The UK government has one of the most ambitious national climate targets in the world: it is legally committed to cut CO2 emissions by 78% by 2035 and to reach net zero by 2050. Reaching this goal will require the transformation of the country’s financial system, greening its portfolios, channeling funds towards alternatives to fossil fuels, and moving beyond a purely risk-based approach.
This effort involves a growing range of governmental and regulator initiatives that, given London’s position as the one of the world’s leading global finance centres, will have international significance.
With input from analysts at the New Economics Foundation and Positive Money, Green Central Banking has reviewed the evolving climate change response from government and financial regulators to reveal five key initiatives aimed at greening the UK’s financial system.
Financial services and markets bill
The financial services and markets bill, published on Wednesday, proposes adding alignment with the net zero target as a “regulatory principle” to be applied by both the Financial Conduct Authority and the Prudential Regulation Authority (PRA), established by the Bank of England (BoE) , the country’s two main financial regulators. The measure replaces and strengthens an existing principle concerning the “desirability” of sustainable medium or long-term growth, but falls short of being added as a new secondary objective, alongside competitiveness and growth.
The inclusion of the UK’s emissions targets as a “regulatory principle” means that both financial watchdogs will be required to “have regard” to those targets when exercising their regulatory functions.
The draft legislation is part of the UK’s biggest financial services reform in over a decade, repealing retained EU laws governing the financial sector and replacing it with new UK laws. It gives the government the power to force regulators to review and consider their decisions, but not the power to force them to change.
BoE governor Andrew Bailey has cautioned against excessive government intervention, using a recent speech to emphasise the importance of central bank independence. Bailey has previously spoken of regulatory independence as a key part of London’s reputation as a global finance centre.
The bill will now make its way through the parliamentary process, with the final version expected to become law in 2023.
Green finance strategy
The government is also updating its 2019 green finance strategy, aimed at aligning financial flows with the 2050 net zero target. Expected to be published in October ahead of the Cop27 conference, the new strategy was the subject of a recent public consultation seeking comments on how to finance transition activities, develop natural capital and voluntary carbon markets, and ensure broad access to green finance, including for retail customers.
In anticipation of this new approach, a group of 75 civil society and academic leaders issued a joint letter seeking an ambitious, whole-of-government and independently assessed strategy aligned with a 1.5ºC pathway, which would also consider climate adaptation and biodiversity goals. The signatories, representing a wide range of policy, research and campaign organisations, called for the use of policy and regulatory tools to actively shift private credit and capital in line with a rapid, managed transition.
“The government and the Bank of England should use targeted lending schemes and coordinate monetary and fiscal policy to keep the cost of capital low for green lending and stimulate critical green investment,” they said. The letter also called for a “science-based, credible and robust regulatory framework to incentivise and enforce the private sector transition to net zero”.
Green finance roadmap
Published in October 2021, the green finance roadmap outlined the government’s plan to deliver the first phase of the green finance strategy by providing investors with quality and decision-useful information on environmental sustainability from companies and financial institutions.
The roadmap gave details on development of a green taxonomy and sustainability disclosure requirements. This included an overview of requirements for listed companies, financial institutions and asset managers to report in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures on a “comply or explain” basis.
The green finance roadmap also included details of a new requirement for UK-listed companies and financial institutions to publish transition plans on meeting near-term and science-based emissions targets, beginning in 2023. This is be the world’s first regulation for mandatory transition plans.
A taskforce for transition plans
The transition plans required under the roadmap will receive input from the Transition Plan Taskforce, a Treasury initiative to develop a “gold standard” for corporate plans to reach net zero.
Announced at Cop26 and launched in April, the taskforce – a group of high-level representatives from companies, financial institutions, regulators and civil society – is tasked with setting out the specific requirements for the plans by the end of 2022. A briefing document accompanying a recent public consultation suggests that the taskforce is developing a sector-neutral framework, along with sector-specific transition plan templates.
In response to the consultation, the Climate Safe Lending Network (CSLN) offered a series of recommendations to ensure the resulting transition plans are accurate, robust, and accountable. Based on its report on transition plans, the campaigning group of banks, NGOs, academics, and investors called for plans that incorporate double materiality, include scope 3 emissions and minimise reliance on carbon capture.
The CSLN also explained the need for transition plan targets to include cumulative impacts, in the form of aggregate absolute greenhouse gas emissions from the reference baseline year.
The green finance roadmap also proposed that the FCA be given regulatory powers to oversee environmental, social and governance (ESG) data and rating providers. Following a consultation on ESG integration into UK capital markets, the regulatory authority has supported this measure, saying it sees a “clear rationale” for the move.
The support comes in a report summarising the feedback received and outlining the FCA’s policy actions in response. The FCA may work with the Treasury to develop a standard for green and other “use of proceeds” bonds, it says, and will consider ways to strengthen climate-related disclosure requirements.
Meanwhile the PRA has committed to embedding climate change in its supervisory approach and is considering the use of capital requirements as part of this effort. The prudential authority has promised to “advance its thinking on the use of capital for micro and macro prudential purposes” relating to climate change and has pledged to “update its approach” to such capital use by the end of this year.
As part of this learning process, the PRA will hold a conference on climate and capital in October, examining the adjustment of its capital framework to take account of climate-related financial risks. Registration for the two-day hybrid event is now open.
With the financial services and markets bill adding the UK’s ambitious emissions targets to the remit of the FCA and PRA, it is likely that further governmental and regulatory initiatives will be outlined in the upcoming revision of the green finance strategy. So far, the actions announced have focused on informing investors and consumers and, to a lesser extent, on creating expectations for companies and financial institutions around policy responses to the climate emergency.
However, as much of the country recovers from record-breaking heat associated with a changing climate, it remains to be seen whether UK authorities will move beyond information and expectation management to actually shift financial flows away from carbon.
This page was last updated July 21, 2022
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