Greening the Financial System

Alan Brown Excerpts

Wednesday 30th November 2022 Westminster Hall

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Bone. I congratulate the hon. Member for Sheffield, Hallam (Olivia Blake) on securing this debate. It is good to see Back-Bench participation.

The hon. Lady set the scene very well on the amount of investment required for us to achieve our climate goals, and on the specific impact that so few companies have, with 100 companies responsible for 70% of emissions. The scale of investment from the City of London makes it the equivalent of the ninth biggest polluter in the world. Those are very stark statistics.

I liked the key point about pension funds and looking at wider beneficiary considerations rather than just returns. Clearly, there is no point in having a high financial return if it results in greenhouse gas emissions that wreck the planet we live on. Also, the point about energy efficiency investment flatlining is key. We need to get more money invested into energy efficiency.

An answer that I got to a written question said that 12 million homes are still rated in EPC band D to G in terms of energy efficiency, so to get every property upgraded to band C by 2030 means that more than 1,000,700 properties need to be upgraded every year.

We heard from the hon. Member for Rother Valley (Alexander Stafford). I commend him on the work he is doing as chair of the all-party parliamentary group on environmental, social, and governance. I pledge to look out for its report. He made a key point about the risk of greenwashing and how we need to make sure that that does not remain part of the financial system. On greenwashing, I am always cynical when companies contact me and say, “Hurray! We have set a target. We have announced we are going to meet net zero. Will you congratulate us and promote us?” I never do that because I want to see the proof of the pudding.

As always, we heard from the hon. Member for Strangford (Jim Shannon), who made a very good contribution. He rightly pointed out that it is fine to have 10-point plans and other soundbites, but, as he said, we need meat on the bone. The reality is that we need a joined-up Government strategy to deliver. He touched on the risk of the Amazon’s deforestation and how we cannot allow investment that encourages that. It seems to me that we should encourage investment as part of the loss and damage considerations as we move forward as well. I did wonder if the hon. Gentleman slipped up slightly, and I have to ask if he is okay, because he did not once mention Better Together. I think that is the first time he has not done that.

Finally, we heard from the hon. Member for Reading East (Matt Rodda), who again highlighted the importance of the pensions industry in driving investment in brownfield regeneration to create renewable energy. What could be better than to regenerate in a sustainable way and actually help bring down emissions?

As many Members have said, it goes without saying that we do need to hit net zero, in line with the Paris climate agreement on a global scale, if the Earth is to have a proper future at all. Time is running out. But as well as fighting this existential threat, we do actually have fantastic economic growth opportunities arising from the green investment required.

As the hon. Member for Sheffield, Hallam said, an estimated $32 trillion of investment is needed globally by 2030 to tackle climate change alone. Instead of the bland rhetoric about being global Britain, there is actually a great opportunity for the UK to be a global centre for those financial flows. It will bring significant economic returns and help address our own economic challenges, including the ongoing cost of living and energy crisis. We have to remember that London recently lost its position as Europe’s most valuable stock market. This green concession could spur the necessary growth to help the UK regain its overall competitiveness.

The reality is that the UK will not lead the global green finance sector without the right regulatory framework to support it. At COP27, finance experts, including the former Governor of the Bank of England, Mark Carney, demanded the alignment of financial regulation with net zero. The reality is that the financial sector is exposed to financial risks that stem from nature loss, via the businesses they invest in, advise, insure and lend to. That was illustrated by the Bank of England’s first climate stress test, which concluded that UK banks’ insurers could end up taking on nearly £340 billion-worth of climate-related losses by 2050 without better mitigation and adaptation efforts.

Separately, the Green Finance Institute estimates that almost £650 billion-worth of infrastructure investment from UK organisations, planned to take place this decade, could face considerable climate risk. It is madness that the Government are trying to commit us to giving billions of pounds to Sizewell C, in an area that is subject to coastal erosion and the threat of increased sea levels due to climate change. That is not joined-up thinking when we are looking at infrastructure for the future.

The Financial Conduct Authority must have a duty to consider climate goals in dealing with its activities. The SNP’s proposed amendment to the Financial Services and Markets Bill could have had that effect. Had the amendment been accepted, it would have required the FCA to act in a way compatible not only with competitiveness and growth objectives, but with the Government’s climate commitments, in addition to strategic and operational objectives.

At the moment there is a disconnect between the Financial Services and Markets Bill and the Government’s work on transition plans. The COP26 commitment included the requirement for all UK regulated financial institutions and public listed companies to publish their net transition plans by 2023. To implement that, the Government pledged last year to legislate for mandatory transition plans through the UK sustainability disclosure requirements. But the Financial Services and Markets Bill fails to do so, and there is currently no other upcoming legislation to allow that to be implemented.

The Government’s transition plan taskforce, set up to develop the gold-standard transition plan guidance, recognises the importance of nature. By contrast, nature is not addressed in the Financial Services and Markets Bill, despite the Economic Secretary to the Treasury recognising in Committee that we cannot achieve our climate goals without acknowledging the vital role of nature. Other contributors touched on the importance of considering nature as well.

Even business is saying more needs to be done in terms of regulations. Numerous financial institutions, including Aviva Investors, Phoenix, Hargreaves Lansdown and Federated Hermes, have written to the Bill Committee backing a secondary statutory objective of facilitating the transition of financial services to net zero. Supplying goods and services to enable the global net zero transition could be worth £1 trillion to UK businesses by 2030. Accelerating the roll-out of low-carbon technologies could reduce household energy bills by up to £1,800 a year. Onshore wind is the cheapest form of energy generation, so, by blocking it for so many years, the Tories are adding money to consumers’ bills.

Get this right, and there are fantastic opportunities. However, Brexit Britain—a subject close to your heart, Mr Bone—is currently playing catch-up on green finance. The EU has legislated on a number of issues, which include corporate disclosures, climate-related obligations and sustainability-related disclosure in the financial services sector and the European green bond standard, while the UK lags behind. As the hon. Member for Rother Valley said, the UK also lags on taxonomy. There might be some failings that can be picked up and improved on, but the reality is that the UK lags behind.

A report by the social enterprise think-tank New Financial entitled “A reality check on green finance” claims that the value of green finance in Europe increased by 97% in 2021 compared with 2020 levels, to reach an overall total of €311 billion. It concludes that Government issuance tripled, and several nations launched sovereign green bonds as part of their covid-19 recovery plans. Meanwhile, activity in the private sector doubled year on year. The report also notes that, despite that massive increase in expenditure, green finance represented only 12% in all capital markets across Europe in 2021. By contrast, green finance in the UK accounted for only 6% to 7% of all capital markets activity.

It is clear that more must be done to green the financial services industry. It is imperative that the FCA is mandated to consider climate goals and that the Government improve legislation accordingly. To finish on a positive note, if we get this right, there are fantastic growth opportunities, green jobs and a just transition to net zero.