On 28 January 2025, the Financial Conduct Authority (FCA) published its Adaptation Report 2025, in which it responds to the Department for Environment, Food and Rural Affairs’ (DEFRA) invitation to report on climate change adaptation challenges faced by financial services firms.
The report is based on informal engagement with financial services firms and the FCA’s understanding of market dynamics, but the FCA flags that it is not a comprehensive assessment and further research is needed to verify the findings. It also notes that the report is not intended to set out regulatory expectations for firms.
Issues
The FCA identifies 3 major issues affecting climate change adaptation in the financial services industry:
- Data and modelling to help financial services quantify and manage climate risks.
- Barriers and enablers to insurance underwriting for climate risks and, as a consequence, lending and investment.
- Barriers and enablers to financial services in allocating capital to adaptation.
Areas of focus
The report emphasises the need for financial services firms to adjust their risk management practices in response to climate change. It also highlights the crucial role of financial products in facilitating and supporting adaptation and transition within the broader economy. These two areas are closely connected, as a thorough understanding of climate risk is essential for both.
Additionally, the report warns that firms must protect their critical infrastructure, particularly IT systems, while ensuring that net-zero transition plans consider necessary adaptation.