2018 is shaping up to be the year that policymakers and financial regulators around the world accelerate their oversight of the financial risks of climate change. Following last year’s TCFD recommendations, the European Commission’s HLEG recently published their recommendations. The Commission has had a parallel policy work stream, and has made strong commitments to carry HLEG’s work forward. In the UK, the Clean Growth Plan has spawned the Green Finance Taskforce, due to report in the first half of this year. And the House of Commons Environmental Audit Committee (EAC) has just finished taking evidence in its Green Finance Inquiry. Select Committees typically cover one Government department (e.g. Treasury or Work and Pensions) but the EAC is unusual in having a more wide-ranging cross-cutting remit to examine the environmental policies and performance of the whole Government and all public bodies. The Green Finance Inquiry first sought submissions from interested parties on the issues that the Committee decided to explore. This was followed in early January by a Roundtable, held under Chatham House rules, to inform Committee members of the status of green finance in the UK. A week later, the first formal hearing took evidence from two panels, gathering the views of participants on what needs to be done, and how Government might provide support. The next hearing took evidence from two trustees of the Green Purposes Company (GPC) which was set up – following a recommendation of the EAC – to protect the Green Purposes of the Green Investment Bank (now Green Investment Group) after privatisation. The trustees’ evidence was followed by evidence form Edward Northam, Head of the Green Investment Group. EAC had previously spent time on the GIB privatisation and now, with the likelihood of a drop or even removal of European Investment Bank funding post-Brexit, the financing of early stage green projects is seen as potentially challenging. Subsequent hearings took evidence from green finance experts and investors with experience of managing climate change risk and wider sustainability issues. Not surprisingly, there was a focus on the TCFD recommendations.
Another focus was the remit of the Green Finance Taskforce, co-hosted by the Treasury and the Department for Business, Energy and Industrial Strategy (BEIS). Its recommendations will be a key development in the progress of green finance in the UK.The last two hearings took evidence from financial regulators and then government. Amongst the issues tackled by the EAC was how might regulators and policymakers give effect to the TCFD recommendations. Should they be regarded as voluntary or soon become mandatory? How might they be applied to investors as well as to companies? The Committee’s work evidenced the fragmentation of financial regulation in the UK: the Bank of England (including PRA), the Pensions Regulator (TPR), Financial Conduct Authority (FCA) and Financial Reporting Council (FRC). This contrasts with the situation in other countries where, for example, in the Netherlands, the central bank (DNB) oversees the whole financial sector. The primary role of a cross-party parliamentary Select Committee is to hold government to account. One interesting theme to emerge during the inquiry was to separate the idea of green finance from the broader greening of finance. The first concept focuses on investment products, such as green bonds or green retail offerings. The second speaks to the whole financial system and the roles of companies, investors, regulators and policymakers. Indeed, the greening of finance can be seen as one element of the development of sustainable finance. That is where the Sustainable Development Goals (SDGs) meet finance. The committee plans to publish one report on ‘green finance’ sometime in April and another on ‘greening finance’ later in the Spring. One of the issues discussed during the EAC inquiry, also central to the GFT, is London’s role as a financial centre. There is a wealth of green finance expertise in the UK but other European centres are making rapid strides. French efforts have been stimulated by their world-leading law which gives us Article 173. Work by the Swiss pensions regulator to assess climate risk in their sector is another interesting development, even if the results are daunting. What role should UK policymakers and regulators have if the UK is to maintain its leading role? The Committee has just written to the top 25 pension funds in the UK to ask how they manage the risks that climate change poses to pension savings. The Committee will use the information it receives as it drafts its report. We wait to see what conclusions they draw from the evidence they have gathered, and what recommendations they will make in that report. We can be sure that their work will add momentum to the greening of finance in the UK. And, because finance is global, beyond.
Mike Clark is Founder Director of Ario Advisory and currently Specialist Adviser to the EAC for their Green Finance inquiry