HMT to Require Regulators to Embed Climate Considerations into Policy
In the run up to COP26, the United Nations Climate Change Conference, the UK is extending its global leadership on green finance by requiring the principal financial regulators to consider climate change in their policy and rule-making activities. Building on the existing body of climate change work, the FCA, the Financial Policy Committee (FPC), the Prudential Regulation Committee (PRC), and the Monetary Policy Committee (MPC) should now consider the government’s legally binding commitment to transition to a net zero economy by 2050, as part of the recommendations in the letters from the Chancellor that update the agencies' respective remits. The letter to FPC notes the intention to issue sovereign green bonds, mandate climate risk disclosures, implement green taxonomy, and prevent financial stability risks.
In the letter to FPC, the Chancellor welcomed the continued commitment of FPC to the implementation of robust prudential standards in the UK. As the world recovers from the pandemic, it also faces a tipping point for the climate. The shift to a world with net zero economy will mean systemic changes across all parts of the economy. This includes delivering a financial system that supports and enables the transition to an environmentally sustainable net zero economy by expanding the supply of green finance and that is resilient to the physical and transition risks that climate change presents. Thus, subject to market conditions, the UK will issue its first ever Sovereign Green Bond this year, helping to fund projects to tackle climate change and finance the much-needed infrastructure investment. Finance will also be a key focus of COP26, which will be hosted by the UK in Glasgow in November 2021. Consistent with its objectives, FPC should continue to act with a view to building the resilience of the UK financial system to the risks from climate change and support the government’s ambition of a greener industry, using innovation and finance to protect the environment and tackle climate change.
The Annex to the letter to FPC further details the remit and recommendations for the Committee. The letter notes that the government aims to align private-sector financial flows with environmentally sustainable and resilient growth and to strengthen the competitiveness of the UK financial sector by ensuring it can capture the opportunities arising from the greening of finance and to help foster the transition to net zero. To meet these aims, the government intends to introduce mandatory climate-related financial disclosure requirements and implement a "green taxonomy," robustly classifying what we mean by "green" to help firms and investors better understand the impact of their investments on the environment. In line with the Committee’s responsibility to monitor systemic risks—and to act to reduce those risks with a view to protecting and enhancing the resilience of the UK financial system—the Committee should continue to regard risks from climate change as relevant to its primary objective. Climate change poses risks to the stability of the UK financial system, including physical risks (which arise from the increased frequency and severity of climate and weather-related events) and transition risks (resulting from a sudden or disorderly transition toward a net zero economy). In addition, the Committee should consider the potential relevance of other environmental risks to its primary objective.
Keywords: Europe, UK, Banking, Securities, Insurance, Climate Change Risk, ESG, Net Zero Economy, COP26, Sustainable Finance, UN Climate Change Conference, Disclosures, Taxonomy, Financial Stability, Green Bonds, PRA
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
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