Britain’s new target to reach net zero greenhouse gas emissions is 2050. Mohamed Dabo looks at the green finance strategy of the first major economy to set such a target into law
Climate change and the degradation of the world’s natural capital assets are defining issues of our time. The world is getting warmer, sea levels are rising, pollution is costing lives and biodiversity is collapsing.
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The recent Intergovernmental Science and Policy Platform on Biodiversity and Ecosystems Services (IPBES) Global Assessment and the Intergovernmental Panel on Climate Change (IPCC) Special Report on 1.5°C are both timely reminders of the urgency of action.
What follows is the government’s own rendition of its green finance strategy:
We are introducing a landmark Environment Bill, which will place environmental ambition and accountability at the very heart of government and put our flagship 25 Year Environment Plan into law.
We need to shift to a world where we are at net zero emissions and deliver our commitment that this will be the first generation in our history to leave the environment in a better condition than we found it.
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By GlobalDataThis means systemic changes across all parts of our economy; and in particular delivering a global financial system that supports and enables these outcomes. This strategy is our first step towards delivering that vision.
The global shift towards cleaner, resilient growth
The reallocation of tens of trillions of dollars of capital towards green investment offers the potential to reshape cities, energy systems and land use around the world.
The nature of this investment over the coming decades will determine the future of our climate, the natural world and the resilience of our communities. It also presents a substantial commercial opportunity for the UK financial sector.
As recently noted by the International Energy Agency, the UK has led the way in the transition to a low carbon economy.
Since 1990, we have grown our economy by two-thirds while reducing our carbon emissions by over 40%, the strongest performance of any G7 country.
There are already almost 400,000 jobs in low-carbon businesses and their supply chains across the country, and clean growth sits at the heart of the UK’s Industrial Strategy as one of four Grand Challenges.
The government has a proud pedigree of climate and environmental leadership, such as the UK Climate Change Act, Clean Growth Strategy, 25 Year Environment Plan and the National Adaptation Programme, and now this Green Finance Strategy.
As we move towards a net zero economy, finance will play a crucial role in enabling changes to our homes, how we travel and our agriculture.
The UK has the opportunity to lead the way in clean, climate resilient growth that protects our natural environment.
And here too, the UK has led the way. The Green Finance Taskforce report, published in March 2018, was a landmark in the development of UK green finance.
The Bank of England has played a pivotal role, both domestically and internationally, to ensure climate change is considered a mainstream and far-reaching financial risk, as well as one that requires action today.
UK firms have also played a leading role at home and abroad, with banks, insurers, asset managers and pension funds in the vanguard of green financial innovation, supported by a rich ecosystem of civil society, business, academia and technical experts.
Cementing UK leadership
Leadership on green finance will enable the UK to maximise the economic opportunities of the global and domestic shifts to clean and resilient growth. Progress is undoubtedly being made. Some 70% of banks in the UK now consider climate change as a financial risk, and green financial products are increasingly becoming more widespread in the market.
But much more needs to be done. Only 10% of banks in the UK are taking a long-term strategic approach to managing the financial risks from climate change, and the total global and domestic value of outstanding green bonds is only a fraction of the financing required.
And more needs to be done to ensure the physical and transition risks from climate change are fully taken into account so as not to undermine the future resilience of individual investments and the wider economy.
The taskforce is a leading example of the cross-sector collaboration that the strategy seeks to advance.
To this end the government has already taken action to implement its recommendations ahead of the publication of this strategy, such as announcing the establishment of the Green Finance Institute (GFI).
As the UK’s principal forum for collaboration between the public and private sector with respect to green finance, the GFI will play an integral role in supporting delivery of our Green Finance Strategy and driving the mainstreaming of green finance in the UK and abroad.
This strategy is an ambitious package, bringing together work from across the government, regulators and the private sector. We will be coordinating closely with our international partners to achieve our objectives.
There is increasing international recognition of the need to integrate climate and environmental factors into mainstream financial decision-making.
One of the most influential initiatives to emerge is the Financial Stability Board’s private sector Task Force on Climate-related Financial Disclosures (TCFD), supported by Mark Carney and chaired by Michael Bloomberg.
This has been endorsed by institutions representing $118trn of assets globally. An increasingly large proportion of the private sector is now beginning to implement the TCFD recommendations and in September 2017, the UK became one of the first countries to formally endorse them.
Alongside the private sector, central banks and supervisors are also taking action to address the far-reaching financial risks associated with climate change. World leaders also took notice in 2016 and welcomed the work of the G20’s Green Finance Study Group7, co-chaired by the UK and China.
Building on the UK’s existing leadership, the first chapter of this strategy sets out the actions we are taking to ensure climate and environmental factors are recognised and acted upon as a matter of strategic and financial imperative.
Our strategy focuses on four elements:
- Establishing a shared understanding;
- Clarifying roles and responsibilities;
- Fostering transparency and embedding a long-term approach, and
- Building robust and consistent green financial market frameworks.
