Our green finance series concludes with thoughts from Banking and Finance partner, Tony Cameron, on the UK Treasury Committee's Net Zero and the Future of Green Finance report.
The UK Treasury Committee published its report on Net Zero and the Future of Green Finance in April 2021. There are very many interesting aspects to this report but this article touches on a few important themes.
The first key theme relates to the need for clarity to allow tangible progress to be made in green finance and achieving Net Zero.
The report recommends that a UK taxonomy is adopted to define what exactly constitutes green investment in the UK. This would allow investors and the public to have a greater degree of certainty as to the nature of what legitimately is and isn't a green investment and help to identify investment opportunities which only have partial green characteristics but perhaps have a carbon heavy element too.
Linked to this is the recommendation for clearer labelling of green projects so that capital is being deployed in the right direction to get to Net Zero. It is recommended that indices are made clearer because there are some indices purporting to be green that are actually still carbon heavy (for example, 65 oil and gas companies appeared on the FTSE4Good’s emerging and developed markets indices) as a result of "greenwashing".
The report identifies a need for a more holistic approach to ESG and Net Zero across UK Government departments/emanations of state. More long term policy setting is also required in order to give investors the certainty they need to apply capital in UK "green" projects with confidence.
Pricing to reflect climate risk
Another element links to the Bank of England Governor's statement that, in his view, financial markets are not yet properly pricing for climate related risks. The report suggests that the Financial Conduct Authority/Prudential Regulation Authority may consider making changes to the capital regime to rectify that. In turn, this should lead to a greater focus on financial institutions getting to the point where ESG considerations will drive pricing and ultimately availability of funding.
As well as the general point about clearer, more accurate indices (which is very relevant to pension funds, especially passive tracker funds) and how this can distort investment, the report touches on default funds for defined benefit pension schemes and the fact that, as it stands, these needn't migrate to an ESG focussed fund. The report recommends that consumers should not have to switch out of the default fund to invest sustainably and that existing practices are diverting what could in aggregate be significant available funds applied to ESG.
A key challenge will be to facilitate the Net Zero transition in a way that is fair to the communities and sectors that rely on the kind of industries that are being phased out. Decarbonisation will have a disproportionate impact on some sectors of UK society, especially in different geographies, and there is a need to acknowledge and address this to ensure a fair and just transition.
The report highlights and proposes solutions to many issues that, if addressed, could collectively make a significant contribution to the green economy and to achieving Net Zero.
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