With the FCA’s anti-greenwashing rules coming into force from 31 May, advisers may be thinking this doesn’t affect me, it’s down to the fund managers right?

I’m afraid not. These rules also apply to financial advisers in situations where you promote or advise on any product or service that claims to have sustainability characteristics. This also applies to your own advice service. 

Tatton Investment Management shares their thought leadership piece, as part of Tenet Compliance Services Professional Development Programme. 

Downing Street is running a consultation on its carbon border adjustment mechanism (CBAM), to be introduced in 2027. CBAM is designed to level the playing field for emissions costs between foreign and domestic goods, and follows the EU’s carbon mechanism introduced last year.

It is a key pillar of the UK and EU’s broader climate goals. Most Western policymakers believe these goals are best achieved through price incentives rather than bans, so they try to make it expensive to emit. This was traditionally done through taxes or levies.

Enter the EU Emissions Trading System (ETS). ETS works on a ‘cap-and-trade’ principle, whereby the regulator sets a limit on the total emissions, and companies can buy or sell the rights to emit within this limit. Businesses have to buy these ‘carbon credits’ on the open market, though some are given out for free by the EU (a giveaway that will eventually be phased out).

The UK officially broke away from the EU ETS in 2021, but quickly introduced a similar system. Both try to let the ‘invisible hand’ of the market allocate emission rights to companies that most need them, while giving policymakers the power to control overall emissions.

The problem – as so often with climate change initiatives – is that ETS only covers a small part of the world. This creates ‘carbon leakage’, whereby emissions from one part of the world are just replaced with emissions from somewhere with looser regulations.

Not only does this negate the overall climate benefits of the policy, but it also means foreign producers have an unfair price advantage. US companies, for example, are not currently subject to a national cap-and-trade policy, meaning their carbon-intensive production is cheaper than in the UK or Europe.

CBAM is supposed to tackle this problem. The EU says it will put a “fair price on the carbon emitted” by companies selling into Europe. Importers can buy CBAM certificates from national authorities – where the price of these certificates is set by carbon credit markets. Companies will have to declare the emissions that went into their imports, and hand over the corresponding number of certificates each year.

It comes into full effect in 2026, but the EU’s CBAM has been in a “transitional phase” since October. During this transition, importers have to report on the emissions that went into goods production, but don’t have to pay for certificates. Even these reporting requirements will only apply to a few select industries: cement, iron and steel, aluminium based fertilisers, electricity and hydrogen.

The EU calls it “a learning period for all stakeholders”. The UK government is fortunate that this learning period coincides with their own consultation on CBAM. Teething issues are likely to include how to make sure that reporting is accurate and avoids double counting, especially when regulation can differ greatly from source to sale.

A deeper issue is the policy’s sole focus on imports. This is a feature rather than a bug, but it means UK and European exports might be disadvantaged in global markets. It is currently more expensive for Europeans to emit than it is for Americans, making European exports less competitive in American markets. This will probably get worse if Donald Trump becomes president again, considering his promotion of emission-heavy industries.

Yet again, the problem is a lack of international cohesion. The CBAM will likely have a positive impact in terms of reducing emissions – as indeed the ETS seems to have already had – but coordination remains a barrier. For investors, this could mean another competitive disadvantage for Europeans. We will watch the transition closely.

For more information about Tatton , please visit: www.tattoninvestments.com

Are you thinking of getting away from those eye-watering Network retention fees and running your business your way? Going Directly Authorised can be a challenge but it’s our bread and butter, we’ve helped hundreds of financial and mortgage advisers go directly authorised.

One of our dedicated regulatory consultants will guide you through our easy 5 stage authorisation process and make sure you have the right compliance support and research to hit the ground running once you’re out the other side.

Don’t just take our word for it, here’s what Jeff Lange, Chief Executive Officer at TFAS Wealth Ltd had to say about the support he received from our team.

“When we decided to make the substantial transition to leave the network and to become a directly authorised firm we knew from the outset that the process would be challenging and at times even daunting.  This was especially true in light of significant regulatory changes and needing to ensure that our organisation was aligned with the emerging Consumer Duty framework.  After a thorough review of compliance support options available we decided that TCS stood out as our partner of choice.

Right from the beginning, TCS assigned Nick Watson, a highly competent and dependable consultant to assist us with developing our business plan and preparing our application.  Nick’s insights into regulatory expectations was absolutely invaluable, and he helped to simplify the complicated landscape.  This helped us to prioritise resources and meant that we were weren’t caught off guard at any stage throughout the application process.  This made a big difference in our early stages of confidence and ultimately increased our commercial efficiencies and resource allocation.

Working with TCS meant that we had a reliable and pre-arranged exit plan from the network when it came to client novation and managing cashflow from pipeline still with the network during the transition.  The transition from TNS to TCS was made a lot smoother as our income stream was maintained throughout the novation process. TCS were able to efficiently obtain the necessary information from TNS, including regulatory references, which made the application process more robust and efficient.  TCS also assisted with our understanding of capital adequacy requirements and how to best approach our PI application, having the advantage of historical knowledge of our business from our time as a network member.

Once contact with the FCA started, TCS supported us every step of the way through multiple interactions, helping to prepare for FCA interviews and assisting with responses to FCA queries.  Ultimately this was instrumental in our successful application.

Once FCA approval was guaranteed TCS helped us to plan for our go live activities.  This included benchmarking, reviews and support to implement all aspects of Consumer Duty with confidence.  Their file review service provided comfort and guidance, helping to make our advice process more robust whilst aligning with our risk appetite.

Overall, we would highly recommend TCS as compliance support service.  They are personable and provide bespoke and tailored value adding support!”