The Financial Inclusion Centre (FIC) has published a new report today entitled Time for action: the Devil is in the policy detail – will financial regulation support a move to a net
zero financial system? It argues that greening the UK economy cannot happen without major reform of financial regulation to compel UK financial institutions to take climate responsibilities seriously.
The summary report can be found here: FIC DEVIL IS IN THE POLICY DETAIL SUMMARY REPORT FEB 2023
The full report can be found here: FIC DEVIL IS IN THE POLICY DETAIL FULL REPORT FEB 2023
A radical change of approach is needed by the government and UK’s main financial regulators, the Bank of England, the Prudential Regulatory Authority, the Financial Conduct Authority and the Financial Reporting Council. The regulators need new objectives and powers to put protecting the environment from harmful financial activities at the core of their work.
Moreover, the government is pushing through deregulation in the hope that this will incentivise financial institutions to finance the green transition. FIC issues a stark warning this will just weaken regulatory defences against future financial crises, undermine the security of people’s pensions, and allow financial institutions to extract higher fees from savings and pensions without requiring those institutions to stop financing climate damaging activities. The report explains there are better ways to make financial firms take their environmental responsibilities seriously without compromising consumer protection and the financial system.
The report, sponsored by the Friends Provident Foundation, is entitled: “Time for Action: The Devil is in the policy detail – Will financial regulation support a move to a net zero financial system?” was researched and written by FIC directors Mick McAteer, a former non-exec at the FCA and Robin Jarvis, Professor of Accounting and Finance at Brunel University.
Equal status with other regulatory goals
The UK is failing to meet its ambitious climate goals, and will not, unless powerful financial institutions change their behaviours. It will not happen without a new approach by financial regulators. The report argues that environment-related financial regulation should be given at least equal status to financial stability, prudential regulation, financial market integrity, and consumer protection. The Bank of England should be given a new statutory objective to promote financial market behaviours that contribute to environmental sustainability. The other main regulators should be given new obligations to support and have regard to the impact of their policies on the Bank of England’s sustainability objective.
The FIC team undertook an extensive analysis of the approach and policies adopted by the UK government and regulators to align financial markets with climate goals. It concludes that the existing and planned regulatory powers and initiatives fall well short of what is needed to ensure that financial markets and institutions fully support the green transition of the UK economy.
Some regulations even risk investor confusion and perverse incentives with the FCA’s planned sustainable fund-label a particular cause for concern. The report argues it could mislead investors without adequate thresholds for emissions and independently verified data.
The report argues that the full range of regulatory powers including prudential and conduct tools need to be deployed by UK regulators to deter financial institutions from contributing to climate damage. Financial regulators should require banks, insurers, asset managers and pension funds and shadow banks to adopt clear plans for transitioning from climate-damaging assets towards climate-positive assets.
New regulations must target both new asset flows and existing books of assets, and hold financial institutions to account for continuing to finance climate damage.
To underpin this, plans for listed and large private companies to disclose their climate-damaging activities including their carbon footprint should be accelerated, driven by the FRC, with disclosures independently verified and included in company report and accounts. Where sustainability claims cannot be proven, auditors should qualify the report and accounts.
In turn, this will provide reliable data to financial services firms and facilitate plans for much better regulation of financial entities in terms of the drive to net zero.
FIC director and report author Mick McAteer says: “UK financial institutions continue to finance climate damaging activities at scale. Protecting the environment needs equal status with protecting consumers and preventing financial crises if we are to achieve net zero. We need a radical shake up in financial regulation and company reporting to align financial markets with critical climate goals
“The Bank of England should have a statutory duty to promote financial market behaviours that contribute to environmental sustainability. The government needs to provide regulators with sufficient powers and better targeted mandates to align the behaviours of financial markets and real economy firms with climate goals.
“We are at a fork in the road on climate-related financial regulation. The government wants the UK to be a global centre of green finance. It remains to be seen whether the UK competes on the global stage as a beacon of high standards on green finance or establishes a weaker regime so risking a regulatory race to the bottom. Signs are not good. The decisions the UK makes could undermine efforts to green the global financial system. ”
Commenting on the report, Friends Provident Foundation said: “At Friends Provident Foundation we welcome the ‘Devil is in the detail policy report’ by the Financial Inclusion Centre. It is clear from this report that the UK financial regulation lacks appropriate policies, tools, and culture to align finance with sustainability goals. The report recommends radical but necessary changes to centre sustainability in UK financial regulation. We hope this report can start discussions about how we can achieve sustainability, in a fair and equitable way.”
This is a follow up report to “Time for Action – Greening the Financial System” published in March 2020. Time for Action – Greening the Financial System | The Financial Inclusion Centre
As part of our research, we also published a series of Podcasts – Podcasts: The Devil is in the policy detail – will financial regulation align financial market behaviours with climate goals? | The Financial Inclusion Centre