APPG Meeting on Post COP26 Priorities for Sustainable Finance

 

The APPG on Sustainable Finance held a meeting of parliamentarians and key sustainable finance stakeholders on the 25th November over Zoom to explore what the priorities for sustainable finance should be post COP26 over the next year. 

The chair, Sarah Olney MP, Liberal Democrat Spokesperson for Business, Energy and Industrial Strategy, Transport, and International Trade, and vice-chair of the APPG, opened the session and introduced the speakers. She said that COP26, which was attended by 193 countries, had agreed on a number of outcomes for climate finance. The final document committed developed countries to double the collective share of adaptation finance within a $100 billion annual target for 2021 to 2025 and to reach the $100 billion goal as soon as possible. They also committed to a process to agree on long term climate finance beyond 2025. However, developed countries had previously committed to provide $100 billion of climate finance per year from 2020, which has still not been met. She outlined the main questions: How will the climate challenges be financed? Who is going to be financing the transition to Net Zero? What do we need to be doing now and over the next few years to reach the $100 billion goal?

Ryan Jude, Programme Director for Green Taxonomy work at the Green Finance Institute, said that COP26 was positive overall for green finance. A lot of progress was made as “we saw private finance really taking a central role” and “we need both public and private finance to achieve our transition to net zero”. There was also  “increased scrutiny and discussion on greenwash and the need to address it” to ensure that pledges are turned into meaningful action. Although there was disappointment that the $100 billion was not met, it will hopefully be a lot higher by 2023. The global finance industry has announced that $130 trillion in assets is committed to Net Zero by 2050 through the Glasgow Financial Alliance for Net Zero – this means that around 40% of global financial assets are now aligned with the goals. This includes 95 banks with $66 trillion in assets under management that are committed to aligning their lending and investment portfolios with Net Zero emissions. Ryan also spoke about Chancellor Rishi Sunak announcing that the UK will become the first Net Zero aligned financial services centre and the new requirement for transition plans to be published by major companies. The SCA (Strong Customer Authentication) has also announced its new disclosure regulation advisory group to develop sustainable labels for products that fall to retail investors. This will help to tackle greenwashing and ensure that there is more transparency in the system.

Heather McKay, Policy Advisor in the Sustainable Finance team at E3G, said that “sustainable finance is the essential bridge between pledges on Net Zero and action”. She added that financial delivery and credibility were key themes that emerged from COP26. It is very important that the UK succeeds domestically and then leads internationally. This will create sustainable growth and opportunities in our own country and encourage replication from other countries worldwide to help us achieve Net Zero globally. Heather said that one of the most positive announcements was the UK becoming a Net Zero financial centre. This policy will integrate the public policy and tools that the Government has at its disposal together with the private market signals and regulations that inform the decisions of market actors. Heather argued that investors in businesses and consumers need policy certainty and clear signals to change their investments to decarbonise business models. To deliver cross-sectoral decarbonisation and unlock private finance at the scale required, a robust plan is needed. 

Furthermore, Heather made the point that both private and public finance are vital as public finance and policy has a key role to play in unlocking new markets and reducing the risks to investors. She expects there to be a Green Finance Strategy review in summer 2022, with a focus on transition plans, which will require all large companies and financial institutions to outline a plan for how they will meet Net Zero targets. The Government has announced a Net Zero Taskforce, which E3G will be the secretariat for, to provide standardised guidance to companies on what a good Transition Plan looks like and to help investors start to take major steps towards decarbonisation. Heather added that this guidance must be science-based to ensure that it is not watered down. Another point she made was that both private and public decision making need consistency across the board so that there is an understanding of where we are going right and wrong on policy making. The UK Infrastructure Bank is a great step forward and has a dual mandate of “levelling up and Net Zero”. She welcomed the increasing “synergies between creating jobs and creating growth and creating a climate safe and sustainable world”. The UKIB needs to be set up for the long-term to provide certainty; all its investments need to be Net Zero investments; and it should target investments into creating new markets.

