"One option that the Committee may explore is an EPC-style ‘carbon footprint’ rating of a financial product."
Stride has written to the Bank of England and FCA, asking whether it would be viable for them to implement a rating system on financial products, similar to an EPC rating on a property.
He also asked how consumers can better navigate the market from a sustainability and climate risk perspective and whether the Bank should consider asking firms to hold additional capital against assets that are particularly exposed to climate risk, known as the brown penalising factor.
In response, Andrew Bailey, chief executive of the FCA, admitted that consumers "do not yet have clarity on the climate-related exposures of their investments, and whether their savings, pensions and investments are aligned to achieving net-zero emissions by 2050."
Bailey agreed that consumer protection could be undermined if they "do not have transparent information about how their providers are managing their assets’ exposure to the carbon bubble".
On how to clearly signal products’ sustainability characteristics to consumers, Bailey said the FCA is "keen to support the development of appropriate common approaches, which could support consumers in making investment decisions".
He said the FCA is currently engaged in four initiatives to improve climate-related disclosures which will either directly enhance firms’ disclosures to consumers, or help to provide firms with the information and capabilities they need to make these disclosures.
In his response, Mark Carney, governor of the Bank of England said that if commitments to net-zero are realised, "many carbon-related assets will not be viable".
He said the Bank is examining the case for a 'brown-penalising factor' that introduces additional capital charges on polluting and potentially risky activities but said "there are impediments to implementing such a measure".
Mel Stride commented: “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.
“More information is needed to help consumers make informed decisions. One option that the Committee may explore is an EPC-style ‘carbon footprint’ rating of a financial product.
“Another issue that the Committee may examine is whether firms should be required to hold additional capital on assets exposed to climate risk.
“Action is needed to help consumers navigate the market. Labels to clearly signal the sustainability of a product to consumers may be a good start.”
