UK aims to pull away with Green Finance Strategy but is still in the slow lane

Despite the agony of Brexit, the UK has been making impressive strides in turning away from climate change. The government's new Green Finance Strategy is the latest. It goes in the right direction, but unfortunately is less a leap, more a shuffle.

  • By Jon Hay
  • 02 Jul 2019
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The UK’s publication on Tuesday of its Green Finance Strategy should be commended. It has taken some time, since the government set up its Green Finance Taskforce in 2016 to investigate this area — but it is important, indeed essential, that government has now unambiguously taken responsibility for driving progress.

Much more cheering than this is a wider change. The UK government, like others, is now responding to the challenge of climate change by moving towards long term planning for the economy. This does not mean boom and bust are a thing of the past, or that governments will no longer be tempted to put short-term urges first.

But the fact that the UK now has a long-term Clean Growth Strategy, a 25 Year Environment Plan, a National Adaptation Plan, and has enshrined in the Climate Change Act the commitment to get to net zero carbon emissions by 2050 means that at last, policymakers are thinking beyond the electoral cycle about how to move the economy in a consistent way towards a sustainable model. This is hugely encouraging.

The Green Finance Strategy is another piece of the puzzle. Its structure is clear, and all its themes are right. It has three parts: Greening Finance, Financing Green (yes, they are different) and Capturing the Opportunity.

Greening Finance is about ensuring environmental risks and opportunities are integrated into mainstream financial decision making, and that markets for green financial products are robust. Financing Green means accelerating finance to deliver the UK’s carbon and clean growth targets, as well as international objectives. Capturing the Opportunity is about ensuring the UK finance sector is ahead of the pack.

The Green Finance Strategy will be reviewed and upgraded over time. That is vital. Because at the moment, although it is pointing in the right direction, it does not have nearly enough oomph to be the game changing reform we urgently need.

Many worthy measures are proposed, but most of them mean more talk — albeit better quality talk — rather than immediate action.

At the City of London’s third Green Finance Summit on Tuesday, where the Strategy and the UK’s new Green Finance Institute were launched, the usual disconnect was visible. All the speakers, from government and the private sector, emphasised the vital need to transition to a sustainable economy. Several said this would involve a complete and unprecedented transformation of society.

All are aware of the Intergovernmental Panel on Climate Change’s report last year, which laid out the horrifying effects of global warming going beyond 1.5C — a disaster that seems virtually inevitable, since global emissions need to fall by at least 45% in the next 12 years, yet are still rising.

Yet very few of those making investment and lending decisions have adjusted their portfolios to anything like the extent required to shift the economy fast enough.

JP Morgan sponsored the event, and Matthew Arnold, its global head of sustainable finance, was asked why the bank was still criticised for financing fossil fuels. A report in March found that the US firm had provided $195bn of financing to fossil fuels since the Paris Agreement was signed, more than any other bank. The top 33 had provided $1.9tr between them — an average of over $600bn a year.

Arnold was not fazed — he said the bank was “super-big”, had cut coal mine financing to less than $1bn a year, and reduced the carbon intensity of its power portfolio by 30%. It was also the biggest green bank, with about $35bn a year of financing.

On the same panel was Steve Waygood, chief responsible investment officer at Aviva Investors and one of the investment industry’s thought leaders on sustainability, who has helped design both EU and UK policy. Using an International Energy Agency estimate of $1tr of investment a year to achieve zero carbon, Waygood said that was the equivalent of four times the post-war Marshall Plan and Apollo space programme combined.

If that kind of investment was needed in the private sector, you would expect the finance director to have a plan on how to raise the money, Waygood argued. But “look at the world financial system — there is no finance director. The UN, for all its strengths, isn’t yet convening the Marshall Plan for the planet.”

Yet the sum required is not huge, compared with the $300tr Waygood quoted for the total value of world capital markets.

Aviva, with £340bn of assets under management (perhaps 0.14% of the world total), has been putting £500m a year into new green infrastructure — about a third of its share of the required $1tr a year.

Thus even the most sophisticated financial institutions, with the best chance of understanding the issues, and which ought to be — perhaps are — leading the way, are still doing only a fraction of what they can see is needed to achieve the financial and economic transition to sustainability.

Either they do not want to change fast enough, or there are barriers stopping them. Either way, the Green Finance Strategy ought to be jolting the system into action.

Instead, the headline announcement in the Strategy is that the government will apply moral suasion to ask all listed companies and large asset owners to report in line with the Task Force on Climate-Related Financial Disclosures by 2022. The TCFD is a useful and necessary initiative, but it falls far short of grabbing the Old Economy by the arm and frogmarching it to the exit.

The TCFD asks all companies to publish their strategies for dealing with climate change, to help investors move capital away from climate risk and towards opportunities. But will a self-reported assessment of how climate will affect, say, BP, make all that much difference to investors? It is blindingly obvious that, at least for now, financing oil companies is funding climate change. If investors want to stop doing that, they can do so now.

As Mary Robinson, former president of Ireland and UN climate change envoy, said at the Summit: “we need to get out of coal, first of all, but also oil and gas” — adding “we’ve got to keep faith with the science”.

It is still taken as gospel that gas is better than coal, even though evidence is mounting that methane leaks take away much or all of the benefit.

There are reforms to the financial sector that could help. Waygood mentioned reforming Solvency II to encourage insurance companies to invest in infrastructure instead of corporate bonds and shares. An enlightened means of getting savers more connected with the use of their money could unleash a wave of capital for socially useful ends. Above all, clear, long-term national financing plans for the transition would show the private sector where to put its money.

But for the moment, the UK government in its Green Finance Strategy is tiptoeing around the issue with proposals to establish standards and improve disclosures. It’s all good, but may in its effects be little better than prevaricating.

If the finance industry will not force the transition on its own, and government is not going to force the finance industry, it is time for the people to force both of them. As Robinson said: “Get angry and get active — get angry with those with responsibility, who aren’t taking their responsibility — industry, business should be doing more.”

  • By Jon Hay
  • 02 Jul 2019

Global Green Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 7,598.35 54 5.81%
2 BNP Paribas 7,260.25 45 5.56%
3 Citi 6,686.10 41 5.12%
4 Bank of America Merrill Lynch 6,647.97 45 5.09%
5 Credit Agricole CIB 6,505.58 44 4.98%