Following the publication of the government’s Green Finance Strategy, Stephen Dawson (financial services sector head), James Wood-Robertson and Nick Iliff (joint infrastructure and energy sector heads) at legal firm Shoosmiths LLP, consider how the government’s 2050 net-zero carbon pledge could undergo change in the future.
The government recognises that meeting the 2050 target will require “unprecedented levels of investment in green and low-carbon technologies, services and infrastructure”.
It is therefore focusing attention on green financing, as it believes the financial service sector has a significant role to play in shaping the UK’s greener future.
The Green Finance Strategy has two key objectives:
- To align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by government action; and
- To strengthen the competitiveness of the UK financial sector.
There are three strategic pillars to the strategy to support these objectives:
- Greening finance, which centres on ensuring climate and environmental factors are integrated into mainstream financial decision making;
- Financing green, where the focus is on accelerating finance for clean and resilient growth and improving access to finance for green investment; and
- Capturing the opportunity, which aims to cement the UK’s position as a global leader for green finance, and ensure the UK is at the forefront of green financial innovation, data and analytics.
Of particular interest to publicly listed companies is the strategy’s expectation that they will disclose climate risk and impact data by 2022, and that such reporting may become mandatory.
The strategy truly shows that everyone has their part to play to address climate change and that while funding green projects is an important building block, the financial services sector has a much bigger role in helping the private and public sectors to deliver on the 2050 targets.
We are already seeing financial institutions recognise climate change as a key financial risk factor in their decision-making processes – perhaps as more of a reaction to significant increases in insured losses resulting from weather disasters over the past decade rather than pre-empting the issue, but there are the beginnings of a more proactive approach by lenders and the regulators alike.
HSBC has made a longer-term commitment to sustainable funding through the launch of its green finance range for businesses, and now we are seeing the regulators speak up about their desire to embed climate change initiatives within the regulatory frameworks through concepts such as mandated climate-related disclosures.
No doubt this is just the beginning, with more rules and guidance to come from the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to drive better behaviours to support the strategy, which is all very encouraging.
However, businesses and financial institutions need to be ready and willing to adapt quickly as the scale of the issue can only mean that any changes will need to be implemented very quickly if 2050 targets are to be achievable.
This strategy also shows that the UK government recognises the importance of putting climate and environmental considerations at the heart of financial decision-making, and the need to encourage and accelerate private investment in clean energy.
The government has introduced some positive initiatives such as the £5m (€5.42m) Green Home Finance Fund, established to help scale green finance mechanisms, including home energy efficiency grants, green mortgages, the Green Finance Education Charter and the expectation for publicly listed companies and asset owners to disclose climate risk and impact data by 2022.
These initiatives deserve support and some praise. There is an overriding concern in the market, echoed by the shadow chancellor in his response to the strategy, that it may be “too little, too late”, and it is not going to bring the scale of investment required to deliver the UK’s commitment to net-zero emissions by 2050.
However, the government needs to follow up this strategy with the right policy framework, including binding targets to push through change, and support mechanisms and reliefs to encourage and underpin investment. In turn, the financial services and energy sectors need to embrace and implement the strategy if the UK and the City of London are to meet their potential to be the global hub for green investment.