Climate and the City: The Role of Policy in Getting Finance to Net Zero
Last week the All Party Parliamentary Group (APPG) on Sustainable Finance hosted a webinar with APPG partner E3G – called ‘Climate and the City: The Role of Policy in Getting Finance to Net Zero’. This panel discussion explored which policies are needed to make it easier for the financial sector to decarbonise, and whether the recent flurry of voluntary commitments to Net Zero by private finance are sufficient to support a transition with integrity.
Alex Sobel, Labour MP for Leeds North West and Vice-Chair of the APPG on Sustainable Finance spoke about how he is encouraged by the government’s Ten Point for a Green Industrial Revolution, which will mobilise £12 billion of government investment, and potentially 3 times as much from the private sector, to create and support up to 250,000 green jobs. He stressed the need for the U.K to additionally commit to green technology transfer and to increase our finance to countries of the Global South for building low-carbon infrastructure and for responding to climate impacts ahead of COP26.
Steve Waygood, Chief Responsible Investment Officer at Aviva Investors, spoke about how Aviva have made a commitment to Net Zero which means that all their investments must consider their potential climate impacts. He argued that the financial sector has a responsibility to their clients and shareholders to consider the climate risks of their investments. Financial institutions need to protect their shareholders from risky investments, considering that investments in fossil fuel based industries may become stranded assets as the economy rapidly transitions away from fossil fuel use. He spoke about the responsible investment case for redirecting finance from dirty industries into the low-carbon sectors of the future. He referred to research finding that 75 percent of the world’s population could find that where they live today is uninhabitable due to climatic impacts if we continue on a trajectory based on the world’s current climate pledges, which are likely to lead to 3.5°C of global warming above the pre-industrial era.
Steve stressed how the climate crisis is an existential threat to businesses and banking as climate breakdown would create enormous financial instability, creating an imperative for these sectors to rapidly transition to Net Zero and to shift investment out of fossil fuel based industry. Steve spoke of the need to use the G7 and COP26 to ‘harness the entire international financial architecture’, so that all the financial regulators and multilateral development banks adopt transitioning to Net Zero as a crucial part of their mandate.
Meryam Omi, COP26 High Level Champions Team member and Head of Sustainability and Responsible Investment Strategy at Legal & General Investment Management (LGIM/Climate Champions), spoke about the work that the Glasgow Financial Alliance for Net Zero is doing to mobilise businesses, public sector organisations and financial institutions to join the Race to Zero campaign. Race to Zero is a global campaign run by the UNFCCC which has so far mobilised a growing coalition of 708 cities, 24 regions, 2,360 businesses, 163 of the biggest investors and 624 Higher Education Institutions committed to achieving net zero emissions by 2050. LGIM has rated around 1000 companies to measure how they are performing in relation to the net-zero framework and what key areas they need to improve on, which is published on LGIM’s website for companies and investors to see. Meryam emphasised the importance of companies not just putting in place net-zero targets, but setting transition plans and interim targets (including short and medium term targets i.e. 2025/2030) to support the drive towards rapid, resilient and robust decarbonisation.
Nick Robins, author of The Road to Net Zero Finance report for the UK’s Climate Change Committee and co-founder of theFinancing the Just Transition Alliance, explained that policy must drive a phase-out of investment in fossil fuel industry and redirect investment to low-carbon sectors. He argued that financial regulators, primarily the Bank of England and the Financial Conduct Authority, should require all financial institutions to produce mandatory Net Zero transition plans. Nick argued that voluntary commitments are not enough as many firms do not seriously engage with them, and mandatory requirements are the only way to ensure that all financial institutions redirect their investments into the low-carbon economy. Nick emphasised the role for transition plans in supporting net-zero commitments with integrity, and preventing greenwash. Nick spoke in favour of the Government introducing green sovereign bonds, explaining that the financial sector will continue to invest in fossil fuels and not redirect significant investment into low-carbon sectors until the Government sends a clear message that green investment must be prioritised.
‘We need to connect net zero with the way in which we’re going to deal with rising inequality, in terms of region, in terms of gender, in terms of race’
Nick spoke of the need for a just transition which ensures that the low-carbon economy is developed in a way which reduces inequality and provides secure, green jobs and investment across the U.K’s regions.
‘How do we connect pension funds and investors with the place-based type investments that we’re going to need?’
Nick stressed the need for public investment to crowd in private finance into new low-carbon markets, suggesting that the recently established U.K Infrastructure Bank provides an opportunity for this. This investment would also address the need to level-up between regions of the U.K and provide secure jobs for areas which currently have few economic opportunities.
Steve Waygood spoke again about how voluntary commitments from the financial sector are not enough, arguing that we must ensure that climate impacts are internalised to create a strong financial incentive for businesses and investors to reduce their carbon footprints. He suggested that making the polluters pay for their climate impacts through carbon taxes, changes to subsidies and an Emissions Trading Systems with a high carbon price is required to finance and to drive forward the Net Zero transition. Steve argued that current carbon prices are too low, and suggested that the Government should work to raise the price of carbon and provide forward guidance for businesses on what the cost is likely to be in the next 5-10 years, to enable businesses and the financial sector to adapt.
A key message of the discussion was that policymakers must ensure that the financial sector is required to consider the climate impacts of all of their investment decisions and stress test all their assets against climate risk. Policymakers should support this by mandating the disclosure and implementation of transition plans Furthermore, policymakers must ensure that the trillions that are required to reach Net Zero are mobilised through setting the right financial policies. This would be supported by a Net Zero Strategy which set out a whole of economy approach to financing the transition. This would include ending all subsidies for fossil fuels, increasing subsidies for low-carbon energy and introducing a carbon tax across the economy.