Financial regulators don’t have the tools they need to support the transition to net zero, a report from UK nonprofit the Aldersgate Group has found.
The group called on the UK government to provide financial regulators with a legal basis to implement more sustainable issues in policymaking. While the recently passed financial services and markets bill gives financial institutions the scope to consider the government’s 2050 net-zero targets, regulators should have “a stronger net zero mandate”.
Central bankers and other regulators have long debated whether sustainable objectives should be part of their mandate.
The report found that while climate and nature-related risk management were starting to be implemented, regulators face several barriers including a narrow mandate, limited capacity and resources, and a lack of a net zero-aligned policy across the economy.
The nonprofit recommended five things the government can do to give financial regulators the tools they need to help the industry transition:
- implement the UK’s net-zero strategy at pace
- give regulators clearer mandates on net zero and nature considerations
- encourage regulators to use green prudential tools
- support companies to manage their systemic climate risk
- provide resources and training to ensure regulators are sufficiently staffed
Some of the other recommendations given include overseeing and creating net-zero transition plans, providing guidelines to show investors how they can engage with companies on climate ambitions, requiring climate capital risk, and imposing large exposure limits to prevent bank losses from climate change.
Addressing climate change will require all government bodies to act, including financial regulators, said James Fotherby, policy officer at Aldersgate Group.
“Over the past few years, we have seen financial regulators starting to use the supervisory and market regulatory tools at their disposal to understand climate risk exposure and improve the availability of climate-related financial information. To build on this, we now need a stronger mandate to mainstream climate and nature within their policy work and more actively facilitate the transition,” he said.
The Bank of England’s climate biennial exploratory scenario found that without an orderly transition, financial institutions’ bottom lines would suffer and climate losses would likely be passed on to customers.
This page was last updated July 10, 2023
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