Peers have secured significant changes to the Financial Services Bill in the House of Lords this week, which will ensure that climate considerations are part of the future regulatory framework for the UK’s financial services sector.
The Bill is the first step in a series of wider financial services sector reforms that will set the framework for a new approach for the UK sector. Financial services can play a pivotal role in tackling the climate and biodiversity crisis and, in spite of growing momentum within the sector to identify and report on climate change risks, peers were concerned that the Bill as introduced made no mention of climate change or the environment.
Working cross party, peers tabled a series of climate change amendments which sought to ensure that the future regulatory framework would explicitly provide for climate risk to be assessed and factored into all decisions made to set new regulations or to change existing rules. After a series of lively Committee Stage debates, peers met with the Minister and were able to secure Government amendments to the Bill at Report Stage. These amendments introduce provisions in law that regulators must take the UK’s net zero target into consideration when making any future changes to prudential rules as specified in the Bill. This means that future major reforms – such as implementation of the Basel 3.1 banking standards – will need to factor in climate change considerations.
Peers were also seeking to ensure that regulators objectives and remits were aligned with climate goals. On the day that peers brought Report Stage amendments that would secure this, the Chancellor also announced new remits for the FCA and PRA that will require them to consider climate change commitments across the whole of their remit and in all future decisions and planning. At the same time, the CEO of the FCA announced that a dedicated director of ESG is being recruited. Finally, peers also secured assurances that the Government would recognise the need to address climate change across the whole of the regulatory framework as part of the future consultation process.
The Bill and Government announcement represent positive progress in terms of addressing the climate change challenge at the highest levels in the sector and setting the future direction of travel both domestically and on the international stage. However there is still much more to be done and peers indicated they would continue to press the case for embedding climate considerations in financial regulation and at a systemic level. Peers raised the importance of consideration for regulators to take account of biodiversity goals in making new rules and also sought a Government review of the capital risk weightings for fossil fuel investments – financial institutions have invested $2.7 trillion in fossil fuels since the Paris Agreement - to ensure that future finance flows align with net zero. Government assurances were made that a Basel Committee Task Force on Climate Related Financial Risks review is already underway and is expected to report in the Autumn and it is hoped that the sector will take urgent action to address this critical issue.
This is the first time climate has been specified in a financial services bill. The changes to the Financial Services Bill follow efforts by peers last year, when they secured provisions ensuring that new pensions regulations on climate risk disclosure take account of international and domestic climate goals, making the UK the first country in the world to align the actions of pension schemes with the Paris Agreement.
Commenting on the changes, Baroness Hayman said:
The amendments brought by the Government on the Financial Services Bill and new requirements for the FCA and PRA to consider climate change commitments across the whole of their remit send a welcome signal on the direction that the financial sector needs to take.
But there is a great deal more to be done to ensure that climate change is embedded across discussions and decision-making at a systemic level within our financial services industry and I hope that the mindset within the sector will continue to shift from not simply managing climate risks to positively aligning finance with net zero.
As we approach COP26, the UK has an opportunity to show global leadership by setting blueprints that can be adopted globally.