UK outlines 'leading role' for financial services on climate change

The government's 'green finance strategy', published this week, has been welcomed by financial services firms and regulators. Its commitments include an expectation that publicly-listed companies and large asset owners will disclose how climate change risk impacts their activities by 2022; and clarifying the need for financial regulators to have regard to climate change when advancing their objectives and discharging their functions.

The global Task Force for Climate-related Financial Disclosures (TCFD), chaired by Mark Carney of the Bank of England, has developed climate-related financial disclosures for firms, although usage of these is voluntary. The strategy encourages publicly-listed companies and large asset owners to adopt this style of disclosure, but the government may pursue making this mandatory by 2022 following work with the regulators.

A new Green Finance Institute, jointly funded by the government and the financial services industry, has been set up to create new opportunities for investors and encourage greater cooperation on green finance between the public and private sectors. The government will also work with professional bodies to ensure that financial services qualifications and certificates incorporate green finance through a green finance 'education charter'.

Insurance law expert Elaine Quinn of Pinsent Masons, the law firm behind Out-Law, attended the launch of the strategy at the third annual Green Finance Summit in London. She said that the policy initiatives were greeted with "overwhelming support" from industry attendees and speakers.

"Businesses and industry leaders were reminded that they have a huge responsibility for action, and cannot hide behind the excuse of slow progress on policy change from government and regulators," she said. "PRA [Prudential Regulation Authority] green policy advisor Lauren Anderson said that 'regulatory pace should not hold the industry back', and reminded regulated firms that the PRA requires an updated senior management function for climate change by mid-October."

"For insurers, one big challenge in moving forward is the EU prudential supervisory regime, Solvency II. Steve Waygood of Aviva Investors said that Pillar 1 of the regime, which includes minimum capital requirements, had been drafted via an 'old climate lens' and 'tipped towards an old economy', preventing greater investment by insurers in the green economy. He said that UK regulators may look to re-weigh Pillar 1 as their own green finance commitments become clarified," she said.

Quinn added that while speakers including chair of the Intergovernmental Panel on Climate Change Hoesung Lee and Mary Robinson, the former president of Ireland and a leading climate change campaigner, had "commended the UK for its leadership in the climate space", they had also "made clear that privileged, more climate-resilient countries - and the businesses and industries within them - have the greatest responsibility for urgent action".

Earlier this year, the UK parliament declared an 'environment and climate emergency' in response to demands from campaigners. The UK government has also set a target of reaching net zero greenhouse gas emissions by 2050, and is to commission a Treasury review into where the costs of doing so will fall across the economy as part of the new policy proposals.

The UK's main financial regulators - the PRA, Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and The Pensions Regulator - issued a joint statement (1-page / 513KB PDF) on Tuesday backing the government's plans. Each of the regulators has increased its own engagement on climate change in recent months including by way of policy statements, consultations and new regulatory requirements, including through the senior managers' regulatory regime.

The combination of government and regulator statements "made it absolutely clear" for pension trustees that climate risk should be "a key consideration - whether in the context of a scheme's investments or its employer covenant", said pensions expert Carolyn Saunders of Pinsent Masons.

"The direction of travel towards mainstreaming climate and environmental factors into the UK's financial system is clearly signalled," she said. "Trustees should expect increasing scrutiny of their governance around climate risk and will, in turn, need to demand more of their asset managers and investment and covenant advisers."

From October, trustees of defined contribution (DC) pension schemes will be required to set out how they take account of "financially material considerations", including climate change and other environmental, social and governance (ESG) factors, when making investment decisions as part of their statement of investment principles (SIP). They will also be required to make their SIP publicly available, and to include a link to it with scheme members' annual benefits statements.