The Treasury Committee has published a unanimously-agreed report as part of its decarbonisation and green finance inquiry: Net Zero and the Future of Green Finance.
- Financial products should have climate impact labels
- Greenwashing of financial products must be prevented
- FCA should further encourage FinTech innovation and tackle regulatory barriers
- Government should set out cost of achieving net-zero by 2050
- Strategy needed to support regions and sectors impacted by decarbonisation
Report Summary
On World Environment Day in June 2019, the Treasury Committee launched an inquiry into decarbonisation and green finance to scrutinise the role of HM Treasury, regulators, and financial services in supporting the Government’s climate change commitments. Shortly after the inquiry was launched, the Government announced that the UK would eradicate its net contribution to greenhouse gas emissions by 2050. Today, on International Mother Earth Day, the Committee has made a series of recommendations in its report for how the Government can achieve net-zero by 2050:
- Financial products should be clearly labelled to allow consumers to assess their relative climate impacts and to make choices accordingly. HM Treasury and the Financial Conduct Authority (FCA) should consult on making such green labels mandatory, including how they could encourage innovation and be widely understood by retail consumers.
- Greenwashing is where financial products or funds are labelled as ‘green’ or sustainable but may not be so. The Committee heard evidence that this may be an issue, with the potential to mislead consumers. HM Treasury must ensure that the FCA has the appropriate remit, powers, and priorities to prevent the greenwashing of financial products available to consumers.
- The Government’s Green Finance Strategy noted the need for innovation in green finance products and services. Yet the Committee received evidence that innovation could be accelerated and that more could be done to encourage take-up. The FCA should consider further FinTech challenges, which it launched in 2018 to develop innovate products and services to assist the transition to a greener economy, to encourage innovation. The regulator should also set out how it will tackle remaining regulatory barriers that discourage innovate green financial products from coming to market.
- The overall cost of achieving net-zero is uncertain. The Government should set out the principles upon which the UK will fund its transition to net-zero. It should also set out its own cost assessments of achieving net-zero by 2050, its methodology, and highlight where the uncertainties lie.
- The Government has recognised the likely differing regional impact of a transition, observing that it would “lead to significant changes in the structure of the economy” and that these changes would “have knock-on impacts on sectors, jobs and regions.” HM Treasury’s Net Zero Review final report should include clear sectoral pathways towards decarbonisation and should address the key policy decisions as to the future of high carbon industries. Particular attention should be given to the potential regional impact of those decisions and the Government should set out a framework and strategy for supporting those communities which will be most impacted by these changes.
- At the November 2020 Spending Review, the Chancellor announced that the UK would issue its first green sovereign bond, which are debt securities issued by governments where the proceeds raised are used to finance clearly defined projects that have environmental benefits. With the first issuance expected this summer, the UK is lagging behind other countries. For example, France’s first green sovereign bond was issued in January 2017 and Germany’s was in September 2020. And whilst concerns about the potential for green sovereign bonds to be a more expensive form of debt seem to have dissipated to a degree, the Government should nonetheless set out its tolerance for them to be more expensive than other forms of debt.
- Many pension savers in defined contribution pension schemes are invested in their pension’s default fund, which is the fund used should the saver fail to make an alternative investment choice. HM Treasury will not require default funds to move to greener alternatives, but maintains that consumers should not have to switch out of the default fund to invest sustainably. The Government should resolve this apparent contradiction. It should also report on the proportion of pension holders in defined contribution pension schemes who remain in the default fund, and the extent to which those default funds are aligned with a path to Net Zero.
Chair’s comment
Commenting on the report, Rt Hon. Mel Stride MP, Chair of the Treasury Committee, said:
“The Government, private finance, consumers, and regulators all have vital roles to play in helping the UK to achieve net-zero carbon emissions by 2050.
“The UK is a global leader in financial services. When the world’s eyes are on us for COP26, we must show that we can also be a green finance powerhouse to help achieve net-zero.
“Today, on International Mother Earth Day, we’ve made a series of recommendations to the Government and associated public bodies for how the UK can achieve its climate change commitment.
A response by Positive Money:
The cross-party Treasury Committee has today published unanimously-agreed recommendations on greening the financial system, following a two-year inquiry.
The committee recommends that the Bank must “explain its thinking, as to what measures it might consider appropriate for the capital regime to better accommodate the climate risk associated with different investments” and “set out its views on the options for amending the capital regimes to reflect its new remit”.
This comes after Sarah Breeden, Executive Director for UK Deposit Takers Supervision at the Bank of England, stated on Sky News earlier today that the Bank of England is not currently considering altering banks’ capital requirements to reflect climate risk.
MPs also made a wide range of other recommendations for greening the financial sector ahead of COP26, including that the Treasury widen the scope of the mandatory climate-related financial disclosure regime, “work at speed” to develop a green taxonomy that could “exceed” the EU taxonomy in aid of the UK’s climate goals, and prevent “greenwashing” of financial products.
David Barmes, Economist at Positive Money, said:
“Unlike recent industry alliances, the Committee is going in the right direction by recommending that the Bank of England consider increasing capital requirements for high-carbon lending to more accurately reflect the huge risks to financial and planetary stability involved.
“The Committee recognises that a taxonomy defining which activities should be labelled as ‘green’ is essential to align finance with the Paris Agreement, but even more importantly we need to define which activities are ‘dirty’. The UK taxonomy must benefit from extensive public consultation and be far more stringent than the disastrous EU taxonomy, which is blatantly detached from science.
“As banks continue to pour hundreds of billions into planet-wrecking fossil fuel projects, we urgently need proper regulation, not more greenwashing. With its new mandate, the Bank of England and regulators have the green light to take a more active role in shaping a green financial system.”
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