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Regulators placed at the heart of UK green finance push

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UK financial regulators have come under the spotlight of political and industry groups pushing for the growth of green finance in the country.

The parliament’s Environmental Audit Committee has written to Michael Gove, secretary of state for the environment, to use powers under UK climate change legislation to require the Pensions Regulator (TPR), the Financial Conduct Authority (FCA), and the Financial Reporting Council (FRC) to produce climate adaptation reports in respect of their public functions.

“Amongst financial regulators in the UK, only the Bank of England and its Prudential Regulation Authority have given the issue serious attention,” the committee wrote in its letter.

It was “particularly” concerned the FCA needed to develop its thinking in this area, it said.

The Department for Environment, Food and Rural Affairs (DEFRA) has already approached TPR, FCA and FRC about the possibility of them voluntarily participating in the next cycle of climate-related reporting.

The bodies’ adaptation reports would need to set out their assessment of the current and predicted impact of climate change in relation to their functions and how they would adapt to it.

A spokeswoman for the FCA said: “Our strategic objective is to ensure that the relevant markets function well. We are working alongside DEFRA and other regulators to address the issues of reporting and working towards a more collaborative approach to climate-related issues.”

A spokeswoman for the FRC told IPE it was considering its approach to climate adaptation reporting and would “respond in due course”.

The Environmental Audit Committee is conducting an inquiry into green finance, examining how to mobilise investment to meet the country’s climate change targets and “factor sustainability into financial decision-making”. It recently wrote to the 25 largest UK pension funds to question them about their approach to climate change.

Expert group presents raft of green finance policy proposals

Ice floes

Investment consultants need expertise on climate change and other ESG issues, says Green Finance Taskforce

The financial regulatory framework was also the focus of some of the wide-ranging recommendations issued by a government-commissioned green finance group in its report to the government today.

The Green Finance Taskforce issued a suite of recommendations for policy measures that could help mobilise investment needed to meet the UK’s environmental objectives and strengthen its position as a centre for green finance. 

“Clarification of fiduciary duties, investor competence, good fund governance on environmental, social and governance (ESG) issues and processes that take proper account of the financial risks and opportunities that they pose, are essential to enable the UK financial system to respond in a timely way to climate risk and clean growth opportunities,” the taskforce wrote in its report.

Fiduciary duties were “foundational” for the UK investment industry and “the way they are framed, viewed and understood helps set the assumptions for appropriate investment behaviour,” it said.

The taskforce recommended that the government clarify fiduciary duties and implement several supporting recommendations on investment processes and disclosures, in particular in revising investment regulations.

The government should also “clarify” that investment consultants have sufficient expertise and competency on ESG issues, including climate change, and should include ESG issues as “a standing issue” when giving advice to pension scheme trustees.

“Significant market failures are created by the challenges of translating science and data and applying it productively in corporate contexts.”

Green Finance Taskforce

 

The green finance taskforce also advised the government to establish a centre for climate analytics, together with the private sector.

This would help bridge a communication gap between climate impact experts and businesses, as many corporates and governments did not properly understand the potential size and scale of climate risk, according to the group.

“Significant market failures are created by the challenges of translating science and data and applying it productively in corporate contexts,” it said.

The taskforce also urged implementation of recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD), including that the government legislate if financial regulators did not provide the necessary support by 2021. 

Nick Molho, executive director at the Aldersgate Group and member of the Green Finance Taskforce, said that, if implemented together, the recommendations would make investment in green infrastructure projects more attractive and help “move the needle on green finance”.

To be fully effective, implementation must be accompanied by more policy detail under the government’s Clean Growth Strategy and 25-Year Environment Plan, he said.

“If we want financial institutions to ‘green’ their investments, there needs to be a pipeline of green infrastructure projects for them to invest in,” Molho said. “This will only happen if government provides more clarity in the coming months on the regulations and incentives that will be introduced to encourage investment in the energy efficiency of buildings, on- and offshore wind, low-carbon heat, electric vehicles and the natural environment.”  

The government is due to respond to the recommendations in full later this year.

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  • The Houses of Parliament, London

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