Baroness Hayman: How the UK’s House of Lords is driving green financial regulation post-Brexit

Baroness Hayman discusses TCFD reporting, COP26 and the UK taxonomy

As part of its Brexit strategy, the UK government plans to introduce the major, EU-regulation-replacing Financial Services Bill into law, covering everything from Basel Standards and issues about Libor to trade with Gibraltar.  

But until a few weeks ago, the bill had no mention of climate change. That is, until a cross-party group of peers in the country’s upper chamber, the House of Lords, tabled amendments focused on the climate emergency. 

The peers, including Baroness Helene Hayman, Lord Jonny Oates, Baroness Jones of Whitchurch, Baroness Altmann and Baroness Bennett, secured significant changes supported by the UK government. 

Speaking to RI, Baroness Hayman said: “The government has good rhetoric in these areas – you don’t have to argue the case that we need to have a green lens on investment. But somehow there is always a gap between rhetoric and policy, and we particularly found it with this legislation.”

The House of Lords ensured that last year’s Pensions Schemes Act was the first pensions legislation in British history to contain a reference to climate change. The amendment, introduced in response to amendments led by Baroness Hayman, resulted in mandatory TCFD reporting for UK pension scheme trustees (and large companies). Importantly, it contains provisions to ensure that new pensions regulations on climate risk disclosure take account of international and domestic climate goals, making the UK the first country in the world to align the actions of pension schemes with the Paris Agreement.

This time, the peers persuaded the government to take forward an amendment requiring financial regulators to consider the UK’s Net Zero target when updating prudential rules. This means that future major reforms – such as implementation of the Basel 3.1 banking standards – will need to factor in climate change considerations.

On the same day, and also following pressure from Peers, the UK Chancellor, Rishi Sunak,  announced new rules for the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), requiring them to consider climate change in all future decisions.

The peers also proposed that the Financial Conduct Authority should practice what it preached when it came to climate change oversight. The regulator brought in rules last year stating that companies must have a senior manager responsible for climate change. It has now confirmed to the Minister that it will adopt the same principle, voluntarily.

“We are told the FCA is currently advertising for the post, which will be wider than green issues, and include ESG issues across the board,” says Baroness Hayman. She adds that the Minister also confirmed that there will be wider consultations on the shape of the financial industry with regards to climate change in the future. 

An amendment tabled by Lord Oates climate considerations in capital risk weightings failed to go forward after a tied vote – a very unusual occurrence, according to Baroness Hayman. The issue has been raging for a number of years, and reflects the belief from some corners that capital requirements for banks should be revised to reflect the lower financial risks of green assets in an energy transition. The European Banking Authority has said in the past that it would explore the potential for such a ‘green supporting factor’, but others want tighter capital requirements for fossil lending – rather than looser ones for green assets. Influential central banking body the NGFS published research last year concluding that a lack of data and definitions make it hard to prove there is a correlation between ‘greenness’ and financial risk – research that was cited by Deputy Leader of the House of Lords, Earl Howe, when he opposed the amendment. 

“There is a concern that banks are continuing to lend to oil and gas projects that in the long term have a real risk of being stranded assets,” says Baroness Hayman. “The amendment didn’t go through, but I do think it was really important in terms of highlighting the issue. I hope the government will do some work on it even though they don’t have a legal obligation to do so now.”

She admits “the argument hasn’t been completely won yet”, adding that “a lot depends on evaluating timeframes”. 

“If you are investing in innovation, like green hydrogen or lithium mining that’s assessed as having obvious and immediate risk. But if you look at the billions that are being invested in oil and gas, that may not be an immediate risk, but it’s a very serious long-term risk, so I really think we do need more work and research into how you quantify and compare those risks over time.”

Work on this is progressing worldwide, with the European Mortgage Federation involved in a long-standing project with Europe’s biggest banks to identify the default risk of ‘green’ mortgages compared with their conventional counterparts. Much of the work will be based on the (currently beleaguered) EU taxonomy – a UK version of which is in development. 

Baroness Hayman says she will be tabling some parliamentary questions on the taxonomy’s progress. “There was a lot of technical work that was done in Europe that is valid and useful but it is really important that we [the UK] look to develop our own taxonomy because it is going to be so crucial in determining some of the investments that go forward,” she explains. RI understands that the names of those advising the UK on the taxonomy will be revealed this month, and are likely to include a high number of civil society and treasury employees, rather than market participants.

2021 is an important year for the UK in climate change leadership as it gears up to host COP26 in November. “We’ve got a real opportunity, in hosting the G7 this year too, to set a standard when it comes to regulatory frameworks,” says Baroness Hayman. “I’ve always said that the UK’s contribution to climate change won’t be measured just in reduction of emissions, because we are not one of the world’s greatest emitters. We will be judged on the quality of our leadership. And you show leadership by getting your own house in order and being smart, creative and committed on these issues.”