UK financial services bill ‘canary in a coalmine’ for climate, warn green groups

The bill would make regulators responsible for the growth of the UK’s financial sector despite expert warnings.  

Major UK financial reforms being put to parliament today fall significantly short on climate, according to green and sustainable finance campaigners.

MPs are due to have their first debate over the Financial Services and Markets Bill, a mammoth piece of legislation which will set out the post-Brexit architecture of financial services regulation in the UK. It is the largest financial policy package to be tabled in more than two decades.

But observers have been left underwhelmed with the draft law after long-awaited provisions on sustainability-related disclosures did not materialise, and the achievement of net-zero was given second-tier billing on the regulatory agenda.

“The UK has made a number of commitments in its role as COP president but the lack of a strong climate focus in this bill could be a canary in the coal mine with regards to whether these can be achieved,” said one UK sustainable finance expert who requested anonymity.

“In order to deliver a world-leading net-zero financial centre, it is essential that regulators have appropriate enforcement and rule-making powers to deliver on the transition.”

There are particular concerns over the designation of net-zero as a regulatory principle, which puts the climate objective on par with a host of other principles to which the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) must “have regard” when discharging their functions. Civil society, which include the WWF, ShareAction and the Finance Innovation Lab, have argued that climate neutrality should instead be made a statutory objective.

The controversy comes as the UK faces pressure to deliver the ambitious climate agenda unveiled at COP26, following the high-profile failure of rich nations to deliver on some $100 billion of climate funding commitments to developing countries under the UK’s COP presidency.

It’s not quite in the details

Under the administration of former prime minister Boris Johnson, the government had already promised to make companies disclose how they plan to achieve to net-zero and publish TCFD-aligned climate reports. Details on how this will be achieved are still unclear, however, and implementation will depend on support from the government led by new prime minister Liz Truss.

Karen Ellis, chief economist for WWF UK, said the Financial Services and Markets Bill was a “once-in-a-generation” opportunity to build in a net-zero statutory objective within the UK’s regulatory ecosystem, rather than risking instances where the climate objective “may potentially conflict” with other regulatory principles.

“Company disclosures aligned to the TCFD and transition planning may not be sufficient in and of itself,” she said. “Regulators will need to utilise both carrot and stick to monitor, incentivise and reward progress on those transition plans.

“Our big ask is to elevate net-zero as a key priority within the bill and this will hopefully drive regulators to put in rules and requirement which are needed to drive this alignment across the financial sector.”

Doing so will give regulators the tools to “call out greenwash, protect our pensions, and attract the new investment we need to cut our reliance on fossil fuels and reduce our energy bills”, Ellis added.

Concerns over the bill’s climate element are playing out against a backdrop of broader fears about its elevation of “competitiveness and growth” as a statutory objective. Parliament removed competitiveness from the remit of regulators more than a decade ago following the Treasury’s damning conclusion that “excessive concern for competitiveness” had contributed to regulatory failure leading up to the 2008 global financial crisis.

Some 50 economists wrote to the government ahead of the bill’s tabling, warning that competitiveness “is an inappropriate objective for regulators” and could be “a recipe for excessive risk-taking”.

Heather McKay, an E3G sustainable finance policy advisor, has suggested that a focus on net zero would itself support the UK’s global prospects.

“While the UK continues to be global leader in finance, it must look toward the net-zero markets of the future to remain competitive,” she said. “If we are to pursue competitiveness and growth, then it is also crucial to include net zero among the statutory objectives as the two can no longer be separated.

“Failing to do so could jeopardise the UK’s ability to capture green opportunities which will support resilient long-term growth, and insure families and communities from the next energy crisis.”