What does the Green Finance Strategy mean for business?
Following the launch of the UK Government's Green Finance Strategy, the chief executive of the Green Finance Institute has outlined how climate disclosure, policy signals and a robust business case for sustainability will transform how corporates engage with the finance community.
Earlier this week, the UK Government finally unveiled its Green Finance Strategy (GFS), outlining how the finance sector and better climate disclosure from corporates can drive progress towards wider action on climate change and the push towards net-zero emissions.
The strategy is set to place UK financial services at the centre of efforts to tackle climate change and reduce emissions to net zero by 2050 – a target that was passed into UK law last month. The strategy features investment and funding increases into green projects, infrastructures and homes and is built on findings from the Task Force on Climate-related Financial Disclosures (TCFD), led by former New York Mayor Michael Bloomberg and Bank of England Governor Mark Carney.
Also launched this week was the Green Finance Institute. The City of London Corporation, alongside the Government, will fund the Institute to champion sustainable finance and funnel more investment opportunities to green projects.
Speaking exclusively to edie, the Green Finance Institute’s chief executive Dr Rhian-Mari Thomas claimed that one of the institute’s key roles would be to enable investors and businesses to collaborate and discuss green projects with greater clarity.
“What is quite profound about the way the GFS is positioned is that it looks at ‘greening finance’ and ‘financing green’ as two separate challenges, which is absolutely right, I think,” Thomas told edie. “Creating the conditions, incentives and possibly even penalties for the finance markets to pivot towards green business will be extremely important.
“I think the Institute can play an important role. We need investment pipelines, and if banks are to pivot their models, we need to have profitable, robust business cases they can get behind. That’s why the TCFD is so important, it can help elevate the dialogue for disclosure.”
Thomas noted that investors would traditional baulk at capital-intensive large infrastructure projects and early-stage technology investments, the latter of which is more commonly associated with corporate-led venture capitals. With investors keen to understand the entire value chain of funding opportunities, having corporates at the table to share insight is extremely important, Thomas noted.
Thomas highlighted the growth in green mortgage and lending opportunities as a model that the GFS could replicate to other sectors. An energy efficient housing stock is a key pillar of the Government’s Clean Growth strategy, and banks such as Barclays and HSBC – this week – have spurred progress in this area.
Thomas added that the ability of investors and corporates to align products and services with clear policy signals would unlock more opportunities to finance the low-carbon transition.
“There’s a real signal there [for energy efficient homes] for so many businesses across construction, so we need to marry up macro-policy trends to see what the requirements and skills are on the ground and from businesses,” Thomas said. “It can create the whole business case for banks to innovate into.”
Business and the TCFD
Research suggests that there is sufficient finance circulating in the global economy to drive the low-carbon transition. The Intergovernmental Panel on Climate Change (IPCC’s) Dr Lee, for example, has claimed that studies had proved that there wasn’t a lack of finance or financial instruments to facilitate that transition, but rather a “lack of political will”.
In the UK, research that built the case for the Government to enshrine a net-zero goal into law found that a net-zero target could be achieved at the same cost that is currently put against achieving the current Climate Change Act, which is between 1-2% of GDP in 2050.
But in order to better align this money, Thomas noted that businesses needed to get better at providing relevant data to investors.
More than 500 companies have expressed support for the Task Force on Climate-related Financial Disclosures’ recommendations.
The TCFD’s 2018 Status Report, provides an overview of the disclosure practices of nearly 1,800 companies. The Status Report found that the majority of companies are already disclosing certain climate-related information in a way that is aligned with the TCFD recommendations.
However, the report claims that companies have the ability to adopt more of the TCFD’s recommendations. Notably, very few companies were found to disclose the financial impacts that climate change has on a business, while disclosure is still most prevalent in traditional CSR reports, rather than integrated into financial filings.
“I think the TCFD, and reporting in line with it, is a fantastic initial framework for corporates to think about their governance and to pull together different groups of people across the organisation,” Thomas said. “It gets different people around the table to map out a future scenario.
“It’s a great tool for elevating the dialogue and uncovering knowledge gaps and to meet investor satisfaction. TCFD isn’t business as usual, it’s business unusual and it will require people and businesses to build new expertise.”
Interestingly, the Green Finance Strategy includes expectations for publicly listed companies and asset owners to disclose climate risk and impact data by 2022 and to work with regulators as to whether this becomes a mandatory requirement.
Thomas claimed that making this requirement mandatory through legislation would “create a signal that [disclosure] is imperative”. However, she claimed that making it mandatory too soon would carry its own risks and businesses should learn through practice.
While legislation will increase the number of companies disclosing relevant climate data to investors, Thomas suggested that companies should avoid using the TCFD recommendations and disclosure as a tick-box exercise, claiming that there were opportunities to be reaped by carving out pathways to the low-carbon economy ahead of the curve.
“As soon as you equip yourself with the expertise as to how best position your business, you’ll find that huge risk will pave the way to huge opportunities,” she added. “But burying your head in the sand is not going to work. Either your competitors will find opportunities around consumer expectations, or regulatory cases will arise, and you’ll lose your competitive edge. In some industries, there are direct risks of inaction."