Climate and nature role sought for UK financial regulators

Leading civil society groups have urged the UK Treasury to make supporting climate and nature goals a top priority for the country’s financial regulators, saying the current requirements do not go far enough.

Although the Financial Conduct Authority and Prudential Regulation Authority have already been asked to have regard to the UK’s commitment to reach net zero by 2050, groups including ClientEarth, WWF and the Finance Innovation Lab argue this lacks sufficient weight, and prevents them from addressing climate issues with the urgency that is required.

Instead, they say regulators should be given a statutory objective requiring them to help ensure all of the UK’s commitments in relation to climate change are met. This would include not just the net-zero target, but also the five-yearly carbon budgets set out under the Climate Change Act, and the Paris Agreement goal of keeping warming close to 1.5ºC.

The Treasury is currently undertaking a major exercise to consider the future of UK financial regulation after Brexit. There has been a large-scale transfer of powers from the EU to UK authorities, and the government is looking at how regulation should be adapted to take advantage of the new circumstances. As part of this, it has proposed referring to net zero as a principle to be considered in the pursuit of other objectives, but not as a goal in its own right.

In a submission to the review, ClientEarth argued that regulators must be required to actively advance climate goals. It said this would help to ensure that sufficient resources are diverted to climate issues, and that regulators are empowered to drive through climate regulation without having to wait for legislation.

As well as upgrading the regulators’ climate responsibilities, the groups also said they should be required to consider the desirability of restoring nature and protecting biodiversity. Following recent publications by the Network for Greening the Financial System (NGFS) and Taskforce for Nature-related Financial Disclosures, this is an issue that is increasingly understood to be of paramount importance for financial stability. However, the topic received no mention in the Treasury’s 28,000-word consultation paper.

There has been significant controversy surrounding a Treasury proposal to give financial regulators a statutory duty to increase the competitiveness of the UK economy and financial sector, something which civil society groups have warned could come into conflict with their other remits to protect consumers and financial stability. A recent post by the LSE Grantham Institute argued that climate action is consistent with enhancing the UK economy’s competitiveness, and that giving regulators a climate objective should be the priority.

“The only way to retain international competitiveness over the coming decades is for growth to be inclusive, sustainable and resilient,” said the authors. “The integrity of the financial and economic system is highly dependent on an orderly transition, and on limiting global temperature rise and ecological collapse.”

A study looking mandates of central banks around the world, also published by the LSE Grantham Institute, found that 12% had explicit sustainability mandates, and a further 40% had a potential indirect sustainability mandate via a requirement to support government policies. The paper also noted that a majority of the central banks with no form of sustainability mandate were still planning to take climate action in some form. Many authorities are justifying climate action based on their primary objectives of upholding price and financial stability, as the Bank of Japan (BoJ) has done in setting up a new climate loans scheme.

“From a central bank standpoint, with its mandate of achieving price stability and ensuring the stability of the financial system, supporting the private sector’s efforts on climate change will help stabilise the macroeconomy in the long run,” said BoJ governor Haruhiko Kuroda.

ClientEarth stressed that a climate objective would build on the work regulators are already undertaking to address climate risk and protect consumers. For example, the UK is set to introduce new requirements on companies to publish climate transition plans, and is working on a new green taxonomy. The group cited both as examples of areas where a climate-friendly statutory duty might be helpful. They said there may be instances in which implementation of these initiatives could happen in such a way as to aid emissions reduction, but that the regulators might not be able to justify this under their current objectives.

The Treasury is currently reviewing responses to its consultation, and has said it will issue a further update in due course.