The interests of people with money to invest and those who need investment are not always well-aligned. Green finance is designed to guide funding towards climate change solutions and provide confidence that investments are not vulnerable to global warming impacts. Jon Herbert reports.

Investors, including banks, pension funds and others with governance responsibilities for customer stakeholders, increasingly want to know that the money they control has good sustainable climate change credentials with no potential to become a future hostage to environmental misfortune.

In practice, there is a growing appetite to finance urgently needed climate-related infrastructure such as renewable energy schemes, plus low-carbon and low-waste house-building initiatives and business projects.

Developers meanwhile are keen to secure funding for ventures that they can prove are not only profitable but also green and in line with the wider high-priority policy initiatives now proposed to meet, mitigate against and create resilience in the face of an accelerating climate emergency.

Cash but no will

Small companies are often in a position to explain their green supply chain credentials directly to clients but at a corporate level, where large listed companies are involved, the challenge is complex.

Research from the Intergovernmental Panel on Climate Change (IPCC) suggests that there is no shortage of global finance to drive the low-carbon transition. Rather, there is a “lack of political will” to quantify risks and create the confidence required to direct monies to where they are needed. In response, investors and developers are now being encouraged to improve the long-term allocation of capital.

From a stakeholder perspective, there are two key fears. One is that projects which contain climate-related risks may be less resilient in the transition to a lower-carbon economy – with lower returns. The second is a compounding effect on longer-term returns if existing valuations cannot factor in climate-related risks because of insufficient information. To be certain, long-term investors need data showing how companies are preparing for the lower-carbon economy. For example, how might a ban on plastic packaging hit profits? The corollary is that organisations with this data are likely to have a competitive advantage.

Green Finance Strategy

The question, until recently, has been how to bring together the interests of both parties. In September 2017, the Government asked finance expert and former Mayor of London, Sir Roger Gifford, to chair an independent taskforce. The resulting Green Finance Task Force produced the Accelerating Green Finance report.

One result, following the report, was the launch of the Green Finance Strategy in July, with a specific aim of supporting the UK’s radical net-zero emissions by 2050 policy with well-targeted cash. In fact, ministers want to put clean growth based on green money at the centre of the UK’s Industrial Strategy.

The Government described the introduction of the Green Finance Strategy at the third Green Finance Summit in London in early July as “a comprehensive approach to greening the financial system, mobilising finance for clean and resilient growth, and capturing the resulting opportunities for UK firms”.

The then Energy and Clean Growth Minister, Chris Skidmore, said, “As the first major economy to legislate to reach net-zero emissions by 2050, green finance can play a crucial role in our mission to protect the planet while growing the economy”.

City Minister, John Glen, commented, “The City has a vital role to play in securing a greener future for us all. By investing more in sustainable projects it can not only protect our environment, but also help establish London as the pre-eminent international centre for green finance”.

WSP’s UK Director of Sustainability, David Symons said, “The UK’s financial sector has a great opportunity both to finance the carbon-free economy and also protect the nation’s pensions and savings from the fall out of dangerous climate change”.

However, E3G Sustainable Finance Programme Leader, Kate Levick, added the cautionary note, “But as a total package the Green Finance Strategy does not deliver the transformational step-change that the UK needs to finance action on climate change, and we call on the Treasury to increase its level of ambition”.

What the green strategy is designed to achieve

There is a burgeoning market for green bonds, which act like mortgages for businesses that want to follow environmentally-friendly projects. At the same time, creating confidence is important for investors who might hesitate when faced with the large capital-intensive infrastructure projects and early-stage technology developments now deemed essential for long-term climate change strategies.

By aligning sustainable products, services, technologies and innovations offered by forward-looking companies with clear central policy signals, the aim is to unlock opportunities to put more finance behind the low-carbon transition.

Specifically, the goal – which is currently voluntary, but the Government’s regulators could potentially make mandatory from 2020 – is to improve the workings of the finance sector through formal data disclosures from larger listed business organisations about the environmental consequences of their activities.

Better green decision-making

By improving transparent decision-making and making listed companies concentrate their teams and think more intently about the implications of their proposals, the hope is that the corporate shoulder can be put firmly behind national and international action to decelerate or halt the growing impacts of global warming and climate change.

In addition, the strategy sees the launch of the Green Finance Institute which replaces the Green Task Force in encouraging investments in sustainable businesses. A £5 million Green Home Finance Fund will also help to scale-up finance mechanisms, as an example, for home energy grants, green mortgages and energy-efficiency retrofit projects for dated properties. In parallel, a Green Finance Education Charter will make green finance and climate change issues essential skills and qualifications for financial practitioners.

How we reached this point

As background, the Green Finance Strategy is built on the findings of the Task Force on Climate-related Financial Disclosure (TCFD) led by Michael Bloomberg, the former New York Mayor, and Mark Carney, current Governor of the Bank of England. In its first report in 2017, the TCFD found that:

  • Most companies disclose some climate-related information, usually in sustainability reports

  • But the financial implications of climate change on company activities are often not disclosed

  • Information on resilience under different scenarios - 2°C or lower - is limited

  • Disclosures vary across industries and regions. More non-financial than financial companies reported; financial companies were more likely to show their enterprise risk management processes, included climate-related; European companies reported more

  • Disclosures are often made in multiple reports - financial filings, annual & sustainability reports.

In a second Status Report published in June 2019 covering 2016 to 2018, TCFD is shown to be a powerful tool for increasing communication and filling in knowledge gaps that investors must see. It is now supported by 785 of the world’s largest banks, asset managers and pension funds with estimated assets of $118 trillion. What they now have in common is a keenness for green finance.

Summary

Small companies are often well-positioned to show their green credentials relatively easily to clients and other supply chain members. The relationship between large corporates and major banks, pension funds and others with assets of billions is more complex.

The Green Finance Strategy is designed to make environmental data reporting for listed companies more straightforward so that it is therefore easier to make important investment decisions that could have major implications in terms of both suffering from and reducing the impacts of global warming and climate change.

Last reviewed 28 August 2019