The UK’s House of Lords has agreed to an amendment to the Financial Services and Markets Bill (FSMB) that adds nature to the new regulatory principle on net-zero emissions.
The amendment, which was introduced by Baroness Hayman, would require the Prudential Regulation Authority and the Financial Conduct Authority (FCA) to consider the need to contribute towards commitments made to address both climate change and biodiversity loss.
The FSMB is a landmark piece of legislation that has the potential to significantly change financial regulation in the UK.
During a debate on the Bill in the Lords this week, Baroness Hayman said: “I recognise that various initiatives are under way, such as the work of the Taskforce on Nature-related Financial Disclosures (TNFD), which will undoubtedly make a contribution over time, but relying on voluntary action and market forces will not produce a transformation at the pace and scale required.”
She added: “What is needed is a systemic approach and it is essential that we use the opportunity of the Bill, which deals with the regulatory architecture of the financial services sector, to provide an enabling regulatory environment, which can help turn government commitments into clear legal signals.”
Karen Ellis, WWF’s chief economist said she was “delighted” protecting nature would be recognised as a regulatory principle alongside net zero and urged the government to accept the amendment.
She added: “Financial regulators must embed climate and nature at the heart of their decision making so the UK finance sector can become the world’s first net-zero aligned finance centre – a promise that Rishi Sunak made at the Glasgow climate talks in 2021.”
This amendment works alongside a proposed clause also tabled by Baroness Hayman, which would permit the FCA to issue guidance to fund managers and personal pension schemes around considering the impacts of investments on society and the environment.
The Bill will continue to be debated in the Lords next week before it enters the final stages. Back in March the Lords came out in favour of an amendment that would make sure financial institutions carry out due diligence when investing in or lending to businesses producing “forest risk” commodities such as beef, palm oil and soy.
Baroness Boycott, who introduced the amendment, this week said: “The government lists halting deforestation as a ‘top priority’ in its net-zero strategy, but the scale of finance continuing to flow from British banks and investors to the companies actively destroying the world’s tropical forests shows that in practice the government does not prioritise this issue.”
She said the amendment asks that financial actors carry out simple checks to ensure that the companies they finance are not routinely engaged in breaking the law through illegal deforestation.
Reporting in line with the TNFD, she pointed out, does not require a change in financing. “Put simply, the TNFD will not stop UK finance from flowing to those offenders [of illegal deforestation],” she said and therefore mandating action on that reporting is needed.