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22 February 2021updated 29 Jul 2021 10:16am

Brexit weighs heavy on London’s sustainable finance goals

The UK government has high hopes for London staking its claim as a global centre for green finance but Brexit is pulling in the other direction.

By Mark Nicholls

In January, Amsterdam took London’s crown as Europe’s largest centre for share trading in the latest post-Brexit blow to the City. Less commented upon was the 8 February decision by the Intercontinental Exchange to shift trading of its carbon emission contracts, which trade an average of €1bn each day, over the North Sea to its Netherlands-based operation.

Both developments are a result of the failure of the UK government to secure “equivalence” from the EU for its financial services rules. This makes it much more expensive for London-based firms to offer a whole range of financial services to their EU-based clients – often prohibitively so.

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It is unclear how much store the UK government has set in ensuring that the City could retain access to its European markets. Last November, the Chancellor, Rishi Sunak, spelled out a vision for Britain’s financial services sector – one rooted in financial technology, openness to listing the shares of “the most innovative” companies from the UK and abroad, flexible regulation, and with a leading position in sustainable finance.

That latter aspiration is shared by his boss. “We will turn the UK into the world’s No 1 centre for green technology and finance,” announced the Prime Minister, Boris Johnson, in last November’s 10 Point Plan for a Green Industrial Revolution.

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Certainly, London has a strong position to build upon. The City can claim two decades of innovation in sustainable finance, playing a key role in establishing carbon trading, as a centre of green bond underwriting, and with a high concentration of responsible investment assets and expertise.

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“London is a global financial centre and has aggregated a huge competence in terms of sustainable finance, responsible investment and climate bonds,” says Nick Robins, a sustainable finance professor at the London School of Economics. “That clustering effect is a huge advantage. But in terms of translating that into business, London’s position is far from unassailable.”

That vulnerability is evident in the sixth edition of the Global Green Finance Index, published last October by the think tank Z/Yen. It puts London fourth in terms of the depth of its green finance offering, behind Amsterdam, Zurich and Copenhagen. In its “green finance quality” ranking, London had slipped two places compared with the 2019 index, dropping behind Zurich and Amsterdam.

“The UK has huge opportunities” in sustainable finance, says Michael Mainelli, executive chairman of Z/Yen and a sheriff of the City of London. But he suspects that part of the reason for London’s relative decline is its failure, so far at least, to integrate environmental considerations in its day-to-day business.

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“It’s improving, but people in the City don’t raise climate change with clients as much as they should. Clients tend to raise climate change with financiers,” he says. 

In financial services, as elsewhere, Brexit provides opportunities for new approaches to regulation, as does the need to replace financial infrastructure and institutions that the UK no longer has access to – such as the European Investment Bank (EIB), the EU’s development finance bank, which is increasingly directing its funding towards climate action. Before the 2016 Brexit vote, the EIB was lending around £7bn each year to the UK.

To replace EIB funding, the government is planning to set up a National Infrastructure Bank (NIB). It recognises that UK infrastructure needs will be very different to the past as it moves towards net-zero emissions, says Josie Murdoch, senior policy officer at the Aldersgate Group, a sustainable business lobby group.

In creating its own development institution, Brexit does provide opportunity, says Robins. “The NIB can become a real anchor institution in delivering sustainability goals in the UK … There’s huge innovation potential there.”

Elsewhere, he adds, it is unclear how far Britain can usefully stray from the EU. “The EU is a standard-setter,” he says. “The UK can learn from the EU, but markets need to be closely aligned and there is very little appetite for major divergence.”

However, even without divergence, the City’s bankers, consultants and lawyers are hopeful of winning a growing share of global carbon trading. The UK can claim leadership in promoting carbon markets, and its hosting this November of the COP26 climate talks will provide a boost. “COP26 is an opportunity where the whole world will be looking at the UK,” says Jake Langmead-Jones, lead analyst at the Climate Change Committee, an independent body set up under the UK’s 2008 Climate Change Act to advise the government on how to meet its statutory emissions reduction goals. “It is an opportunity for the UK to put itself forward as the world leader in net-zero finance.”

That position was looking shakier after the government initially failed to step in to prevent approval being given for a new coal mine in Cumbria which would produce coking coal for steel furnaces (before the local council announced on 9 February) a review of its decision. The UK needs to show that it is “walking the walk” on climate policy, Mainelli notes.

But there’s only so much that climate policy can do to bring sustainable finance business to London. The decision by the Intercontinental Exchange shows just how much of an uphill struggle the City of London faces in overcoming the damage to its business inflicted by Brexit and by the neglect shown by the Johnson government.