Inaugural Mansion House speech

The Chancellor promises to reinvigorate our capital markets by unlocking private investment through our pension funds and to move to a more dynamic and competitive approach to regulation. Alongside this, we have confirmation that ESG ratings providers will be regulated, and the long-awaited consultation on a UK Green Taxonomy is launched.

Capital markets

In her maiden Mansion House speech, Rachel Reeves confirmed that a new growth-focused remit letter had been sent to the Financial Conduct Authority (and to other financial regulators), and that reform of the capital markets will include legislation to establish PISCES, the new intermittent trading venue, by May 2025 to support companies to scale and grow. The government are also supporting innovation in the financial services sector by launching a pilot to deliver a Digital Gilt Instruments referred to as 'DIGIT'.

The Chancellor also referenced the interim report of the Pensions Investment Review, which has published an analysis of the trends in UK pension fund asset allocations over time illustrating the recent sharp decline in pension investment in UK listed equities:

workplace Defined Contribution (DC) assets invested in the UK, ‘domestic exposure’ has fallen the most for listed equities, which are down from 40% of investments being UK-based in 2012 to 8% in 2023, as schemes have pursued global mandates which have become cheaper over time.
private-sector DB investment in UK listed equities is estimated at under 2% in 2023, down from 32% in 2006, having mostly been replaced by investment in gilts due to de-risking strategies. Whereas allocations to UK-based unquoted equities are low (3%) but rising.

This review states that pension fund investment in domestic markets has the potential to support stronger economic growth and capital market development. Pension fund investment in capital markets has the potential to make markets deeper, more liquid, and less volatile, with increasing market capitalisations leading to higher volume and improved valuations, creating a positive feedback loop. Pension funds also tend to be buy-and-hold investors and can therefore be an additional source of patient capital. Deeper, more liquid public markets may also have reciprocal, positive spillover effects to private markets by providing a domestic ‘exit channel’ for private firms, with increased IPO activity and lower costs of capital. Pension funds’ long-term investment horizons can also help to increase market liquidity and reduce volatility through potential countercyclical effects, predictable liquidity needs and relatively low leverage.

The Review suggests a major consolidation of the UK pension system to unlock new investment. However, so far the Government seem to be focused on increasing pension fund investment in private markets (and infrastructure), rather than UK listed equities. This will be facilitated by the government’s reformed ‘Office for Investment’, which will have a proactive approach to working with investors to ensure capital is directed to the UK’s biggest growth opportunities.

In the Spring, the Government will publish the first ever 'Financial Services Growth and Competitiveness Strategy', which will focus on five priority growth opportunities including sustainable finance, asset management and London's capital markets. Citing the opportunity to seize more global business, and to increase retail participation in the market to the benefit of both investors and the wider economy, the government has published a call for evidence to inform development of the Financial Services Growth & Competitiveness Strategy closing on 10^th Dec, which asks about barriers to growth of the markets or to retail participation, and how to encourage consumers to invest in capital markets to a longer-term time horizon.

Sustainability agenda, including ESG Ratings and Green Taxonomy

Alongside last night's Mansion House speech, the government have published a consultation response and draft legislation to bring ESG ratings providers into regulation. There was overwhelming support for their regulation, although the overall process of designing, developing and commencing the ESG ratings regulatory regime is expected to take around four years. It will be achieved by extending the FCA's regulatory perimeter to capture the activity of providing ESG ratings, including ratings produced in the UK and ratings produced overseas which are made available to UK users, so that the FCA can require affected ESG ratings providers to become FCA authorised and to meet certain conditions (which the FCA will consult on, along with draft rules and guidance for ESG ratings providers). The FCA will:

take account of international policy initiatives, in particular the recommendations provided by IOSCO,
consider the extent to which existing authorised firms could be exempted, whilst ensuring a level playing field between all firms producing ESG ratings,
consider whether ESG ratings providers applying for UK authorisation (depending on size, significance, or market impact in the UK) should be expected to be incorporated in the UK, and
the extent to which there should be a UK passport or overseas regime for ratings issued overseas.

The long-awaited consultation on the UK Green Taxonomy has also finally been published (closing 6 February 2025), which would form part of a wider sustainable finance framework. This asks questions about the value, design, scope (sectors), objectives (and key metrics), use cases and benefits of a UK Green Taxonomy, the practical challenges, whether a UK Taxonomy would be a useful tool in supporting the allocation of transition finance alongside transition planning, and the key design features, criteria and characteristics that would maximise the potential of a UK Taxonomy considering usability, both for investors and those seeking investment (for instance, the level of detail in the criteria and the type of threshold - e.g. quantitative, qualitative, legislative). It also asks for views on how to incorporate a 'Do No Significant Harm' (DNSH) principle, and how this could work.

Other announcements related to 'delivering the foundations of a world-leading sustainable finance framework to drive investment in the green transition and deliver economic growth', included:

the intention to consult on streamlined sustainability disclosures for 'economically significant companies' (very likely to include listed companies),
consulting in H1 2025 on how best to take forward the manifesto commitment on transition plans, and
launching a set of integrity principles for voluntary carbon and nature markets at COP29, ahead of a consultation in 2025.

Published 15 November, 2024