Treasury could mandate UK financial firms to add climate labels to products
HM Treasury has today (22 April) published the results of its two-year review on how the financial system must change to support the net-zero transition, recommending changes to tackle greenwash, empower consumers and properly prepare government departments for future costs.
The review was first commissioned by former Chancellor Philip Hammond and has been running for some two years. Its purpose was to assess the ways in which policy packages, government funding, government processes and the private sector can support the net-zero transition, minimising costs and risks while ensuring benefits are maximised and fairly shared.
The latest report from the inquiry, out today, praises progress to date but states that there is still much work to be done. Specific recommendations relate to reducing greenwashing while empowering the regions and sectors most affected as a priority.
On the former, HM Treasury states that greenwashing by financial firms and their beneficiaries “may be an issue”. This is far milder language than that used in a recent paper from Schroders, dubbing greenwashing the “biggest sustainability-related challenge” to investors.
The Treasury is recommending further work with the Financial Conduct Authority to ensure that the body has “the appropriate remit, powers, and priorities” to prevent greenwashing. It is also planning to launch a consultation with the FCA on whether climate impact labelling should be mandatory for financial products offered to retail customers, such as pension plans and mortgages.
The Competition and Markets Authority (CMA) is already developing new measures to stop corporates from publishing misleading claims that overstate their positive environmental impacts – and to hold them to account if they do. These measures will not apply to finance in the first instance, however.
According to the Treasury’s new report, the Government does recognise the fact that the impacts of the net-zero transition will be felt differently in different regions – and that it will need to act to ensure it meets both its climate targets and its commitment to “levelling up”.
The report outlines how sector-specific pathways to decarbonisation could form the foundation for solving this challenge. For example, many of the regions set to be most effective are either current or historic homes to high-carbon sectors such as fossil fuels and heavy industry. The Government is planning to publish a net-zero roadmap ahead of COP26 but details remain scant at present.
From the predicted impacts of such pathways, policymakers can develop a specific strategy to support the most affected regions, with a focus on the most marginalised communities within these communities.
The Treasury report also argues that better costing of the net-zero transition could help abate concerns around the ‘just’ transition. In its recent Sixth Carbon Budget Advice, the Climate Change Committee (CCC) priced the transition at 0.5-1% of GDP, down from original estimates of 1-2% of GDP. While this advice will be enshrined in law, the Treasury report states that the overall cost is still “uncertain” and calls on the Government to develop its own forecasting. Previous Treasury analysis claimed that the transition could be either slightly negative or slightly positive for the UK economy as a whole.
Commenting on the report, the ECIU’s head of analysis Dr Jonathan Marshall said: “Following years of lagging behind the rest of government, MPs have piled further pressure on Treasury to throw its weight behind the net-zero transition. With no more emissions targets left to set, the focus moves to delivery – for which Treasury buy-in is essential.
“Creating the markets and policy landscapes to mobilise billions of pounds of private sector investment into clean transport, industry and homes is an obvious place to start, and one that can ensure the UK’s journey to climate neutrality doesn’t hit Brits in the pocket.
“Seeking clarity on the total cost of net-zero is fair, but any projections are highly uncertain and more than likely overestimates, as repeatedly seen in years gone by. Recreating policy successes that have slashed the cost of wind turbines and solar panels could make heat pumps and electric vehicles more affordable, addressing market failures would ensure clean industry is no longer held back, and funds to kickstart a home efficiency upgrade programme could keep a lid on long-term costs. These relatively simple actions from Treasury could ensure that UK Plc reaps the rewards of taking a global lead on climate action by locking in jobs and industries for decades to come.”
Ashurst's financial regulatory counsel Lorraine Johnston added: "For a domestic industry that has been on the periphery of the (pain of) implementation of the European Sustainable Finance Disclosure Regulation, the proposal for a climate impact labelling system is going to cause a collective intake of breath. The government should learn from the lessons on the other side of the Channel to ensure that the requirements on firms balance the efficacy of the output against the burden of implementation.
"These UK proposals at least look more contained, focused and – arguably - achievable than their European counterparts with the recommendation limited to reviewing climate or carbon labels for consumer financial products. But the industry should not underestimate the work that will be required in order to achieve a universally understood and effective climate labelling system.
"This looks like a clear message that firms can expect that the UK will follow the framework of the EU taxonomy regulation although there may be 'gold plating at policy level. This comes as good news, particularly for firms who may be subject to both regimes, who can plan for a single transformation programme rather than specific processes for different taxonomy systems. This is the equivalent of firms being able to use the same sausage machine to produce different taxonomy sausages, which can only be seen as a good thing."