Report: UK lagging behind EU on green finance

Published by social enterprise and think-tank New Financial, the report assesses claims that the value of green finance in Europe increased by 97% in 2021 on 2020 levels to reach €311bn. It concludes that government issuance tripled, with several nations launching sovereign green bonds as part of their Covid-19 recovery plans. Activity within the private sector, meanwhile, doubled year-on-year.

On the private sector point, the report concludes that companies whose primary activities involve addressing climate change, such as renewable energy developers, collectively raised some €100bn within the past five years. A further €400bn was raised in that timeframe by other businesses for ‘green’ purposes.

These headline findings are promising – but New Financial has a word of caution. The report reiterates the Intergovernmental Panel on Climate Change’s (IPCC) estimate that annual global green investment will need to be €1trn each year through to 2050 if humanity is to have the best chance of capping the global temperature increase to 1.5C.

Regarding Europe specifically, the report notes that green finance only represented 12% of all capital markets activity across the continent in 2021, despite the major increase. This means much of the other activity is supporting activities that will worsen climate change. New Financial estimates that for every euro raised by companies whose primary activities involve addressing climate change, firms engaged in activities that worsen the problem raise €18. Sectors included in this category include oil and gas expansion and sectors that are primary deforestation drivers.

The report also notes rising concerns about greenwashing. It notes that around half of the capital raised by green bonds in 2021 can be used to finance or refinance existing projects, which may limit their real-world impact on reducing emissions and improving mitigation. Also noted is the fact that only 40-50% of the green bonds market can be classed as ‘dark green’ or ‘actively green’ – the class with the highest positive environmental impact.

On all of these key issues, the report states that the UK is lagging behind the EU. Green finance accounted for 6-7% of all capital markets activity in the UK in 2021, making penetration worse than in the EU. New Financial estimates that it will take the UK four years to reach the penetration position that the EU is currently in.

At COP26, Chancellor Rishi Sunak announced plans to make the UK the ‘world’s first net-zero financial centre’ and to contribute to global efforts to “rewire the financial system for net-zero”. Measures taken to support this transition include the launch of a £16bn sovereign green bond package and the launch of a net-zero transition plan mandate for large, high-emitting businesses from 2023.

Organisations including WWF, Aviva and the Aldersgate Group have warned in recent times that more policy intervention is needed for Sunak’s vision to be realised. They are calling for strong requirements for net-zero transition plans and measures to stop public finance going to projects that would certainly undermine the net-zero transition, among other changes.

Howard-Boyd’s greenwash warning

In related news, Environment Agency chair Emma Howard-Boyd is calling for action to reduce greenwashing in the finance sector. She is notably also the interim chair of the Green Finance Institute (GFI) as a permanent replacement is sought for the late Sir Roger Gifford.

She appeared on BBC Radio 4 this morning (4 July) ahead of a speech at the UK Centre for Green Finance and Investment’s annual forum. During that speech, she stated that businesses are “embedding liability” and “storing up risk for their investors” by understating their climate risks and overstating the actions they are taking to reduce emissions and build in climate adaptation.

The UK did move to mandate climate risk disclosures for some large businesses in April and will be expanding the mandate’s remit in the coming years.

Howard-Boyd wants this built upon with a government review on the economics of climate resilience, which would quantify national risks and opportunities and identify how decisions made by the government and in the private sector could reduce risks. This could inform new standards for climate adaptation and add new stress tests to major decisions. Similar reviews have already taken place on biodiversity and food systems.

The Bank of England’s first climate stress test concluded that UK banks and insurers will end up taking on nearly £340bn worth of climate-related losses by 2050 without better mitigation and adaptation efforts. Separately, the GFI estimates that almost £650bn of infrastructure investment from UK organisations, planned to take place this decade, will face “considerable” climate risk.

As the Government updates its approach, Howard-Boyd is calling on investors to request more detailed information from the firms they support, and for firms to disclose more information. These disclosures should also, she emphasised, be used to inform strategy to avoid them becoming a tick-box exercise.

She said: “The more businesses are transparent about their plans to transition to net zero and prepare for climate shocks, the easier it is to benchmark best practice, set standards and celebrate the companies that really are delivering on their commitments.  As with the government’s ambition for net-zero by 2050, delivering on climate resilience and nature recovery requires robust, consistent and trusted data.”

Howard-Boyd’s speech comes shortly after the Financial Conduct Authority stated that it would welcome being instructed by the Government to provide stricter regulation for ESG data and ratings providers to help tackle greenwashing.

Also last week, the Climate Change Committee’s (CCC) annual progress report to Parliament warned that general progress to reduce emissions and improve resilience was too weak. On resilience, it reminded Ministers that “expected changes in the UK climate will lead to risks across all areas of the UK’s economy, society and environment” and that “adaptation action must be undertaken today to prepare for these impacts and is essential alongside (but not in place of) efforts to reach net-zero”.

Join the conversation during edie’s Green Finance Focus Week

Readers interested in ESG investing and net-zero finance are encouraged to mark edie’s upcoming Green Finance Focus Week (18-22 July) in their diaries.

Throughout the week, the edie editorial team will be publishing a range of features, interviews, reports and more to inform and inspire readers around making sense of the ESG landscape and scaling up finance to accelerate the transition to a sustainable future. We will also be hosting a series of online Inspiration Sessions on the afternoon of Thursday 21 July, sponsored by Inspired Energy and featuring expert speakers from organisations including Natwest, Standard Chartered and the We Mean Business Coalition. Click here for details and to register.