The prospect of Brexit threatens to cause serious damage to the UK’s financial services industry.
Paris, Frankfurt, Dublin and even Luxembourg are circling like hungry jackals waiting to pick off the weakest members of the herd.
London will need to develop a distinctive and competitive offer to investors. I believe we can find it, in part, in the expanding world of green finance, steering investment into the low-carbon and resource-efficient technologies and infrastructure increasingly demanded by world markets.
Britain already has real strengths in the green finance sector, with the achievements of the Green Investment Bank (before its needless privatisation), a track record in issuing green bonds and finance for renewable energy, and the City of London’s Green Finance Initiative.
Mark Carney has highlighted the need to disclose climate risks and the probable over-valuation of many companies reliant on fossil fuel reserves which – in reality – they will never be able to exploit if the world is to have any chance of achieving the targets set by the Paris Agreement.
Yet policy mismanagement by Conservative ministers has resulted in the UK becoming a less attractive destination for green investment. EY’s Renewable Energy Country Attractiveness Index, for example, saw the UK fall from fourth place in 2013 to tenth in 2017.
While many aspects of last month’s Clean Growth Strategy were welcome, its failures in addressing energy efficiency, supporting onshore wind (the cheapest source of renewable power) and demonstrating how the government’s own carbon targets can be met continue to undermine investors’ confidence in the government’s future intentions.
The announcement of the Green Finance Task Force is clearly welcome, although the fact that it only plans to meet three times and then disbands after six months is disappointing.
We need to develop a comprehensive strategy for green finance, featuring two key elements.
First, a programme of innovation, restructuring markets through enhanced flows of information.
I wholly endorse the conclusions of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures. Climate risk disclosure offers the opportunity to generate comparable and comprehensive information, enabling investors to make informed decisions and reducing systemic risks to financial systems.
Furthermore, the fact that some elements of the Taskforce’s recommendations are already included in UK legislation gives us a head start. We should follow France’s lead, in its Energy Transition Law, in ensuring disclosure applies both to companies and to flows of finance, including requiring investors to explain how their policies align with the UK carbon budgets set under the Climate Change Act.
We should also support the expansion of markets for green bonds and consider a range of incentives to encourage investors to hold green securities.
Second, we need to increase demand for green finance.
In September, Baroness Lynne Featherstone and I published a report demonstrating how the UK can meet the aim of zero net greenhouse gas emissions by 2050 – which, unlike the government’s current target, is consistent with the UK’s commitments under the Paris Agreement.
Such a policy framework would both increase the rate of deployment of green infrastructure, and provide investors with the confidence they need to commit to long term investments in green technology.
This would reduce uncertainty and policy risk and, accordingly, the cost of finance.
There is a strong case for replacing the Green Investment Bank with a British Housing and Infrastructure Investment Bank, with a broader remit and a larger initial capitalisation but with similar low-carbon aims, and a similar role of accepting the first slice of risk of any given investment in infrastructure, thus unlocking supplies of capital from institutional investors looking for low-risk returns.
This new Bank would also help to fill the gap left by the probable withdrawal of the European Investment Bank, a major investor in UK energy infrastructure, in the event of Brexit.
These are necessary first steps, but there is much more that could be done. Insurers should be encouraged to offer energy efficiency insurance, mortgage finance needs to be rethought – possibly along the lines of Barclays’ recent €500m green bond to refinance mortgages on residential properties based on their carbon intensity – and we must explore the green potential of alternative finance, building on the UK’s leadership in areas such as peer-to-peer lending.
Such a green finance strategy is essential, not just to meet our climate obligations, but to ensure the City can survive and prosper in a future marked with substantial uncertainty.