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Climate finance | 30 June 2022

Update to Green Finance Strategy: ClientEarth response to HM Government call for evidence
Climate finance

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Update to Green Finance Strategy: ClientEarth response to HM Government call for evidence

The update to the green finance strategy provides an opportunity for the government to undertake a holistic review of the overarching policy and regulatory framework for green finance, in order to support the rapid redirection of financial flows to align them with limiting global warming to 1.5°C over pre-industrial levels (in accordance with the government’s ambition for the UK to be a net-zero-aligned financial centre).

In this response we propose:

Transition plans: All financial services firms and large/listed companies must be required to disclose a transition plan aligned with 1.5°C warming, as well as evidence that their plan is actually being implemented. These rules must be introduced as soon as possible, and the government must clarify the timeline for their introduction in light of the fact that they were not referred to in the Queen’s Speech.

Climate-related disclosures: Requirements for comprehensive climate-related narrative disclosures (including scopes 1-3 emissions and an explanation of the company’s material impacts on the environment and society) must be introduced on a clear mandatory basis.

Climate accounting: Companies’ financial statements must reflect climate-related financial risks and impacts, including stating whether they are based on estimates and assumptions aligned with warming being limited to 1.5°C.

Green taxonomy: The proposed UK Green Taxonomy must be science-based and reflect the precautionary principle. In particular, activities based on the use of fossil gas cannot be classified as contributing to climate change mitigation or as otherwise environmentally sustainable.

Regulatory objectives: The financial regulators must be given a statutory objective in relation to climate change, as well as a regulatory principle in relation to the conservation and restoration of nature and protection of biodiversity in a manner that respects the rights affecting local communities and Indigenous peoples.

Conditions for listing: Applicants for listing on UK exchanges should be required to demonstrate that they have a credible transition plan in place.

Stewardship: Regulators must make clarify to investors that (under existing regulation) they have stewardship responsibilities in relation to environmental issues.

Voluntary carbon markets: Carbon credits should not be used as offsets (in place of emissions reductions), as this can reduce incentives for corporates to mitigate climate change and provide misleading information to the market. If the government nevertheless allows the use of offsets in carbon accounting, at a minimum this should only be allowed for residual emissions which are not technologically feasible to eliminate.

Energy security: The current British Energy Security Strategy’s support of new domestic oil and gas field developments is inconsistent with UK’s climate goals, and would not be effective to increase energy security in the UK or alleviate energy poverty. The financial system should not seek to support investment in new oil and gas field developments.

Sustainable and transition bonds: A unified system of labelling and benchmarking transition investment products is needed in order to mobilise private investment into transition activities.

Capital requirements: The banking and insurance capital regimes should be enhanced to ensure that banks and insurers are sufficiently resilient to climate risks. In particular, they should hold capital equivalent to 100% of exposures related to new exploration, expansion or development of fossil fuels and related infrastructure, so they can absorb the losses themselves if a full write-off of the exposure is necessary.

Retail customers: Financial advisors should be required to take account of investors’ sustainability preferences in their advisory and portfolio management processes. In addition, a robust new regulatory regime governing environmental, social and governance data and ratings agencies must be developed.

Enforcement: For the implementation of the UK’s regulatory framework for green finance to be successful, there should be proactive and robust accountability through enforcement action by regulators to call out egregious non-compliance. The Financial Conduct Authority and other regulators must be adequately resourced and empowered to investigate and enforce against laggards on climate, as overseas regulators are already doing.