Net-zero, Brexit and Covid-19: Businesses say now is perfect time to ‘green’ UK’s financial system

Many MNEs are “resisting, obstructing, or lobbying against change” the report notes

A new Aldersgate Group report, entitled ‘Financing the Future: Driving Investment for Net-Zero Emissions and Nature Restoration’, warns that the government could miss a “unique opportunity” to ensure that financial systems are compatible with its long-term commitments on climate and the environment as part of its Covid-19 recovery plans.

On climate, the report welcomes the recent rise in net-zero commitments from banks and other financial firms, as well as the increasing availability of ‘green’ financial products such as pensions and mortgages – but argues that voluntary commitments are not sufficient, given that the 2050 net-zero target is legally binding and that just one in three banks and building societies have set science-based targets to reduce emissions.

It recommends that the government works with the Financial Conduct Authority (FCA) and Bank of England to mandate financial institutions to produce net-zero transition plans in the 2020s. Such a mandate should come into force by 2025, with guidance published by the end of 2022. This move has already been put to Ministers by Aviva Investors and WWF this week.

The Aldersgate Group has also recommended a requirement for pension fund managers to automatically enrol new members to funds aligned with the Paris Agreement. In this manner, such funds will eventually become the largest and default rather than a “niche”.

Getting the government’s house in order

As well as creating this level playing field in the private finance space, the report calls for more to be done to ensure that the government’s own spending is in line with its long-term climate and nature targets. While welcoming the recent launch of the National Infrastructure Bank (NIB) and the inclusion of tackling climate change in its core mission and strategic objectives, the Aldersgate Group puts forward the case for including resilience as well as decarbonisation in its mandate. Earlier this month, the Climate Change Committee (CCC) published a major report outlining how unprepared the UK is for climate risks that are already “baked in”.

These missions of climate mitigation and adaptation should also be mandated of the government’s upcoming green sovereign bond issuance, which will total at least £15bn, the report states. Net-zero alignment will also need to be embedded into the UK’s carbon pricing trajectory under its post-Brexit emissions trading system (ETS), with green groups and businesses calling for more long-term certainty following a positive initial launch last month.

On nature, the report recommends that more is done to translate the recent conclusions of the Dasgupta Review on the Economics of Biodiversity into the UK’s financial policymaking. That Review, commissioned by the Treasury, states that a natural capital approach – in which a financial value is assigned to natural resources and habitats –  must be embedded into economic decision-making globally to give humanity the best possible chance of avoiding large-scale risk in the future.

Indeed, a recent report from the UN’s major scientific bodies on biodiversity and climate found that most nations are at risk of implementing, at scale, climate solutions that could harm ecosystems, due to poorly joined-up policy.

Disclosure and risk

To help businesses better reduce their own negative impacts on nature and exposure to nature-related risks, the report argues, disclosures in line with the upcoming recommendations of the Taskforce for Nature-related Financial Disclosures (TNFD) will need to be made mandatory this decade.

The Taskforce officially launched this month and a final framework is due by 2023. It represents 74 financial institutions, corporates, governments, regulators, multilaterals, NGOs and consortiums, spearheaded by Banorte, BNP Paribas and the Green Finance Institute.

Disclosure in line with the Taskforce on Climate-related Financial Disclosures’ (TCFD) recommendations – upon which the TNFD is modelled – are already set to become mandatory in the UK. The Treasury is currently deciding between 2022 and 2023 as the start date for the requirement for the largest businesses, but 2025 will be when the mandate is broadened in either case.

While welcoming the TCFD mandate – and the UK’s recent success in encouraging the other G7 nations to follow suit – the Aldersgate Group is warning that Ministers cannot afford to rest on their laurels on this issue. A review of how the TCFD overlaps with other guidance and standards on climate-related disclosures, such as the Streamlined Energy and Carbon Reporting (SECR) requirements, would be beneficial, it argues.

The Aldersgate Group also wants to ensure that businesses are required to complete the scenario analysis portion of the TCFD framework. This involves predicting what the business and its value chain will look like at various warming pathways, including those set out in the Paris Agreement. According to the TCFD’s latest annual status report, the uptake of scenario analysis has proven slow.

Economic Secretary to the Treasury, John Glen MP, has already heard the Aldersgate Group report’s recommendations in full.

“The regulatory review made necessary by the UK’s departure from the EU provides the UK with the opportunity to be a world leader in greening the rules governing its financial system and becoming a genuinely world-class centre for green finance; the Government should seize it,” the Aldersgate Group’s executive director Nick Molho summarised.

Join the conversation at edie’s Sustainable Investment Conference

Financial and environmental experts from some of the world’s largest investors and banks will discuss the prominent rise in environmental, social and governance (ESG) investing and what that means for business at edie’s Sustainable Investment Conference next month.

The two-day digital event takes place on 13-14 July and will see sustainability professionals from businesses and financial experts from investors meet to discuss the array of challenges and opportunities that embracing the green recovery can bring.

Find out more information here.

Sarah George 

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