Analysis: Two-thirds of UK finance firms have climate targets, but most are failing to shift investments

The new Tracker covers some $25trn of managed and owned assets

Conducted by the Climate Policy Initiative, the analysis is being used to inform a new interactive virtual dashboard called the Net-Zero Finance Tracker. It covers more than 1,200 UK-based firms with investing power in the private sector, including banks, investors, asset owners and corporates. Collectively, these organisations represent some $25trn of managed and owned assets.

The Tracker reveals that around 800 of these organisations had set some kind of public climate target as of the end of 2020. This covers qualitative statements, in-house quantitative targets and membership to coalitions or membership organisations with quantitative targets for members. For most of this cohort (700 firms), these targets are beginning to affect investment policies and governance.

This uptick in target-setting and disclosure is particularly clear in the asset management space; 408 firms reported a climate response in 2020, up from 12 in 2015. For pension funds, the number rose from two to 70 in the same timeframe. Banks have also been changing their approach at a pace, with organisations representing 70% of the UK banking sector’s assets now reporting a climate response.

However, the report warns that financial firms are not converting targets into action rapidly enough, with many targets avoiding the bulk of emissions relating to financed emissions or delaying action. It concludes that there has been “no significant shift”, as yet, of finance flows away from high-carbon activities and towards investments in activities that accelerate the low-carbon transition and/or assist with climate resilience.

Project-level finance for climate change mitigation and adaptation decreased between 2015 and 2018, the last year for which there is reliable data, according to the Tracker. Moreover, there are currently 10 times as many institutions whose share of portfolios exposed to climate-critical sectors is misaligned with the Paris Agreement as there are aligned institutions. In general, those with aligned portfolios also tend to be smaller.

As an additional concern, the Tracker outlines how some parts of the financial system appear to not yet have even reached the target-setting and disclosure stage – let alone the point of reallocating finance. Wealth management firms are of particular concern, with just 14 UK-based firms reporting any response to climate change.

“What we have here is a gap between what financial institutions say and what they do on climate action,” the Climate Policy Initiative’s global managing director Dr Barbara Buchner said.

“They’ve made net-zero commitments, but most have not followed up with the policies to make the money flow.”

The trends displayed on the Tracker echo a recent report from WWF UK and Greenpeace UK, which concluded that banks and asset managers collectively financed projects emitting 805 million tonnes of greenhouse gases in 2019 – around twice the UK’s annual national carbon footprint.

Urban climate finance

The launch of the Tracker comes shortly after the Climate Policy Initiative published, through its membership to the Cities Climate Finance Leadership Alliance, a major new report on the state of urban climate finance – funding provided to cities by governments, states, local authorities or the private sector in the name of decarbonisation and/or adaptation.

Produced in partnership with the World Bank Group, the report states that an average of $384bn was invested annually, on a global basis, in urban climate solutions between 2017 and 2018. In comparison, some $1trn to $5trn will be needed annually in the coming years.

This funding gap, the report warns, is disproportionately affecting developing nations. South Asia and Sub-Saharan Africa respectively saw an annual average investment of just $4bn and $3bn respectively in the period covered.

The report also highlights the fact that, of the $384bn average, more than 90% was spent on climate mitigation. Adaptation was, therefore, critically underfunded – particularly in regard to water management.

It is critical that the entire financial system—public, private, and philanthropic—urgently works together to mobilize city-level climate finance at scale,” Dr Buchner said of this report.

edie’s COP26 Primer on Climate Finance

edie’s COP26 Primer Reports are about seizing the green opportunity. Produced in the run-up to the official talks, this mini-series of reports are based on the five key themes of COP26: Clean Energy, Clean Transport, Climate Resilience, Nature-Based Solutions, and Climate Finance.

This report examines how crucial climate finance is in driving the net-zero transition and overcoming the climate crisis. It also explores the role that COP26 will have in creating new tipping points for nations to seize the economic, societal and planetary benefits of shifting finance streams towards a sustainable future.

Click here to read the report.

Join the conversation at edie’s Sustainable Investment conference 

edie’s Sustainable Investment Conference is returning in a virtual format for the second consecutive year on 13-14 July, with hundreds of professionals already registered to attend. 

The conference will unite sustainability professionals from businesses and financial experts from investors to discuss the array of challenges and opportunities that embracing the green recovery can bring. Experts from the likes of BlackRock, UKSIF, UBS Asset Management, CDP and WWF feature on the event’s high-level speaker list. 

Click here for a full agenda and to register for tickets. 

Sarah George