The UK’s Climate Change Committee (CCC) has called for the introduction of adaptation plans for companies and financial firms to help the country prepare for the physical impacts of climate change.
In a report examining the lack of investment in adaptation, the influential climate scrutiny body heavily criticised UK leaders for being too slow to act. While the government has set out its priorities and a strategy for hitting net zero, the CCC said, the uncertainty around adaptation financing is preventing progress in closing the investment gap.
On the financing side, only a small proportion of the £16.4 billion ($20 billion; €18.5 billion) raised from 2021 to 2022 in green gilts and green savings bonds was spent on adaptation. The Environment Agency received £1 billion but this was not new funding, while adaptation was one of the categories in other funding facilities that received small sums.
The report was also critical of the current integration of adaptation into TCFD reporting. It noted that, while alignment with the TCFD should include scenario analysis including adaptation options, most scenarios currently in use have “rudimentary assumptions” on adaptation and many reports do not feature the topic at all.
With this in mind, the CCC called for adaptation plans to be introduced for companies and financial firms, building on the net-zero transition plans that will be a publication requirement for listed firms and financial institutions.
These plans would consider the measurement and management of physical risks as well as how they contribute to wider adaptation outcomes, and the report calls on government-owned companies and public financial institutions to lead the way in developing them.
Disclosure feedback
Looking at other regulatory initiatives in sustainable finance, the report argued that the FCA’s sustainability disclosure requirements will not be effective either in improving the understanding of investment needs or channelling finance to adaptation unless a number of issues are solved. These include corporates viewing climate as solely a question of mitigation, as well as issues in developing metrics, targets and scenario analysis for adaptation.
New data and analytical tools are also needed to measure how investment portfolios and loan books contribute to climate fragility and maladaptation, the report said, noting that the development of an effective adaptation taxonomy is essential for this.
The CCC praised steps taken by financial regulators, including the FCA and Prudential Regulation Authority, but warned that monitoring of physical risk should not fall behind that of the net-zero transition. Regulators should also monitor whether physical risks are mispriced in the market, it argued.
Ben Caldecott, director of the sustainable finance group at the University of Oxford’s Smith School and a member of the CCC’s Adaptation Committee, said financial regulators and government policy need to push both companies and financial institutions to do more, including through mandatory adaptation planning and enhanced supervision.
“Integrating climate risk into economic and financial decision-making across society is essential for urgently needed investments in our national climate resilience to materialise.”
Data dilemma remains
Looking at the UK’s financial institutions, the CCC notes that the main issue facing banks, insurers and pension funds is data and modelling capabilities.
The report praises the progress made by banks, but notes that they are reliant on third parties for climate risk modelling, which in any case depends on poor data. Insurers have also made positive steps in integrating climate risk, but face data challenges when estimating losses, and modelling capabilities vary.
The CCC also highlighted the importance of considering any negative effects from financial institutions improving their resilience to climate change. Banks that adjust lending practices or insurers that adjust their underwriting may become more resilient, but this could have implications for UK companies and individuals trying to access finance or insurance.
If you do not receive this within five minutes, please try to sign in again. If the problem persists, please email: