Greening the Financial System

Debate between Lord Grayling and Olivia Blake

Wednesday 30th November 2022 Westminster Hall

[Olivia Blake (Sheffield, Hallam) (Lab)]

I beg to move,

That this House has considered the matter of greening the financial system.

It is a pleasure to serve under your chairship, Mr Bone. Before I begin, I would like to thank the numerous organisations, especially ShareAction and the WWF, that offered advice and briefing in the run-up to this debate, which is on quite a technical subject.

This is a very important area of debate. Not only do we face the twin climate and nature crises as possibly the greatest existential challenge of our era, but to meet them we will have to engage every part of economy and society, especially our financial system. Globally, the volume of privately invested financial assets is expected to reach $140.4 trillion by 2025, a 250% growth in less than 20 years. In the UK alone, pension assets amount to almost £3 trillion. Across the globe, investment in pensions constitutes half of all the money in the world.

An estimated £32 trillion of investment is required to decarbonise the global economy. In the UK, private investment in carbon-cutting activities such as home insulation and electric vehicle charging points needs to grow by an extra £140 billion over the next five years to reach our current net zero goals. It is therefore not only right but essential to mobilise these vast global and national resources to tackle the climate and nature emergencies; however, our finance system is not serving the interests of people or planet. Just 100 of the richest companies are responsible for over 70% of all global emissions. The world’s three largest asset managers have a combined £300 billion invested in fossil fuels, including money from private savings and pensions. In the five years since the Paris agreement, the world’s 60 largest banks have financed fossil fuel projects to the tune of $3.8 trillion.

Britain is a financial giant and the biggest net exporter of financial services in the world. Our weight in the global financial system means we have the influence to reshape it for the better, but we remain part of the problem. If the City of London were a country, the emissions it finances would make it the ninth largest polluter in the world. Between 2016 and 2021, UK banks HSBC and Barclays provided $107.44 billion to the top 50 companies expanding upstream oil and gas.

So far, efforts to change the system, such as through the Government’s green finance strategy and new benchmarks such as the TCFD—Task Force on Climate-related Financial Disclosures—recommendations, have emphasised greater reporting, transparency and information. Initiatives have often been sector-led. However, while they are necessary, they are certainly not sufficient. We also need action and regulation, not only to shift financial flows away from carbon-intensive areas and towards climate-friendly investment, but to ensure that financial institutions play their own role in tackling the systemic problems in the sector.

[Chris Grayling (Epsom and Ewell) (Con)]

I am grateful to the hon. Lady for giving way and congratulate her on securing the debate. Does she agree that a very important part of the issue to be resolved is the impact of financial investment in countries and organisations involved in deforestation, and that it is important for the City of London and our financial services sector to face the same kind of due diligence requirements that the Government rightly put in place for retailers in the Environment Act 2021, in terms of forest risk products? I encourage the Minister to consider that as an important next step in our battle against the loss of ecologically important forests around the world.

[Olivia Blake]

I thank the right hon. Gentleman for that intervention, and I completely agree: deforestation is a massive issue, and finance plays a huge role in it.

As I was saying, we need financial institutions to play their own role in tackling the systemic problems in the sector, alongside the overarching role. The Financial Services and Markets Bill, which is due back in the House next week, was an opportunity to do that, but the Bill has sent the wrong message. Take the priorities that the Bill sets out for regulators: that they should aim to enhance the competitiveness of the sector, but should only “have regard to” the Government’s net zero target.

That undermines the Government’s green finance strategy, which has two objectives:

“To align private sector financial flows with clean, environmentally sustainable and resilient growth…and to strengthen the competitiveness of the UK financial sector.”

A principle does not have the same force as a statutory aim. The Bill, therefore, represents a significant downgrading of the first target of the ambition set out in the green finance strategy.

The Bill was also an opportunity to move more rapidly on instituting mandatory net zero transition plans for financial institutions, but they are so far missing from the legislation. Plans are important, because they move us away from simply reporting and sharing information, to concrete climate action. We should also be doing much more on investor stewardship and fiduciary duty.

We need not only to encourage and incentivise fossil-fuel divestment, but to ensure that investors are engaging with and making demands of companies on climate action. That means raising capital requirements on fossil-fuel investments and raising the bar on stewardship, so that climate and nature form critical points of engagement with companies. That should also mean expanding the concept of fiduciary duty. The purpose of a pension is to provide a standard of living to the beneficiary when they retire. We need to shift the concept of fiduciary duty away from gaining returns at any cost, to thinking about the kind of world beneficiaries will retire to, or the world in which their children will grow up. Pension investors have a duty to their customers to ensure that the world is not wracked by flooding, flash fires, famine and freak weather, all driven by the climate emergency.

It is clear that the Financial Services and Markets Bill does not go far enough; it may even exacerbate some of the results of the climate crisis. Global heating has made our food supply even more insecure. In dumping the MiFID II regulations, the Bill makes speculation on food even more likely, driving up prices and worsening the consequences of the climate emergency.

However, the issue is not just regulation: so much needs to be done to create markets for green investment. In the green finance strategy, the Government set out their approach to leveraging private investment in five key areas: power, homes, transport, environmental land management and business energy use. On power, we have seen an effective ban on onshore wind, blocking of oven-ready new solar and nothing on tidal. On homes, since the Government “cut the green crap”—I am quoting—in 2013, home insulation has flatlined.

On transport, unless we are talking about building more roads for cars, the system is ravaged by underinvestment. In my constituency, people can wait more than an hour for a bus. On environmental land management, the Government appear to have scrapped or delayed environmental and land management schemes, and are now umming and aahing about their replacement. On business energy use, I repeatedly hear of small and medium-sized enterprises that want to do much more about their emissions, but do not feel they have the support to monitor them and cannot afford the upgrades to do anything about them.

I have long argued for a green new deal, and it is obvious from what I have just said that we are desperately in need of one. One way to kick-start that would be to re-examine the mandates of public financial institutions, such as the British Business Bank, offering discounted financial products to SMEs to make green investment in their business.