At home, inflation and the cost-of-living are soaring, Russia continues to hold Europe ransom by cutting off its gas supply, and climate change is driving severe weather that’s wreaking havoc across the globe.
Against this backdrop, Truss has pledged to lower taxes and to “really unshackle” the City of London by cutting financial regulation. But her current proposals miss an opportunity to ensure that the financial sector is fully playing its part to stabilise the economy, boost climate action and tackle inequality.
Responsible investment has a crucial role to play in tackling the huge environmental and social challenges we face.
It can unlock huge sums that can be invested in things that the UK urgently needs, such as renewable energy and green tech. If she really wants to unlock the City of London’s potential to benefit the economy and British people, then championing responsible investment should be front and centre of her approach.
Here are three ways she can do just that:
Firstly, she should continue to develop a robust Green Finance Strategy
Investment decisions drive big shifts in the wider economy – and the finance sector needs to help power the transition to net-zero. A Green Finance Strategy should focus on urgently shifting financial flows away from fossil fuels towards renewable energy. This will help tackle reliance on Russian energy sources, bolster the UK’s energy security, and create green jobs. Longer-term, it will help to protect people from soaring energy costs.
A key opportunity is the government’s current review of insurance industry regulations (known as Solvency II). We want to see the new PM put sustainability at the heart of these reforms.
Current proposals for reforms of Solvency II, make no mention of climate. Instead, they suggest that UK insurers should hold less capital, increasing the risk of the whole system failing. At a time of multiple economic crises, this is extremely risky.
If capital requirements are reduced, the Government should mandate that freed up capital should only be invested in green taxonomy-aligned companies, not used to increase shareholder bonuses, , as ShareAction recommended in our consultation response.
Change the law on fiduciary duty
Fiduciary duty is the law that requires institutional investors, such as pension schemes, to act in their members’ ‘best interests’, which is defined as making a financial return on their investments. But this definition is too narrow and often leads to short-term investment strategies which can threaten long-term wellbeing.
ShareAction’s Responsible Investment Bill proposes that pension scheme members’ best interests are not only financial, but also depend upon the opportunity to live in a healthy, stable, secure society and environment.
Expanding this legal definition would supercharge the level of green investment in the UK economy, without the sort of tax interventions Truss has said she is keen to avoid.
Finally, raise the bar for stewardship standards
We urge the new Prime Minister to push ahead with plans to create the Auditing, Reporting and Governance Authority (ARGA).
This new body must have a clear focus on stewardship and the resources to enforce higher standards in all areas within its regulatory remit. The Financial Reporting Council’s 2020 Stewardship Code was ambitious and raised standards around how investors use their rights as shareholders, both through corporate engagement and by voting at AGMs.
But it could go further. This is vital to promote the creation of long-term value for clients and beneficiaries that lead to economic, environmental and societal benefits.
Despite the FRC’s essential work to raise standards of stewardship, the relevant legislation fell out of the Queen’s speech in May 2022. A recommitment to the establishment of ARGA would send a strong signal of the Government’s intention for the UK to remain a global leader in investor stewardship.
In conclusion: let’s see a robust Green Finance Strategy, update the definition of fiduciary duty and boost stewardship standards.
Smart financial regulation, not deregulation, is how the Prime Minister can truly help the financial sector effectively play its part in tackling the UK's social, environmental and economic challenges.
