Net zero regulatory requirement in new financial bill ‘inadequate’, say Lords at second reading

Lords have called for the prospective Financial Services and Markets Bill to urgently be amended to take further into consideration the UK’s green goals, in particular net zero.

The Financial Services and Markets Bill (FSM) bill seeks to “make provision about the regulation of financial services and markets”. It is seen by many businesses, politicians, and campaigners as an opportunity for the UK to deliver its net zero commitment and lead the global transition to green finance.

Opening the Bill’s second reading at the House of Lords on 10 January, parliamentary secretary for HM Treasury, Baroness Penn, noted that the bill will “embed consideration of the climate target across the breadth of financial services regulators’ rule-making and cements the government’s long-term commitment to transform the UK economy in line with their net zero strategy and vision.”

The bill, which started in the House of Commons, contains an amendment to ensure that financial services regulators have a “regard to” the UK’s statutory netzero emissions target in their regulatory principles.

However, as highlighted by financial experts from law firm CMS, the Treasury itself has noted that regulators are not required to follow their regulatory principles but to “take them into account when pursuing their statutory objectives”. This, the legal analysis concludes, “could limit the impact of the regulators pursuing the green finance agenda in their activities”.

Crossbencher, Lord Vaux of Harrowden said that he “welcomed” the secondary objective of the bill, which is to “support growth and international competitiveness”, noted in clause 24. He added that this shouldn’t be held back by “overzealous regulation”.

However, on the topic of the net zero requirement in the regulatory principles, he said: “I would be keen to hear from the minister what the practical difference is between a secondary objective and a “have regard” requirement, and why net zero should not have equal billing to growth, given that the government agree about its fundamental importance to our future.

“I do not believe that the two are incompatible.”

Liberal Democrat peer Baroness Sheehan, who is director of Peers for the Planet Ltd, a business associated with the eponymous cross-party parliamentary group, said: “People and businesses want action because the dire impacts of climate change are visibly here with us now, and the increasing ferocity of climate events has taken even pessimistic scientists by surprise”.

She added that the regulators’ requirement to “have regard to” climate goals is “inadequate” to support net zero and nature and noted that the removal of sustainable disclosure requirements from the Bill is concerning. She also called for a “better interpretation of fiduciary duty” to emphasise that climate change is a financial risk.

Labour peer Baroness Hayman noted she was concerned that the Bill “misses the opportunity” to align the financial services sector with net zero, and also expressed concerns about the signal that the delay to an updated green finance strategy is sending to the sector.

She said: “This Bill is the obvious place to legislate for that policy yet it is silent.”

The Lord Bishop of St Albans, who is president of Rural Coalition, a national charity that supports rural communities, added: “It is more urgent than ever that we introduce mandatory net-zero transition plans”. He also said that in order for the UK to meet its COP26 commitments, it will need a secondary statutory objective to protect and restore nature and deliver a net zero economy.

Lib Dem peer Baroness Northover, who is also a member of the Environment and Climate Change Committee, expressed concerns that an update on green finance is still missing, particularly as sustainable disclosure requirements have been removed from this bill. She noted that the EU has already legislated in this area and said  the UK has “ fallen behind, despite the Government’s declared ambitions”.

Closing the reading, Baroness Penn only briefly mentioned the sustainability and green finance issues raised, responding: “They are right that the financial services sector has a critical role to play in global efforts to meet net zero. That is why we have included the measure in the Bill to amend the regulators’ regulatory principles to advance the net-zero objective.”

Nitika Agarwal, WWF’s head of finance policy said: “It’s encouraging to see the number of Lords who called for the Bill to include an explicit objective on climate and nature for financial regulators. This is vital if the Government is to keep its promise to make the UK the world’s first net-zero aligned financial centre and to attract green finance to the UK.

“Investors want to know that the UK market is well regulated, understands climate and nature-related risks and has no place for greenwash. This bill must give UK regulators some teeth if our finance sector is to seize this opportunity to be at the centre of ESG investing, the fastest growing segment of the asset management industry.”