How the UK can become a world-leader in green finance
Stephanie Pfeifer, IIGCC CEO
In November 2021, the UK government hosted the biggest international summit ever held on British soil in the form of COP26. Delayed by a year due to the pandemic and subject to high expectations and pressures from civil society, COP26 managed to go further in its achievements and outcomes than many had anticipated – although still not far enough in the eyes of some.
One of the biggest steps forward came from finance. Actors representing over $130 trillion in assets under management and advice committed via a range of net zero alliances – including the Paris Aligned Asset Owners and Net Zero Asset Managers Initiative, which are co-led by IIGCC – to achieve net zero emissions within their respective portfolios.
This was a significant moment, and the path ahead has only become more challenging to navigate in light of the tragic war in Ukraine and resulting energy crisis. Yet these developments make it crucial that work continues in earnest to align the global financial system with the goal of achieving a net zero, energy-secure, and climate resilient world.
Securing the UK’s COP26 legacy
The UK is pushing hard to ensure a legacy from Glasgow as it hands over the reins to Egypt, who host COP27 in November. As well as continued international momentum, this legacy should also shape the UK’s domestic policy, through which – in theory, if not always in practice – a position of global leadership on climate change can be maintained.
As a new Prime Minister takes up the role in Downing Street, one area where the UK could undoubtedly lead the way is through an ambition to be a leading global hub for green finance.
Government recently issued a call for evidence to support the next iteration of its Green Finance Strategy, which seeks to take stock of progress-to-date and make sure that the UK’s financial sector is well-placed to support domestic energy security and climate objectives.
IIGCC strongly supports this ambition and hopes to work closely with the UK government to realise it. As part of IIGCC’s response to the call for evidence, we set out the key characteristics which we believe underpin such a world-leading centre.
Key characteristics of a global hub for green finance
Firstly, all relevant policy and regulatory frameworks should be fully aligned with the ambitions of the Paris Agreement, limiting the global temperature increase to as close to 1.5° as possible, based firmly on the latest climate science and underpinned by robust methodologies.
Such clear signals into the real economy will be vital if the transition to net zero is to be effectively supported by the private finance sector, with policymakers implementing sector-specific pathways on the basis of credible scenarios (such as the international Energy Agency net zero scenario), supported by clear interim targets and milestones.
In practice this would entail, for example, ensuring the UK’s green taxonomy excludes any economic activities that are incompatible with net zero, and a robust carbon-price mechanism that accounts for negative externalities by making harmful investments more expensive.
Secondly, investors need greater transparency on how the companies they invest in are identifying and managing climate-related risks and opportunities, and transitioning their strategies and business models.
This means ensuring the UK’s sustainability disclosure framework is fit for purpose, covering a broad range of companies across all economic sectors, and providing investors with consistent, comparable data to inform investment decision-making.
This will support investors in their stewardship activities – for example, via Climate Action 100+.
Thirdly, a world-leading green finance centre must promote interoperability of regulatory frameworks. Ideally, governments like the UK will work closely with bodies such as the International Sustainability Standards Board (ISSB) and European Union, who are developing widely applicable climate standards to support a common baseline for assessing investees across multiple jurisdictions while allowing others, such as the UK, to go further.
Finally, to be a true world-leader, it will also be very important for the UK to drive greater international ambition on green finance, for example by ensuring that emerging markets and developing nations are supported in their own transitions to net zero. This could come via the UK Investment Bank, for instance, catalysing investment in innovative international projects.
Finding common solutions
All governments, including the UK, are currently grappling with how to tackle long-term existential challenges like climate change, as well as immediate political crises relating to energy security and cost of living.
The perspective of IIGCC’s members is long-term, but they still invest through times of crisis to ensure a sustainable and prosperous outcome for their beneficiaries, both now and in the future. As such, IIGCC and its members urge governments to adopt measures – such as those I have outlined above – that will pave the way for national economies to become energy independent, to lower prices, and to tackle emissions.
It is only through finding common solutions such as these that financial, economic and environmental stability will be secured. The hope is that by developing a world-leading centre for green finance the UK can facilitate many of the short, medium and longer term outcomes required.