Treasury Committee evidence on decarbonisation of UK economy and green finance

The Treasury Committee today heard evidence as part of its re-launched inquiry into the decarbonisation of the UK economy and green finance.

Witnesses were:

• Sheldon Mills Mills, Interim Executive Director of Strategy and Competition at Financial Conduct Authority
• Sarah Breeden Breeden, Executive Director for UK Deposit Takers Supervision at Prudential Regulation Authority
• Anthony Raymond, General Counsel and Director of Legal Services, Policy and Advisory Directorate at The Pensions Regulator

Responding to questions by committee chairman Mel Stride (Conservative MP for Central Devon), Sheldon Mills said the FCA had taken various steps to support green action and climate change risk management, including issuing a consultation, which ends tomorrow, on disclosures in line with TCFD (Task Force on Climate-related Financial Disclosures) in relation to premium-listed issuers. The FCA hoped to finalised its listing rules by the end of the year. He announced that in the first half of next year there would be a new consultation in relation to TCFD disclosures by other types of institutions - asset managers and others.

Sarah Breeden said the PRA's aim was to make sure the financial system was resilient to the risks from climate change and supportive of the transition to net zero. A stress test for major banks and institutions had been delayed by coronavirus, but it would go ahead next year.

Julie Marson (Conservative MP for Hertford and Stortford) questioned if the FCA could do more in terms of taking a lead. Anthony Browne focussed his questions on 'green washing' and Alison Thewliss asked about green pensions.

Angela Eagle (Labour MP for Wallasey) asked about how asset owners and decision makers could assist in the transition to a low-carbon economy and fulfil their fiduciary duties at the same time. Anthony Raymond said if they didn't they would not get the returns they were expecting and their customers would suffer.

Harriett Baldwin (Conservative MP for West Worcestershire) asked about the pricing-in of climate change in market prices. Sarah Breeden said there had been an improvement in disclosures, but there was some way to go.

Angela Eagle asked about how to 'green central banking' and the difficulty banks may have in lending at a competitive rate to some green projects.

Rushanara Ali (Labour MP for Bethnal Green and Bow) asked about the role of the City of London and fossil fuel financing, especially banks' investment in coal. Sarah Breeden said the FCA had set out expectations that firms should have climate change in their risk management frameworks, but the transition to net zero would take many years. A strategy for the transition was needed, but in the meanwhile, fossil fuels were an important part of the energy mix.

Mike Hill (Labour MP for Hartlepool) asked about creating consistency in the regulatory environment towards net zero. Referring to the PRA's 2019 supervisory statement, what supervisory expectations had been set for banks and insurers? Sarah Breeden said there were supervisory expectations in four areas: risk management, governance, scenario analysis and disclosure. Sheldon Mills said the FCA took a risk-based approach to supervision.

Replying to Mr Hill on stress-testing, Sarah Breeden said for the first time the PRA would be stress-testing both banks and insurers at the same time, aiming to cover about 80% of the market. It would aim to look at where the risks might arise, enabling organisations to plan future action to stop risks materialising. The hope was that the lessons learned would be valuable more broadly. Anthony Raymond said pensions schemes were equally exposed to climate risks.

Anthony Browne (Conservative MP for South Cambridgeshire) asked what else the government could do in the UK and internationally to make sure green finance played a bigger role in the transition to net zero. Regarding removing barriers to active stewardship, Sheldon Mills said the FCA wanted stewards to take more active ownership in fulfilling their objectives and setting their ambitions. Treasury ministers were fully supportive of change.

Replying to Harriet Baldwin, Sheldon Mills said he was told that London was a leading centre in innovation in green finance products, flows in terms of ESG related products, etc.

Mel Stride concluded the session by trying to pin the witnesses down to a year when the risks associated with climate change were priced into markets. Sheldon Mills said the FCA had a three-year strategy to 2023, with milestones along the way, after which there could be a further two years of transition. Anthony Raymond thought about 80% of pensions schemes would show changes by 2023. Sarah Breeden thought the end of 2022 was a realistic initial target.