King's College London

Recent climate- and sustainability-related financial interventions in the UK and EU are breaking new ground. They are unprecedented in pace, scope and ambition; yet they are still emerging and therefore largely untested.

Importantly, they give rise to questions for central banks and financial regulators regarding to what extent they should intervene, and with what regulatory objectives, tools, and strategies for navigating challenges and ensuring impactful implementation.

This project addressed those questions by presenting key research findings about the experiences of early-moving central banks and financial regulators in the UK, France and the Netherlands. It cross-compares and aggregates the experiences, methods, and perceptions of those early-moving central banks and financial regulators to reveal the levers and limits of their interventions, including:

• motivations, aspirations and justifications through the lens of their own understanding of loyalty to mandate;
• preferred types and forms of interventions;
• practical and logistical challenges for implementation; and
• the dynamics of regulatory interactions.

It also identifies several issues outside the scope of this study that require further research.

This study utilised a socio-legal methodology and qualitative research methods that combined documentary analysis with content and thematic analyses of empirical data gathered from semi-structured interviews as part of a multiple case study design (Braithwaite and Drahos 2000; Yin 2003).

In total, 30 respondents were interviewed during 2021-2022 comprising: 23 current and former members of relevant central banks, financial regulators and government agencies; and 7 senior practitioners in academia and industry (legal, pensions, insurance, banking, financial advisory). The sampling logic in a qualitative case study design is purposive not random (Yin 2003). This study targeted central banks and financial regulators in France, the UK, and the Netherlands being jurisdictions that are early-movers and considered in the literature as leading on climate-related financial regulatory initiatives. Accordingly, interviews in those jurisdictions were conducted predominantly with respondents from central banks and regulatory agencies being the focus of this study and, additionally, with some senior practitioners in regulated firms and academia to provide contextual background and data validity via triangulation. Research questions focused on regulator motivations, aspirations and justifications alongside regulatory objectives and challenges.

A comparative review of legal and policy literature (scholarly and grey) facilitated empirically grounded analysis of interview data (Gunningham 2020). Data were analysed following Layder’s (1998) adaptive theory method by taking prior theoretical ideas to inform and guide empirical research, and then moving back and forth between empirical induction and theoretical deduction (Scheff 1990) to generate novel theories and conceptual explanations. Interviews were transcribed manually to enable data immersion, and data were iteratively sifted, coded and compared to enable identification of key themes and initial findings (Miles and Huberman 1994), which were then reviewed and refined to become the core research findings.

Research findings comprise four focus areas:(

1. Legal mandate of central banks and financial regulators
2. New ways of ‘thinking and doing’ climate-related financial regulating;
3. Regulatory tools: Disclosure; and
4. Regulatory tools: Beyond disclosure.

This study identified paradoxes in each focus area that central banks and financial regulators must navigate. It presents emergent regulatory phenomena by aggregating and typologising their practices and preferences.

Legal Mandate: Levers and Limit

• Paradox 1: Financial stability could be undermined if central banks act too quickly on green finance; yet financial stability will be undermined if they act too slowly.
• Paradox 2: Due to their mandate, central banks cannot be so proactive as to usurp governments or parliaments; yet they cannot wait until all the legal frameworks are concretised and all the right policy is in place before acting.

Finding: Central banks and financial regulators are responding with a twofold approach:

• Starting with a risk-based protective approach; and
• Moving cautiously into a new 'legitimate promotional approach' that nudges government leadership andpromotes coordination and cooperation to facilitate the transition without driving it.

New ways of ‘Thinking and Doing’ Climate-Related Financial Regulating

• Paradox 3: The climate crisis heralds unprecedented and dynamic impacts that require experimentation and iterative regulating; yet the urgency requires immediate and decisive action.

Finding: Regulators are embracing experimentalism and cooperation, evidenced by the emergence of 'regulator ecosystems for sustainable finance' (central banks, financial market regulators, government agencies). Such regulator ecosystems will be key to countering the complexity of systems change and ensuring timely action along the full value chain which undergirds regulatory goals for net zero.

Regulatory Tools: Disclosure

• Paradox 4: Climate-related disclosure is key to the transition; yet myopic focus on it will undermine the transition

Finding:

• Climate-related disclosure is a necessary first step for other regulatory activities,
• But it cannot deliver on its own due to inherent shortcomings in disclosure-related practices and logistics,
• So focus must stay firmly on the normative objectives of reporting; disclosure must not be conflated with aregulatory outcome.

Regulatory Tools: Beyond Disclosure

Finding: A multi-instrumental approach by central banks and financial regulators, comprising complementary quantitative and qualitative tools, is necessary and emerging. This includes:

• Mandatory disclosures that include transition plans, double materiality, and supply chain emissions;
• Taxonomy and anti-greenwashing regulations;
• Risk-based measures with cultural effects such as personal liability of directors; fit and proper persontesting; capital requirements and weights;
• Qualitative instruments such as professional culture and conduct supervision; staff training and certification;
• Further research regarding optimal combinations of tools in light of local context and legal mandate.