Since the government published its landmark Green Finance Strategy in 2019, five British Banks – Barclays, HSBC, NatWest, Lloyds, and Standard Chartered – have, between them, provided $112 billion in fossil fuel financing, according to Rainforest Action Network.
This strategy set out two high level objectives: first, to align private sector financial flows with net zero and, second, to strengthen the competitiveness of the UK financial sector. The government is due to update the strategy this autumn, but clearly a more active approach to shifting private financial flows is needed. Simply put, this means: channelling greater financing towards nature positive and net zero aligned economic activities and limiting the flow of finance towards environmentally damaging ones.
Warm words won’t shift investment
At the Glasgow climate conference last year, Chancellor Rishi Sunak set out the government’s vision for the UK to become the “world’s first net zero financial centre”. Since then, the government has pressed ahead with various green finance policies to improve the transparency of the financial sector. These include: the UK green taxonomy, a classification to define which investments, activities and products can be labelled as ‘green’; mandatory climate related financial reporting; and mandatory net zero transition plans. The latter two will require financial institutions and large listed firms to disclose their climate-related financial information, such as the risks and opportunities, and their net zero transition plans that align with the government’s target.
Whilst these policy initiatives are all welcome, publishing information and relying on investor behaviour alone isn’t going to move the dial. To be effective, these standards must be embedded within a robust regulatory and legal framework to drive accountability and implementation, for example, to make sure firms are moving at the pace required and not just stating warm ambitions.
The strategy update should set out clear roles and expectations for government departments, the Bank of England, and regulators to ensure climate-related financial reporting is credible, trusted and leads to investor change.
Green markets need more help to grow
Green markets aren’t large enough yet for investors to wholly align their portfolios with net zero. So, the government has a critical role in creating and growing them to stimulate private investment.
Public financial institutions, such as the UK Infrastructure Bank (UKIB), are ideal vehicles to develop green markets, providing early stage capital to crowd-in private investment. Building new markets will offer British businesses new opportunities and help keep the UK’s financial sector competitive.
Limited and targeted public funding should be deployed to finance under developed markets, such as around natural capital, ie clean water, natural flood management, and protecting and restoring biodiversity. The Green Finance Institute’s Finance gap for uk nature report estimates that £44 to £97 billion is still needed to support the UK’s nature related goals over the next decade. The Aldersgate Group has reported on the main barriers facing private investment in natural capital assets, such as unreliable and unrecognised revenue streams, small scale projects and siloed expertise.
To overcome these, the government should widen the scope of UKIB’s objectives to include biodiversity loss and the 2030 species abundance target. Some of the bank’s £22 billion can be used to help establish natural capital as a visible sector and make it less financially risky, whilst also acting as an expert partner providing skills and knowledge to local authorities.
We need to map where the funding is going
To prevent the financial sector continuing to fund environmental breakdown, the Green Finance Strategy update should introduce a new means of accurately tracking the UK’s financed emissions. This could be, as E3G has called for, a regular mapping exercise of private and public financial flows, carried out by an independent public body like the Office for Budget Responsibility or the Climate Change Committee (CCC).
Financial flows should be mapped against the UK’s Green Taxonomy and the Paris Agreement’s 1.5oC target to assess whether investments are ‘green’ and how they contribute to net zero overall. The mapping will also help to highlight financing gaps which need targeted support and where unsustainable sectors are being financed.
The Net Zero Strategy estimates that capital investment in net zero aligned activity must grow substantially from £10-15 billion a year to at least £50 to £60 billion a year through the late 2020s and early 2030s. The Green Finance Strategy should be aligned to reflect the speed and scale of this investment need, with a coherent vision for how to finance the transition and the roles the government, regulators, and investors will all need to play to succeed.