UK government found wanting on financial disclosure

The Green Finance inquiry carried out by the Environmental Audit Committee at the beginning of this year made crucial headway in raising awareness of the role finance must play in the UK’s low-carbon transition. Ensuring sustainability is at the core of all financial decisions is paramount to achieving climate goals and protecting the financial system.

The action required does not end with growing new markets in green finance. Bank lending and capital investment needs to shift away from fossil fuels and high-carbon infrastructure very quickly if we are to have any hope of limiting global warming.

This week the Committee published the government’s response to its report. It’s good to see steps taken in clarifying fiduciary duties, pension fund investment strategies, and the role of governance in tackling environmental risks.

However, the UK government has passed up a major opportunity – it refused to move ahead towards making disclosure of climate-related risks a mandatory part of financial reporting.

Disclosure is a market-based measure. It assumes that with more information, investment choices will more accurately reflect the respective costs and benefits, leading to better outcomes. That approach relies on assumptions about the efficiency of credit allocation by the private market which are highly questionable following the 2007-8 financial crisis. Nevertheless, the approach is a non-starter unless all firms are required to make the relevant disclosures in a comprehensive and comparable manner.

Voluntary guidelines, like those published by the Taskforce for Climate-Related Disclosures, are good at propelling market leaders but bad at shifting laggards. Industry ‘best practice’ will be little consolation if the breakdown of the climate leads to the ‘long-lasting and irreversible effects’ warned of by the recent IPCC report.

A similar disappointing release came from the Prudential Regulation Authority earlier this month, which declined to encourage banks and insurance companies to prepare for mandatory disclosure.

To tackle an issue as urgent as rapidly accelerating climate change, we cannot afford a bias in favour of the status quo and against the use of new policy frameworks. The UK government and its regulators should show more courage on this crucial issue.