UK FCA sets out climate change adaptation challenges faced by firms

The FCA has published its 2025 Adaptation Report on climate change adaptation challenges faced by firms.  The report focuses on risk management adjustments that firms need to make due to climate change, including changes to insurance and loan underwriting practices and due diligence in investment markets. It also considers the importance of financial products in enabling and supporting adaptation in the wider economy.

The report is based on informal engagement with firms and the FCA's understanding of market dynamics. It is not a comprehensive assessment, and further research is needed to verify the findings. The FCA also notes that the report is not intended to set out regulatory expectations for firms.

Issues identified

The FCA highlight three major issues affecting climate change adaptation in the financial services industry: 

• Data and modelling to help financial services quantify and manage climate risks: A major issue is the availability and quality of local hazard data and models, as well as the lack of a clear 'roadmap' for adaptation standards and metrics.  Firms need this to assess and price, climate-related risk with sufficient accuracy. 
• Barriers and enablers to insurance underwriting for climate risks and in consequence lending and investment: The FCA acknowledges that firms can only do so much when it comes to adaptation as factors outside the direct control of the financial services industry (such as investment in flood defences and planning decisions) affect their exposure to climate risks. The FCA explains that co-ordination between financial firms, government, construction and utilities is essential to maintain the stable provision of financial products.
• Barriers and enablers to financial services in allocating capital to adaptation: A significant problem is how adaptation is to be funded. For example, for small businesses and private individuals the costs of adaptation may be greater than the cost of insurance and many households may find such costs unaffordable.

In conclusion, firms need to make sure they adapt their risk assessments to consider the economic impacts of climate change. However, this must be accompanied by adaptation in the wider economy to minimise these financial impacts if firms are to continue to fulfil their economic roles, including funding of adaptation and transition.

The FCA suggest that there is an opportunity for firms to use their climate transition planning under the existing TCFD regime to assess the impact of climate change and how this might affect their operations. The FCA will consult on strengthening its expectations for their transition plan disclosures at the same time as the consultation over the introduction of the IFRS 1 and S2 standards once they are formally adopted by the UK in Q1 2025.

The FCA also states that firms must protect their critical infrastructure, in particular IT systems, while making sure that net-zero transition plans consider necessary adaptation.

The FCA's 2025 Adaptation Report published on 28 January 2025 is available here.