Green Finance: Harnessing the power of markets
SIR ROGER GIFFORD, CHAIR, GREEN FINANCE INITIATIVE & ALDERMAN, CITY OF LONDON, CORDWAINER WARD.
The public’s demand for action on climate change can be measured in many ways.
You are hard pressed to find someone who has seen Sir David Attenborough’s immensely popular ‘Blue Planet’ documentary series and is not moved by the vivid portrayal of the destruction being wrought upon our natural environment by greenhouse gas emissions and plastics.
Protests also give pause for thought. Earlier this year, schoolchildren from across the country marched on the streets, highlighting the deadly threat our scientists say is posed by rising global temperatures, and demanding the UK government steps up its effort to tackle the effects of climate stress. More recently, Extinction Rebellion, the activist group campaigning for action on climate change, seized the news agenda through a separate series of protests, demanding the government declare a climate emergency and commit to reducing greenhouse gas emissions to net zero by 2025. So effective were the protests, that they briefly toppled Brexit from the front pages of the press.
So, it is good to note that successive UK governments have edged the country closer to sustainable energy consumption. The 2008 Climate Change Act was a world-first at establishing a credible and enforceable emissions reduction pathway. Emissions in the UK have fallen 38% since 1990, an impressive development. And just as noteworthy is that, at the time of writing, the UK has gone 21 days (and counting) without using coal as an energy resource.
While it is clear that climate change is a concern for many reasons, and requires immediate action, assessing the associated economic risk is necessarily complex – which is one reason it has taken a long time for a consensus to form around the right way forward. There is also little doubt that, via taxation and fiscal policy, governments have the most direct means of reducing CO2 emissions. But there is a fundamental problem which has been termed the tragedy of the commons or, more recently, the horizon: the inescapable truth that no market player today needs to take responsibility for shared negative consequences far off in the future. And yet as we are increasingly coming to understand, perhaps the shared negative consequences from climate change are not yet so far away. The market is starting to recognise, and to internalise, climate risk.
From the development of new environmental forms of energy to the finance required to fulfil its production and application, the innovative capacity of markets has done much to drive the proliferation and prominence of sustainable energy. It is, however, clearly not yet enough. Research by NASA shows that the current warming trend has a probability greater than 95% of stemming from human activity since the 20th century. More alarming still, the warming trend is proceeding at a rate that is unprecedented over decades to millennia. We must all, therefore, do our bit – and more.
So, the question for the financial services sector in the UK and beyond is this: what more can markets do?
First, an appreciation of the critical role that the financial services – and the private sector more generally – has in successfully combating climate change must be at the heart of all relevant initiatives. Following the 2015 Paris Climate Summit, this need to place markets at the heart of tackling climate change drove the City of London Corporation and the UK Government to establish the Green Finance Initiative some 3 years ago. By bringing together international expertise from across the financial and professional sector, the Initiative has provided market leadership in green finance, enabling advocacy for specific regulatory and policy proposals that enhance the global green finance sector.
The UK is well-placed to coordinate such efforts, particularly with London being one of the world’s principal financial centres. Through the world-first Green Investment Bank, the UK wrote the book on financing green. And with firms like Abundance Investment, local green projects are riding the wave of green finance – more than £90 million has been invested using the Abundance platform. This innovative drive is clearly demonstrated by the 38 green companies which have raised $10 billion combined on the London Stock Exchange.
Second, the financial services sector must work in a concerted manner towards the aim of establishing a net zero emission economy. Doing so requires coordination. The Green Finance Taskforce published a report in March 2018 which provides a clear path forward. After working with 140 organisations across the finance and energy sector, the Taskforce made the following recommendations to the UK government:
- Boost investment in innovative clean technologies
- Drive demand and supply for green lending products
- Set up ‘Clean Growth Regeneration Zones’
- Improve climate risk management with advanced data
- Improve corporate disclosure and enhance pension fund investment requirements
- Build a green and resilient infrastructure pipeline
Third, we must assemble the necessary resources and construct the necessary regulation to enable an environmentally sustainable UK economy. On 2nd July 2019, the Green Finance Institute will be launched. The Institute – one of the core recommendations of the Taskforce – will be the one-stop-shop for world-leading climate science and capital, dedicated to the further embedding of green finance. The Institute will mobilise green finance missions to accelerate sector-specific transitions to a low-carbon future. Indeed, these missions will draw on actors across the green finance landscape, from government to finance and industry. The Institute will ensure London can use its leadership in green finance, and influence international dialogue through policy, innovation and by creating more awareness around the issues that underpin green finance.
Fourth, while driving change at a local and national level, the financial services sector and UK government must work with international partners. One such partnership is the UK-China Green Finance Centre, which will enhance cooperation between UK GFI and China’s Green Finance Committee. The Centre opens a host of new possibilities including improved access to data for green investors in both countries, cross-border flow of capital including for Belt and Road projects, and more robust UK-China policy and leadership on green finance. Equally, there are opportunities with other international centres to continue to expedite green finance globally and accelerate activity in the green finance sector.
The sharing of best practice, learning from one another’s achievements and coordination on regulatory matters is of mutual benefit. The UK has a lot to offer. Green bonds listed on the London Stock Exchange, which has over 100 green bonds from 16 different countries, have raised in excess of $26 billion of funding to date. This is a good start, though efforts must be strengthened if we are to raise $90 trillion by 2030, the estimated sum required to achieve global sustainable development and climate objectives.
Harnessing the power of the markets means coordination with government to generate consensus, widen access to finance, and promote the free exchange of ideas, best practice and expertise – in the financial sector and beyond.
And that’s what we’re here to do.
Read the Sustainable Finance Report here.