In front of the world at COP26, the UK committed to delivering a world-leading net zero aligned financial centre last year. The UK financial sector, currently ranked first globally as a green financial market, is well placed to take advantage of the opportunities that this presents – potentially worth over £1 trillion to UK businesses by 2030.
London is also the most globally connected banking centre, providing financial services to partners around the world. And, thanks to the current energy crisis, demand for investment in green solutions has never been greater. Unlocking these opportunities requires a plan that brings in the key actors across the financial system – including the UK financial regulators.
In July, the Chancellor of the Exchequer, Rt Hon Nadhim Zahawi presented a new Financial Services and Markets Bill in his first Mansion House Speech, setting out the government’s vision for the future of the UK financial services industry. This is arguably the most significant piece of financial services legislation since the Financial Services and Markets Act was passed in 2000. The Bill includes the Future Regulatory Framework Review (FRF) and introduces statutory objectives for UK financial regulators to promote international competitiveness and economic growth; while the need to contribute to achieving compliance with the UK’s net zero emissions target in line with the Climate Change Act is proposed as a regulatory principle.
This is a cause for concern. As stated in the Treasury’s consultation on the proposals for reform on the FRF: “regulators are not required to act to advance their regulatory principles; instead, they must take them into account when pursuing their statutory objectives”. It is clear then under the bill as it stands, the regulators will have a much weaker mandate to tackle climate change than required to transition the financial sector and mobilise finance at scale.
Moreover, competitiveness – which could reasonably be expected to focus on minimising regulatory restrictions on companies – is directly at odds with the UK’s ambition to deliver net zero by 2050. Prioritising ‘competitiveness’ through deregulation during a cost-of-living crisis risks propelling the UK into another financial meltdown, like the one in 2008 which cost the UK economy £7.4 trillion.
The Financial Services and Markets Bill looks to be another missed opportunity for the UK to lead on action on climate change. Net Zero must be embedded in the UK’s regulatory and governance environment if the government is to deliver a credible Green Finance Strategy at the end of this year and leverage private finance at scale for the transition.
Elevating climate change as a statutory objective for UK financial regulators would have the following benefits:
- Increase the competitiveness of the UK financial sector. The global green finance market is the next big growth market, estimated to be worth $35.3 trillion in 2021. Proactive action by the UK to set international norms will enable UK businesses to gain international market share in these new opportunities and attract investment into the UK. This will also tackle greenwashing and promote the transparency required by investors seeking to invest in net zero opportunities. Capturing these opportunities will only be possible with robust and credible domestic delivery, and incentives for leadership in the innovation of green financial products and services. This requires regulators to be active participants.
- Minimise the shocks from energy and climate to the UK economy. Climate change is and will have material economic impacts that will increase in frequency and intensity over the coming decades. This urgent matter requires mobilising investment swiftly towards cheap, clean and secure sources of energy, and the rapid scaling of energy efficiency. Disclosure tools alone will not be sufficient without regulatory enforcement. Upgrading climate change to a statutory objective would empower UK financial regulators to push forward the net zero transition.
The markets of the future are calling out for a leader, and the UK financial sector is well placed to take advantage of this. However, this will not happen unless actors across the financial system align their activities with net zero. As the Bill passes through Parliament, Parliamentarians must seize the opportunity to ensure that net zero is at the heart of UK financial reform. With the Bill in its current form, the UK’s opportunity for global leadership in green finance – supporting energy security and economic resilience into the future – risks being lost for good.