At COP26, the Chancellor announced that the UK will become the world’s first “Net Zero-Aligned Finance Centre”. While many argue that the changes have not gone far enough, there are still significant changes coming to the UK financial sector.
Bank of England Response
The Bank of England has announced their response to climate change (Climate change | Bank of England) where they have set out 5 goals and 10 pledges. A number of these pledges are likely to have a direct impact on Credit Unions over the coming years, they include:
- From 2022 the PRA will embed climate change within its supervisory approach and actively supervise firms in line with the expectations. Supervisory tools will start to be utilised where appropriate. The CFRF (Climate Financial Risk forum) will continue its assistance of firms in its third session.
- Supervised firms are already required to hold capital against material climate risks. The Bank will advance its thinking on the use of capital for micro and macro prudential purposes. A call for research will be made and an update will be provided on the approach to capital usage by end-2022.
- Achieving Net-Zero is core to the Bank’s remits and the UK government’s economic strategy. The PRA will explore and update on how transition plans will be used within its supervisory approach.
- Disclosure is a cornerstone of the climate agenda. The Bank will work internationally to advocate for new regimes that aid this agenda (including the IFRS Foundation’s International Sustainability Standards Board) and for these regimes to be aligned where possible.
It is therefore likely that there will be an increasing level of green regulation from the Bank of England over the forthcoming years.
Reporting
The last of the pledges stated above related to disclosure. Climate related disclosure is also a key topic under review from the UK’s accounting standard setting body, The Financial Reporting Council (FRC). From April 2022, large UK companies (with over 500 employees and £500m turnover) will need to make climate related disclosures. We would expect to see further disclosure requirements from the FRC over the next few years.
Impact on Assets
Credit Unions are likely to face both physical and transition risks over the next few years in particular those offering mortgages.
- Physical risks– climate change and extreme weather is likely to cause property damage in many areas. A number of lenders are already revising rates for properties in areas at higher risk from climate change. Emoov have come up with a risk system for climate change and rated many of the cities in England and Wales which showed Brighton was the highest risk city in England & Wales.
- Transition Risk– As the economy shifts to a net zero position there will be changes to asset values and expenditure. For example the value of properties with carbon inefficiencies may be impacted by new legislation
A key topic for discussion in many other sectors is how net zero will impact their ability to borrow. Providing green policies as well as Environmental, Social and Governance (ESG) Statements are likely to be requirements for any business borrowing over the next few years.
What you should be doing
All businesses including Credit Unions should be looking at developing Green Policies if they dont already have them in place. The risks of net zero should also be considered and how they will impact your Credit Union. There is likely to be significant change in this area over the next few years.