Regulators’ climate remits ‘at odds’ with UK net-zero goals

Industry experts call for amendments to Financial Services and Markets (FSM) bill on UK sustainable finance


Christine Dawson

Regulators’ climate remits are “easy-to-ignore” and are putting them at odds with the UK’s net-zero goals, according to industry experts speaking at a Sustainable Finance All Party Parliamentary Group (APPG) briefing.

At the event on Monday, which looked at the impact of the Financial Services and Markets (FSM) bill on UK sustainable finance, Nitika Agarwal, head of policy – sustainable finance at WWF, and Patrick Arber, group head of government engagement – sustainability at Aviva, made the case for using the bill to strengthen regulators’ mandate on climate.

Compliance with net zero

The bill, which is about to reach report stage in the Commons, replaces an existing regulatory principle on sustainable growth with a principle on being compliant with the UK’s net-zero emissions targets.

However, Agarwal argued the new regulatory principle does not give the regulator sufficient remit to act on climate and nature risks and opportunities, “therefore, the proposed bill is at odds with the government’s own stated ambition to be the world’s first net-zero financial centre”.

According to Agarwal and Arber, a secondary statutory objective for regulators is required in the bill to facilitate the transition of financial services sector to net zero, and to support nature.

Arber said this would be much more impactful than what has currently been proposed: “Regulatory principles… sound quite serious, but actually, they’re fairly easy to ignore, and frequently are ignored at the moment.

“Whereas a statutory objective, a secondary statutory objective for the regulators, we think would hit the right spot in terms of it’s not going to override their primary objectives, but at the same time they must pay more attention to it.”

Regulatory gaps

Agarwal used the example of the Task Force on Climate-related Financial Disclosures recommendations, which has been mandated by the FCA, to illustrate the need to strengthen finance regulation around climate and nature.

“[The regulator] had to justify it with respect to policy statements made by the government. And there’s a real risk that if you continue with the status quo, as soon as there’s political change your regulator will not be as proactive,” she said.

Another example Agarwal pointed to was the recent formation of the EU’s prospectus regulations. The rules are for prospectuses for companies offering securities to the public.

“The FCA will likely determine what information those prospectuses should contain under the FSM bill. Regulators would not likely require prospectuses to contain the likely environmental impact of company’s operations in the future.

“But armed with a secondary objective on climate and nature, regulators could almost certainly do so, helping to ensure that investors are fully conscious of the environmental impacts of their investments,” said Agarwal.

Hargreaves Lansdown, Phoenix and Federated Hermes are among other financial institutions Agarwal said had supported the call for a secondary statutory objective on climate and nature.

She described decarbonising the economy as “the biggest economic transformation since the Industrial Revolution” and said “the entire financial sector, including regulators, really need to play a key role in that”.

Meanwhile, Arber said Aviva needs to protect its customers and its business from the long-term risks of climate change and it wants “those who are regulators and therefore influence our behaviours and business to handle a similarly long-term mandate around climate change and financial stability”.

Powers to intervene

Catherine Howarth, CEO of ShareAction and a member of the Sustainable Finance APPG, said the FSM bill is an important piece of legislation, potentially setting up what financial regulation will look like in the UK for decades to come.

However, she noted it was not uncontroversial. Outgoing chair of the FCA, Charles Randell, said the bill gives ministers “too much power to intervene and is taking powers and influence away from independent institutions that deliver financial regulation”, Howarth said.

Chair of the APPG, Jerome Mayhew MP, disagreed, saying in a democracy we should be moving away from having quasi-NGOs too removed from ministers responsible for them.

“In my own field of Defra, we have Natural England, the Environment Agency – the political grief lands squarely at the door of the Secretary of State and yet these are genuinely arm’s length bodies where the Secretary of State and other ministers have no control over whether or if they do their job properly.

“We’ve over the last 20 years been palming things away from politicians whilst maintaining responsibility with politicians – it’s a very uncomfortable position to put them in,” he said.

Transforming fiduciary duty

Howarth also laid out some ways she said the FSM bill could move the UK’s sustainable finance agenda forward.

She proposed reforming the definition of fiduciary duty in a way that allows pension funds to focus more on climate outcomes and on protecting savers from detriment arising from climate change.

“We want to see pensions legislation, through this bill, amended in a way that allows trustees of pension schemes to weigh up between climate outcomes and financial outcomes – acknowledging that ultimately it’s financially detrimental and detrimental to our quality of life if we have uncontrolled runaway climate change and nature loss,” she said.

Mandatory transition plans

Building on the government-mandated Transition Plans Taskforce, Howarth said the bill could make transition plans mandatory.

“It’s very likely that will happen in due course and Mark Carney, among others, has spoken of the need to quite rapidly turn voluntary initiatives into mandatory initiatives in order to get everyone in the market base moving in a consistent and ambitious way at pace.”

Mandatory stewardship standards

Stewardship of investments is “absolutely critical to an orderly and efficient, effective, low-carbon transition and decarbonisation”, Howarth stated.

To that end, she said the bill ought to further strengthen the existing regulatory regime for stewardship.

Regulators in the UK could be pushing for much higher standards by pension funds and asset managers which, stewarding companies in the UK all across the world, could be contributing more to global decarbonisation.

“It would be excellent and really strengthening to have an amendment in this bill that supports stronger and mandatory stewardship standards, as opposed to relying on divestment to deliver portfolio security and risk management from a climate point of view.”

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