Financial institutions must set out how their investments align with the UK’s environmental goals
To effect real change, investors, lenders and insurers must deliver transition plans that move environment-related risk reporting to a sustainable footing
According to their respective stereotypes, finance and the environment do not have much in common. As someone who, earlier in my career, worked as both chief executive of the British Bankers’ Association and environment editor of The Observer, I can confirm that historically there has not been much overlap between the two worlds.
Yet in recent years the traditional silos have broken down and the green finance agenda has boomed, as policymakers, regulators, and financiers have started to realise that climate change and biodiversity loss in fact pose significant financial risks to investments, and that financing technological solutions to environmental challenges is a major commercial opportunity.
Environmental campaigners have also begun to understand the role that finance can play in enabling and accelerating the transition to net zero.
It’s about time too. Since the Enlightenment, financial services have helped people take risks on developing new technologies and on building a better world. There is no more important challenge than climate change to which the problem-solving powers of the finance sector can be applied.
We can design our own system of financial regulation that delivers better environmental outcomes
ESG (environmental, social and corporate governance) investing is often considered synonymous with green finance due to it being one of the early methods of making finance more sustainable. Though it’s an imperfect method of evaluating a given company’s green credentials due to a lack of standardisation, the number of ESG-related standards has grown substantially over the last two decades. And following the recent Pension Schemes Act, it is now a requirement for pension scheme trustees to consider ESG factors when making investments.
The practice of disclosing to investors climate-related financial risks has also rapidly moved from a fringe activity to the mainstream. Last November, Rishi Sunak announced this would become mandatory for all listed companies and large asset owners, making the UK the first country to do so.
Climate-related financial risks can take two main forms: the physical risks to assets from rising sea levels, water scarcity, hotter summers, and so on; and the transition risks from climate policies, and increasingly the more favourable economics of clean technologies, leaving fossil fuel assets stranded.
There’s also an increasing focus on the risks to investments from the decline in biodiversity, which is very welcome.
But while disclosures provide an important source of information to potential investors, they are not in themselves a guarantee that an investment will be beneficial, or at least not harmful, to the environment.
That’s why I’d like to see pension schemes and financial institutions more generally produce ‘transition plans’, setting out how their investments align with the UK’s environmental goals.
These could be voted on by shareholders to ensure transparency, accountability, and ambition. Environmental risks can easily be hedged, whereas the urgency of the environmental challenges we face requires underlying economic activity to change rapidly.
The UK is well placed to develop these new approaches. Outside the EU, we can design our own system of financial regulation that delivers better environmental outcomes but in a way that is less cumbersome.
By way of example, the UK is developing its own version of the EU’s ‘green taxonomy’ – a new system to classify how green different investments are. In doing so, we have the chance to design a system that is based on science, rather than the lobbying power of fossil fuels, and which follows a principles-based rather than rules-based approach to regulation.
The Treasury has also announced it is launching “green bonds” to raise money for environmental projects, which should be of interest to both retail and institutional investors.
We now need to rapidly promote these domestic steps on the international stage. Huge credit is due to the Chancellor for securing agreement at the G7 to mandate climate-related financial disclosures. We should use the opportunity of hosting COP26 to push other countries to green their financial sectors too.
Anthony Browne is the Conservative MP for South Cambridgeshire and chair of the APPG on the Environment.
Get the inside track on what MPs and Peers are talking about. Sign up to The House's morning email for the latest insight and reaction from Parliamentarians, policy-makers and organisations.