Until 20th September 2023, ESG (Environmental, Social and Governance) policy was shaping up to be the next big regulatory initiative on the horizon in the financial services sector. We’d had a new and improved Green Finance Strategy from government, a Financial Services and Markets Act (FSMA) amendment, and a remit letter from Treasury addressed to the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) putting net zero firmly on the regulatory agenda.
Then Prime Minister Rishi Sunak made a speech announcing the government’s intention to dial back on a range of net zero pledges, such as scrapping the plans to introduce tougher ‘Minimum Energy Efficiency’ Standards (MEES) in the private rented sector, and extending the deadline for starting the phase-out of new gas boilers from 2025 to 2035. The announcements seemingly came out of nowhere, and according to some sources had left civil servants within the Department of Energy Security and Net Zero (DESNZ) ‘scratching their heads’.
Many in the financial sector and the wider business world added their signatures to an open letter addressed to the PM urging him to reconsider, noting that many have already sunk significant capital into sustainability and the green agenda. Normally the go-to culprit for the media to blame when a major policy initiative is watered down is lobbying from powerful business interests, but that doesn’t seem to be the case here.
There is however one part of the picture that doesn’t add up – the PM made no suggestion of plans to dilute expectations on the PRA and FCA to ‘have regard to the need to contribute towards achieving the Government’s target of reaching net zero greenhouse gas emissions by 2050’. The regulatory side of the equation appears to be moving full steam ahead. This means government and financial regulators are now travelling in two different directions, but what’s interesting is that the government is driving both agendas; this isn’t a case of the FCA and PRA going rogue.
In the mortgage industry, we’re still awaiting both a major consultation response on ESG, and a much-anticipated response to the government consultation on improving energy efficiency through lenders in (hopefully) December this year. There are also clues in the government’s latest green finance strategy that it sees financial regulators as better conduits for greening finance – and financing green – than the government acting directly.
Public sentiment and a complex political backdrop may help to decipher the government’s motivations here. According to Opinium, over half of the electorate is broadly in support of net zero policies, but this falls back to 22% when there’s potential for said policies to affect people financially. This is within the context of an inflation-led cost-of-living crisis, a rising interest rate environment putting levels of pressure on mortgage borrowers not seen since the 2008 crisis, and an increasingly polarised political landscape. In the USA, the ESG agenda has even sparked conspiracy theories – painting ESG as a nefarious slippery slope towards ‘social credit scores’ and threats to freedom of speech.
With an election looming, it’s likely the government doesn’t want to be seen to be pushing too hard on net zero and ESG at large. So, whilst the green agenda remains a legally binding obligation for the UK (unless we withdraw from the Paris Agreement), the government has opted to soften its messaging and pursue its net zero policy objectives via the medium of regulatory pressures and other indirect drivers. The climbdown is therefore likely to be more of a political olive branch to those who remain on the fence, unconvinced or anxious about what net zero might mean for their livelihoods and household bills. Behind the scenes, it’s business as usual.
For example, scrapping plans to tighten up MEES may not mean landlords are off the hook on green property upgrades if lenders are to be targeted to improve the energy efficiency of properties on their loan books. The ‘big bad wolf’ telling landlords to sort out their property’s Energy Performance Certificate (EPC) rating just won’t be the government; it’ll be the Buy-to-Let lender instead.
Consumer preferences are starting to shift too. There are signs consumers value home energy efficiency more highly now when house hunting – again applying pressure on all sellers of draughty, gas-guzzling homes to consider the impact of ‘do nothing’ on their housing equity. This makes it incumbent on brokers and lenders to educate themselves so that they are in a position to help consumers make informed decisions about how to improve the energy efficiency of their homes.
This is not to apologise for government inaction nor pass comment on either side of the political debates surrounding what constitutes appropriate action on climate change. It’s merely to highlight that this latest U-turn may be more for appearances’ sake.
The solutions will look different for each corner of the financial services sector, but in all cases the consumer needs to remain at the heart of regulatory decision-making. Just as the government approach is arguably too laissez-faire, FCA messaging is too overzealous in places, to the extent that it’s trying to solve (to quote the title of a popular movie) ‘everything, everywhere, all at once’.
A case in point: the FCA published a 97-page Discussion Paper earlier this year floating a raft of ambitious proposals, including obligations on firms to set ESG targets tied to remuneration and appraisals, appoint ESG ‘board champions’, roll out comprehensive staff training and hire sustainability specialists where appropriate, and embed ESG objectives at every level of business.
This is all well and good for major corporations with enough capital to throw at the problem and a retail investment industry whose main priority is to align consumer needs, values and preferences with the contents of a fund portfolio.
But in the mortgage advice sector, the biggest potential impact a broker can make as a first port of call is supporting their clients towards improving the energy efficiency of their homes. Estimates vary considerably, but the built environment is thought to account for between 25-40% of UK carbon emissions.
If mortgage brokers can be trained up to support customers towards financing green home retrofit and technologies, this has far bigger potential to bring down the housing sector’s carbon footprint – and that of UK plc overall – than prioritising arbitrary ESG targets and bolstering firms’ ‘green’ credentials.
Of course, achieving this will be no mean feat, which is why the Association of Mortgage Intermediaries has joined forces with the Mortgage Climate Action Group – a cross-industry alliance of brokers, lenders and trade bodies working around a set of common objectives.
We need brokers to be knowledgeable enough to engage in meaningful conversations that help consumers navigate a complex landscape, but not to provide so much guidance as to be on the hook for advice that falls outside their regulatory remit (we’ve already seen the potential for consumer detriment in the energy efficiency space with the revelations around the widespread mis-selling of spray foam insulation).
AMI MCAG is working to build consensus across four industry working groups:
Participants from across the lender and broker communities are welcome to join, and we are also in close talks with the FCA, the Green Finance Institute (GFI), and professional educational providers to move the agenda forward.
MCAG was originally formed to mobilise an industry response to the climate crisis in spite of a lack of clarity and direction from government. To quote one of our steering group members, in light of this new stance from government: ‘everything has changed, and nothing has changed’. Industry can no longer afford to wait for answers from above – the PM’s recent speech only drives that home.
To find out more about the work of AMI MCAG, visit www.greenmortgageadvice.uk.
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