Once again, the UK has claimed a net-zero first. The City of London will become – the Chancellor, Rishi Sunak, has announced – the world’s first “net zero-aligned financial centre”. But the focus on transparency rather than regulation has left environmental activists unimpressed (although even financial regulation would be unlikely to deal with the problem at its source).
Opening today’s (3 November) Cop26 Finance Day, Sunak unveiled plans for every UK financial institution and UK-listed company to publish, from 2023, transition plans that “consider the government’s net-zero commitment” or, alternatively, explain why they have not done so.
The government will set up a taskforce to develop a “gold standard” for such plans, develop the metrics and tools to help companies transition, and reduce greenwashing. It also intends to set up a “transition pathway” that sets out how the UK financial sector will shift to net zero by 2050, with new policies and milestones.
What it is not doing is mandating UK companies to make net-zero commitments (although the UK as a whole has a legally binding net-zero target), nor is it forbidding investment in carbon-intensive activities.
The move has met with cautious welcome from activists. “Mandatory transition plans for financial institutions are a step in the right direction and must be implemented urgently, with strict milestones on phasing out financing for fossil fuels and deforestation,” said David Barmes, senior economist at Positive Money.
But there is no sign that strict milestones are planned. The Treasury’s view is that it is up to the market to decide on the adequacy of decarbonisation plans.
Certainly, the transparency required by the UK plans is important. The Chancellor will hope it will help attract some of the $130trn that the Glasgow Finance Alliance for Net Zero (GFANZ) reports the financial sector has committed to reaching net zero.
This alliance of leading institutional investors – giant pension funds and insurance companies – shows there is enormous and growing appetite for investments that are aligned with the net-zero transition. These long-term investors are concerned about the impacts of climate change on the global economy and their portfolios. They are clamouring for rigorous, consistent and comparable information from companies about their plans to decarbonise their business models.
But, again, environmental groups have decried the lack of commitments among GFANZ to avoid high-carbon investments. There is, inevitably, plenty of scope for these investors to continue to fund carbon-spewing fossil fuel assets, should they choose to do so.
Similarly, it is likely that plenty of investors within Sunak’s net zero-aligned financial centre will remain willing and able to continue to finance fossil fuel companies.
London’s financial centre has profited by raising capital for such companies in poorly regulated parts of the world, showing scant regard for their social and environmental impacts. It has legions of lawyers and accountants skilled in helping the criminal and corrupt move their money without sanction.
And even were these big investors to accept, or subject themselves, to constraints on their lending to the fossil fuel sector, the likelihood would be that funding simply migrates to other parts of the financial system. There is already evidence that fossil fuel developers are turning to private equity firms for investment as they find traditional sources of capital drying up. These investors, which face little scrutiny from regulators or civil society, see the opportunity to generate outsized returns from desperate, but still often highly profitable, operators.
The global economy is often described as being addicted to fossil fuels. It might be instructive, then, to take a lesson from the war on drugs: stamping out supply is next to impossible. What governments need to do is tackle demand – by properly pricing carbon, forcing fossil fuel emitters to pay the full social and environmental costs their pollution incurs. That would lead finance to stampede towards the net-zero economy.
Mark Nicholls is a freelance editor and writer, who previously co-founded and edited “Environmental Finance”. He specialises in sustainable finance and responsible investment.