Julia Jasinska, Senior Policy Adviser for Sustainable Finance at the CBI, opened her remarks by saying that “We need trillions of dollars to close the financing gap to get to a Net Zero and sustainable economy”. She said that it was a “Special COP26 as businesses have truly been at the centre of it”. There was a real sense of urgency from businesses and she said that the CBI would continue to work with businesses of all sizes to keep them at the centre of climate action. The CBI has written a paper on ‘Financing the Transition to a Sustainable Future’, outlining how finance can enable the transition to a greener economy. The paper says that the three pillars of a sustainable future are: sustainable economy, sustainable markets and sustainable communities as all of these interact together. She emphasised that the key to a sustainable future lies in ensuring that there are enough sustainable projects to invest in across different sectors and across different regions. Solid Government plans are needed for sectors such as transport and buildings to build investor confidence and to help de-risk investments. Public-Private collaboration is vital to unlock private capital flows, particularly for less well established sectors and technologies. 

Julia added that “appropriate policy frameworks and unambiguous regulation” are needed to “allow the financial services sector to drive the growth of sustainable finance”. The financial services sector needs government action and regulatory tools to be able to appropriately estimate sustainability related risks and opportunities. In addition, she said that clear, consistent and usable sustainability disclosures and metrics that focus on lower carbon emissions and improving biodiversity are needed to ensure a real economic link. Finally, the CBI’s members want to see “international convergence in sustainability standards” to create consistent standards and regulatory requirements and this will be helped by the creation of an International Sustainability Standards Board. On sustainable communities, Julia said that plans to decarbonise the UK economy need to go together with plans for a just transition and leveling up. Beyond the UK’s green financial roadmap, the focus should be on the real economy impact and ensuring that projects reduce carbon emissions, lead to positive biodiversity and social outcomes. Julia then argued that a whole-economy approach is needed beyond regulation to encourage SMEs to participate in green financial reporting on a voluntary basis, otherwise they might be excluded from supply chains of large companies.

The chair, Sarah Olney MP, reflected on the contributions made. She said that one of the key themes was international convergence standards and how important it is that companies feel confident about investing. She opened the floor to questions.

First set of questions:

Chidi Oti Obihara: Could you talk more about the potential place that a UK or global climate finance plan might have analogous to the US climate finance plan?

Geoff Harvey: Do the panel accept oil industry protestations that for an ordered wind-down of fossil fuel reliance, further exploration and oil field development is still needed. If not, what can be done?

Huw Davies: Could the panel give thoughts about how best to integrate deforestation into climate disclosure and transition plans, given its importance to 1.5c?

Chidi Oti Obihara: Does Ryan foresee any gaps between the nascent EU green-brown and the new UK green brown taxonomy as is to be delivered by HM treasury. Do these create opportunities or challenges?

Duncan Grierson: What are thoughts on the likelihood of getting a true carbon price any time soon?

In response to the questions, Heather McKay said that the UK was only as strong as how we work together internationally. Having only one Net Zero financial centre in the world is not enough, we need all of them to switch to Net Zero. She highlighted the example of the Build Back Better initiative from the US, the UK and the EU that will help to mobilise finance towards better infrastructure investment. She hoped that the UK would use its diplomatic position to encourage international replication. She also emphasised that there can be no new investments in fossil fuels if we are to stay within 1.5°C of warming and existing investments have to be transitioned away. On deforestation and climate disclosure, Heather said that investors need clarity over their supply chain using tools like ‘Trace’ to create a conversation around how to tackle the issue.

On the oil and gas question, Ryan Jude said that there should not be any further exploration or whole field development. What matters is the timeframes as new investments in oil fields would result in decades of pollution. He added that the divestment movement had helped to begin to move investments away from fossil fuels 10 years ago. But it’s not all about divestment on existing assets, but transitioning and establishing “investor stewardship” to deliver decarbonisation. On deforestation, Ryan mentioned that 100 world leaders signed up to a pledge at COP26 to end and reverse deforestation by 2030. The key will be what happens in practice. At the Green Finance Initiative, they have developed a scheme that has six environmental objectives and any economic activity has to contribute to one of them, and do no significant harm to the other five. This could help to reduce deforestation as it can be identified as doing harm in a company’s supply chain. The TNFD (Taskforce on Nature-related Financial Disclosures) has developed a way of embedding the impact of deforestation and all the nature related issues into financial plans. On the UK and EU taxonomy, Ryan said that divergence will be expected, but it was important to keep the taxonomy science-based through the Committee on Climate Change’s Decarbonisation Pathways. The UK has the opportunity to go further on specific thresholds. We can go through the International Platform on Sustainable Finance or through the ISSB (International Sustainability Standards Board) and we can look to influence international taxonomy to increase ambition.

