The news has been inundated with headlines expressing the importance of tackling climate change and the transition to a cleaner and less carbon-intensive economy. It doesn't appear to be merely coincidence the day following the United States election of Biden as the new President-elect, a surge of press from the Bank of England ("BoE"), Financial Conduct Authority ("FCA") and Chancellor of the Exchequer surrounding Environmental Social Governance ("ESG") launches from the woodwork.
The UK's new found love for finance sustainability is also closely tied to the Brexit transition period ending on 31 December 2020. Could this be seen as the UK's attempt to reinforce its status as a leading and ground-breaking financial centre?
It seems after a devastating global pandemic and a new President who has vowed to make tackling climate change his top priority, the UK has pressed the fast forward button. Perhaps the severe climate destabilisation the world has witnessed this year has triggered the FCA and BoE to realise the vast investor-driven push towards sustainability means close collaboration between regulators and the industry is inescapable? Whatever the driving force, the financial services sector is fundamental to Britain's economy and will be essential to our recovery post-COVID.
A record level of demand has been witnessed so far in 2020, with a £5 billion increase on inflows into mandates seeking a positive impact on the world compared with Q1-Q3 of 2019. At the same time, sustainable equity funds gathered 82% more new money than traditional equity funds.
We are all aware of the pressing need to focus on sustainability and climate change, yet political actions have rarely moved past seemingly empty words and treaties. The move from a financial institution being 'charitable' by considering ESG, to firms realising there is a large financial incentive to being 'green' is long overdue.
The Chancellor of the Exchequer has set out a new green plan, including policies designed to position the UK at the forefront of the move to a sustainable future, whilst also managing climate risks in the financial sector. The measures announced include:
- Mandated TCFD disclosures for all listed firms and financial institutions by 2025;
- Adequacy stress testing to include climate risks for banks and insurance companies;
- The first UK 'green gilts' to be launched to fund low carbon infrastructure projects; and
- Adoption of a Green Taxonomy.
The Chancellor also mentioned "significant economic and financial dialogue" has taken place with large financial hubs such as Switzerland, India and Japan.
The speech given by Andrew Bailey of the BoE focused on the importance of data and disclosure. The BoE explained that "what we cannot measure we cannot manage" and thus financial institutions must measure and disclose the climate risks they are exposed to currently, and those predicted for the future.
It is urged that firms assess how climate risks could impact their business and determine if additional near-term capital needs to be held against this. Climate change is set to make historically safe investments "existentially risky" and on the flip side, innovate and previously speculative investments will be much safer on the path to net zero.
It's clear that sustainable finance is the future and therefore vital to understand how to practically implement ESG and comply with new legislation. Firms cannot use uncertainty or lack of data as an excuse. We are equipped at Howard Kennedy LLP to assist with managing climate risks and ensuring compliance.