstomanageexposuretophysicalclimateriskthatcouldaffectconsumersandwidermarketstability.•Theimportanceoffinancialproductsinenablingandsupportingadaptationandtransitioninthewidereconomy.Thisincludesallocatingcapitaltoactivitiesthatsupportadaptationandunderwritingrisks.2.2These2areasarecloselylinkedbecauseagoodunderstandingofclimateriskisneededforboth.5Chapter3Ourremitonclimateadaptation3.1OurfunctionsaresetoutprincipallyintheFinancialServicesandMarketsAct2000(FSMA2000).WhenundertakingourgeneralfunctionsunderthatAct–including,amongotherthings,makingpolicyandrulesandissuingguidance–wemustact,sofarasisreasonablypossible,inawaythatiscompatiblewithourstrategicobjectiveandwhichadvancesoneormoreofouroperationalobjectives,aswellasoursecondaryobjective.3.2Ourstrategicobjectiveis‘ensuringthattherelevantmarketsfunctionwell’(s.1B(2)),FSMA2000).3.3Our3operationalobjectivesareto:•Protectconsumersfrompoorconductbyregulatedfirms.•ProtectandenhancetheintegrityoftheUKfinancialsystem.•Promoteeffectivecompetitionintheinterestsofconsumers.3.4Oursecondaryobjectiveistofacilitate,subjecttoaligningwithrelevantinternationalstandards,theinternationalcompetitivenessandgrowthoftheUKeconomy.3.5Inaddition,whenundertakingourgeneralfunctions,wemusthaveregardtotheregulatoryprinciplessetoutins.3B(1)ofFSMA.Theseinclude(amongotherthings...