Can government and investors make post-Brexit UK a green finance leader?

The recent Clean Growth Strategy has created a multi-billion-pound framework for low-carbon growth, but the UK Government is still keen to strengthen relationships with investors to tackle the "hard and challenging" times ahead.

The UK’s green economy is riding a wave of optimism at the moment. Recent reports have shown that efforts to decarbonise the nation since 2008 are bearing fruit; the UK is outperforming the rest of the G20 when it comes to decoupling carbon emissions from economic growth.

The 7.7% reduction in carbon intensity is part of an ongoing journey to cut overall carbon emissions by 80% by 2050, with an interim 57% target by 2032 as part of the fifth carbon budget.

The recent and long-awaited publication of the Clean Growth Strategy has buoyed the green economy, pledging to back low-carbon innovations to the tune of £2.5bn between 2015 and 2021.

But even with the foundations in place, the UK Government Department for Business, Energy and Industrial Strategy’s (BEIS) transformation director Catherine Bremner believes that “hard and challenging times” lie ahead.

Bremner appeared at a Bloomberg conference in London on Thursday (16 November), and explained that innovations were needed to accelerate progress in underperforming areas such as renewable heat and the built environment – but unlocking these solutions would require new relationships with the finance sector.

“It’s fair to say the really hard and challenging times are coming,” Bremner said. “If you look at the Clean Growth Strategy, it really outlines the Government’s intentions across the whole economy on what we need to do in terms of decarbonisation.

“But there are some barriers…one is around finance, and what things we can do to incentivise finance. We know we need a lot more venture capital, but it goes right the way across to rental mortgages, and what we can do to be a leader on climate insurance.”

If unlocking finance is a challenge, the Government is currently mapping out how to overcome it. In September, a Green Finance Taskforce launched to increase the revenue opportunities for low-carbon businesses and solutions.

Top financial experts from Aviva, Barclays, HSBC, Legal & General, and the Bank of England will work alongside academics and sustainability experts to accelerate private sector funding in green technologies, infrastructure and innovative start-ups.

Bremner also noted that Barclays, the first UK bank to issue a green bond, was able to do so through the new information and data that the Government is making available to the finance sector.

Barclays’ £445m bond, which matures in 2023, intends to refinance residential mortgage properties across England and Wales based on the carbon intensity of each property. Originally, data to assess these performances, through Energy Performance Certificates, was only made available on an individual basis. In 2016, a decision was made to widen the access to this data.

According to Bremner, access to information is a key area of focus for this government and is viewed as a crucial enabler to providing knowledge for investors to target low-carbon projects.

“We’ve seen the emergence of the green bond market in recent years, it’s the first time that investors have signalled that they want to invest in green, and the context of defining what it means.

“Some of the barriers we’ve seen is about information, and how we can provide it around the different pathways and signalling…there’s this really interesting picture on what data the government has that can assist businesses.”

Brexit’s financial distraction

Falling technology costs, such as the “unprecedented” record low-strike price of £57.50 per MWh for offshore wind in the latest Contract for Difference (CfD) auction, have seen the attractiveness of renewables investment in the UK climb slightly.

Last month, the UK cemented its position in the top 10 rankings of the world’s most attractive countries for renewable energy investment. But with the uncertainty of Brexit still looming large, what do international investors make of the UK’s green finance prospects?

Speaking at an earlier session at the Bloomberg event, Hermes Investment Management’s head of responsibility Leon Kamhi claimed that Brexit was an obvious distraction to the Government’s low-carbon aspirations, but that businesses were picking up the slack.

“Here in the UK, we’ve seen removal of subsidies for renewables,” Kamhi said. “That’s not a good step. Is the UK Government focused on climate change and sustainability? It probably has other things to focus on right now.

“Brexit is obviously a distraction, and it is going to have a huge impact on the wealth of the UK economy. It’s extremely uncertain on which way this will go. On the climate change side, the UK did very well from a carbon efficiency aspect, but that’s all happening because of the market rather than any government intervention.”

Kamhi noted that Brexit hadn’t had any impact on Hermes’ day-to-day investment activities, but that is because the firm is a global investor. He did suggest that the company may have to find other European offices outside of its London headquarters, but that discussions were at an early phase.

One positive business aspect that has been driven by the Brexit vote, in Kamhi’s opinion, is the Government’s decision to push stakeholder interaction in the UK.

Current European governance models place less emphasis on the interest of shareholders, with regulation such as the Florange Act in France failing to integrate the interests of investors into business decisions.

The Brexit vote was followed by the Government publishing its response to the Corporate Governance Green Paper. The response issued support for strengthening section 172 of the Companies Act 2006, which would strengthen employee, customer and wider stakeholder – notably investor – voices in business decision making.

With the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) growing in prominence within the business community, strengthening section 172 could add more weight to investor calls for climate disclosure. A 12-week consultation has been scheduled by the Financial Reporting Council towards the end of 2017.

Kahmi felt the progress was positive in giving investors a greater voice, which in turn would enable them to steer companies towards low-carbon initiatives and business models. However, he also suggested that “the distraction means that we won’t have that much time to think about growing ourselves sustainably”.

Revolving funds

The financial implications of Brexit have been used as a weapon by politicians that are against the vote to leave the European Union.

Just a few days ago, Liberal Democrat leader Sir Vince Cable warned of the impact that Brexit could have on the UK’s finance system. Cable believed that promoting green finance in London was essential to economic growth.

“The prospect of Brexit threatens to cause serious damage to the UK’s financial services industry,” Cable said. “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.”

The C40 Cities Climate Leadership Group (C40) had previously praised London for its ability to mobilise climate finance. London’s success was based on a “revolving investment fund” – aided by EU funding which may soon become unavailable – that helped in the regeneration of certain areas in the capital.

But at a wider scale, green investment will likely have to come from the UK banks. The Times reported last year that billions of pounds of investment into sustainability projects had been jeopardised by the Brexit decision, with the European Investment Bank (EIB) unable to provide clarity on whether a pipeline of future UK projects would be backed. The UK received more than £42bn in low-cost loans from the EIB over the past decade.

Some banks are already stepping up to fill the potential void. Legal and General Investment Management created a fund that tracks a smart sustainability index from FTSE Russel, which accounts for climate change consideration. HSBC UK also announced that they would move a £1.85bn pension fund into these new accounts.

Matt Mace

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