On fossil fuels, Julia Jasinska believed that we needed to be asking how to engage with companies to divest away from fossil fuels as they will be the ones paying for the switch to renewables. It is very important that the system does not allow fossil fuels to become stranded assets or for there to be additional financial risks to investors. On deforestation, she said that it was now included in taxonomy and this needs to be consistent across different financial systems. She suggested that more convergence would be helpful.

Next set of questions:

Chris Dodwell: The CCC’s 6th Carbon Budget Report has flagged that we need to increase annual investment into the net zero transition from around £6bn to £50bn by 2030, i.e. in 8 years and 1 month. What role can Transition Plans play in directing finance into climate solutions? What do the panel consider as the other key elements needed to establish a Net Zero Financial Centre/System in the UK?

Tilia Astell: Following from the discussion on divestment vs corporate engagement – would the panel be able to outline which are the most important things to be engaging on to deliver climate action?

Anna Pick: Presumably the engagement strategy only works if it’s backed by the threat of divestment. What does the panel think is an appropriate ambition level to expect companies to demonstrate before moving on to divestment, and on what timeline?

Geoff Harvey: Many investments in mitigation fail to happen because investment analysis based high discount rates favour short term investment. How can we address that or will this issue somehow fix itself?

Heather McKay said that the Government needs to understand all the tools and pots of money it has at its disposal to avoid a piecemeal approach. To build on the major financial commitments, the Government also needs to develop a way of tracking financial flows, both public and private, across the economy, so the gaps can be identified. A comprehensive plan is then needed to address those gaps identified. She added that the UK Infrastructure Bank needs to last long-term and have a Net Zero screen on its investments. Once a green taxonomy is developed, it must be used to guide government decision making on investments across the board and the Government must be held accountable to its own public finance spending on climate action. One option could be to establish a new Net Zero and Resilience Office to evaluate the progress towards Net Zero. Heather argued that new stewardship guidance is needed to advise on how to manage and steward companies that are invested heavily in fossil fuels and legacy industries.

In response to the questions, Ryan Jude argued that one measure could be to stop allowing the listings of fossil fuel companies as that would help to stop fossil fuel capital. The tracking of financial flows would also be helpful as the data is key to achieving the transition to Net Zero. He added that having the taxonomy underpinning public finance, as well as private finance, would help incentivise private investors. On divestment vs stewardship, Ryan said that education on the risks was really important to ensuring that investing in fossil fuels is seen as bad investments.

Julia Jasinska agreed that education was key to changing people’s mindsets as it can be challenging for companies to deal with a wide range of different regulatory environments. For the UK’s financial centre, it is important that the taxonomy delivers the right kind of framework that is not only credible and scientific but is also usable.

Sarah Olyney MP asked the panel if the experiences of the pandemic would feed into some of the changes we need to see in our financial system, especially on accelerating the transition to Net Zero.

Ryan Jude said that the pandemic had realigned what people think about the natural environment and their local area and switched people onto the precariousness of losing your job and systemic risks. The biggest looming systemic risk is that of the climate crisis and the pandemic has aligned more people to this reality and has introduced an opportunity for finance in terms of creating more social bonds. We have also seen a shift in the public spending priorities and Ryan argued that public finance needed to be directed towards supporting the green transition, especially Zero Carbon buildings and homes.

Heather McKay said that the pandemic highlighted that public finance can be mobilised quickly and rapidly to tackle crises. By investing in tackling climate change, Heather argued that we are not just mitigating the risk of devastating unchecked climate change, but also investing in new opportunities for job creation, new businesses and a better way of life.

Julia Jasinska outlined that the pandemic had completely changed people’s outlooks. Before the pandemic, green bonds were on the rise and there has now been a spike of social bonds. There is now a lot more accounting of potential risks like pandemics, climate change and biodiversity loss. Businesses are now taking their social responsibility very seriously and turning it into action.

The chair, Sarah Olney MP, thanked the panellists and attendees for an interesting discussion and thanked Joe Porter and Zoe Roberts from UK100 for organising the APPG event.