The ambitious actions we are taking include:
- The government setting out its expectation for all listed companies and large asset owners to disclose in line with the TCFD recommendations by 2022;
- Establishing a joint taskforce with UK regulators, chaired by government, which will examine the most effective way to approach disclosure, including exploring the appropriateness of mandatory reporting;
- Supporting quality disclosures through data and guidance, such as that being prepared for occupational pensions schemes by a new government and regulator-sponsored working group;
- Clarifying responsibilities for the Prudential Regulation Authority, the Financial Conduct Authority (FCA) and the Financial Policy Committee to have regard to the Paris Agreement when carrying out their duties, and including climate-related financial issues in government’s allocation letter to The Pensions Regulator;
- Working with industry and the British Standards Institution to develop a set of Sustainable Finance Standards, and chairing a new International Organisation for Standardisation (ISO) Technical Committee on Sustainable Finance;
- Working with the FCA and Bank of England, including through the Fair and Effective Markets Review, to consider steps that can be taken to understand the potential or actual barriers to the growth and effectiveness of green finance markets, and
- Working with international partners to catalyse market-led action on enhancing nature-related financial disclosures.
This will complement the recently announced global review of the economics of biodiversity by Professor Sir Partha Dasgupta.
Our ambition for bringing about the systemic change required will not happen overnight, and our strategy for greening the UK’s financial system will evolve. We will continue to explore actions government can take to green the UK’s financial system and will publish an interim report by the end of 2020.
The report will examine progress on the implementation of the TCFD recommendations.
Building on the UK’s international experience, including the Bank of England’s involvement in the Central Banks’ and Supervisors’ Network for Greening the Financial System (NGFS), we will also use our influence to strive towards the greening of the global financial system.
- Playing an active role as a founding member of the Coalition of Finance Ministers for Climate Action;
- Co-leading, alongside Egypt, an adaptation and resilience strand at the UN Climate Action Summit;
- Partnering with the private sector to drive the phase-out of unabated coal power and develop sustainable supply chains;
- Exploring initiatives to accelerate the alignment of financial flows to the Paris Agreement’s objectives, and
- Aligning the UK’s Official Development Assistance (ODA) with the Paris Agreement.
As we move forward with this ambitious domestic and international agenda, the government will call upon the GFI to provide ongoing representation, insight and guidance from the financial sector to inform our strategy.
And while the focus of this Green Finance Strategy is on private financial flows, we recognise that the financial risks and opportunities of climate change are relevant for the public sector as well as industry.
That is why:
- The government will consider the financial risk exposure relating to climate change and the low carbon transition as part of the 2020 Managing Fiscal Risks report; and
- CDC and UK Export Finance will make climate-related financial disclosures in their accounts in line with the TCFD recommendations as soon as practicable, following the close of the 2020-21 financial year.
These help provide the longterm certainty we know investors need and the foundation on which we are financing our clean growth ambitions.
Since 2010, there has been more than £92bn invested in clean energy in the UK. We have also made specific interventions to accelerate green financing, for example, through the Green Investment Bank (GIB).
Working alongside over 100 private sector and third-party investment partners, GIB committed £3.4bn of its own capital to 100 projects with a total value of over £12bn.
And the transition to a clean and resilient economy will hugely expand the opportunity for green finance investments – from homes to power generation to our natural environment.
Our strategy for mobilising green investment will build on our excellent track record and has four primary elements:
- Establishing robust, long-term policy frameworks;
- Improving access to finance for green investment;
- Addressing market barriers and building capability; and
- Developing innovative approaches and new ways of working.
The ambitious actions the government is taking within this include:
- Announcing a package of measures to mobilise green finance for home energy efficiency;
- Using the forthcoming Environment Bill to place the 25 Year Environment Plan on a statutory footing;
- Determining the steps necessary for landlords and businesses to understand and potentially disclose operational energy use;
- Strengthening engagement with local actors to accelerate green finance across the country;
- Working with the GFI to address market barriers to greater and more rapid deployment of green capital into priority sectors, and
- The National Infrastructure Commission examining the resilience of the UK’s infrastructure to consider what action Government should take to ensure it is resilient to future changes, such as climate change.
The government is also mobilising green investments internationally:
- Since 2011, our International Climate Finance has mobilised £910m of private finance and £3.3bn of public finance in key sectors including forestry and land use, industrial decarbonisation, sustainable infrastructure and energy transitions11;
- We are working with governments such as China, Brazil and Mexico to develop green finance markets, through the UK Partnering for Accelerated Climate Transitions (UK PACT) programme and the Prosperity Fund.
The UK has a strong record in green financial innovation ranging from Yieldcos, green bonds and environmental, social and governance (ESG) exchange-traded funds listed on the London Stock Exchange Group to green mortgages and retail investment platforms.
To ensure the UK continues to capture the commercial opportunities arising from the ‘greening of finance’ and the ‘financing of green’, our strategy aims to:
- Consolidate the UK’s position as a global hub for green finance;
- Position the UK at the forefront of green financial innovation and data and analytics, and
- Build skills and capabilities on green finance.
The actions the government is taking within this include:
- Launching the GFI to strengthen public and private sector collaboration and cement the UK’s position as a global hub for green finance;
- Enhancing climate-related and environmental data and analytics and promoting dialogue with regulators and industry to support innovation;
- Promoting the adoption and mainstreaming of green finance products and services, including through the launch of a Green Home Finance Fund making £5m of funding available to the private sector to pilot products such as green mortgages; and
- Engaging with professional bodies to drive green finance competencies – notably through the launch of a Green Finance Education Charter – upskilling the UK’s diplomatic networks and building capacity on green finance across the public sector.
We will also explore actions government can take to ensure a just transition and linkages with related policy areas, such as impact investing.
We will formally review progress against the aims and objectives of this strategy in 2022.
