Covid-19: Businesses and the Private Sector

Lord Gadhia Excerpts

Thursday 21st May 2020 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, Milton Friedman’s dictum that the business of business is business was always an exaggerated and oversimplified representation of the role of private enterprise in society. Today’s debate has highlighted how the vast majority of businesses take their wider responsibilities seriously and are playing a crucial role in our effort to combat the current pandemic. This forms part of a much broader secular trend, from shareholder supremacy to stakeholder primacy. From the pioneering work of the Quakers in Bournville or Port Sunlight in the late 19th century to the aerospace and munitions manufacturers in World War Two, and through to the modern manifestation of stakeholder capitalism enshrined in Section 172 of the Companies Act 2006, this shift is increasingly being reinforced by the attitude of institutional investors and their use of ESG metrics to evaluate sustainable corporate performance. Indeed, Covid has been a live test of business resilience and agility. The mass implementation of homeworking and the reconfiguration of supply chains and business models to accommodate physical distancing has been a remarkable feat. Covid is accelerating trends and bringing the future closer.

It is clear that businesses will not return to the status quo ante, but the road ahead remains uncertain as we learn to live with the virus. Soon, our health anxieties may be overtaken by concerns for the economy and our livelihoods. Once again, businesses will play a pivotal role in this next phase. While the near-term priorities will be incorporating health and safety protocols into the workplace and any customer interactions, we should also seize the opportunity to address the fundamentals that are holding back our economic performance and productivity.

If there is a silver lining to this human tragedy, it will come from building back better. To borrow from a sentiment expressed previously by the most reverend Primate the Archbishop of Canterbury, we can recast Milton Friedman’s dictum to demonstrate that the business of business is human flourishing.

Green Economy

Lord Gadhia Excerpts

Thursday 12th March 2020 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, in speaking in today’s debate on the green economy I draw attention to my register of interests as a board member and investor in Calisen plc, which owns and manages critical energy infrastructure, including smart meters. This experience has provided me with not only direct insight into the Government-mandated smart meter rollout programme, but perspectives on how the right policy framework, together with appropriate regulatory certainty, can galvanise substantial infrastructure investment from the private sector for transition to a net-zero carbon economy.

Before turning to the wider theme of green finance, I will recap the public policy benefits of the smart meter rollout, which have sometimes been lost in the technical challenges of implementation. The new generation of smart home devices sits in the middle of the triangle of decarbonisation, digitalisation and decentralisation, which is transforming the energy landscape. As well as the valuable consumer and supplier benefits of real-time consumption data, removing inefficiency of manual readings and increased billing accuracy, the potential benefits go much wider and deeper.

These encompass ease of switching, now running at almost one in five customers changing supplier each year, and incentivising households to change their energy consumption patterns away from peak hours by offering variable time-of-use tariffs. Beyond demand-side management and helping to reduce peak supply capacity, smart meters can also support localised generation and storage through the likes of home solar installations and electric vehicle batteries. In a nutshell, this £13 billion investment programme to replace 51 million gas and electricity meters by 2024 will be a key enabler of a smarter, greener and more dynamic energy ecosystem and an area where we will lead the world.

But this is just one component of a much wider transformation required for the economy to achieve net zero. To attract the estimated $3.5 trillion of investment required every year for several decades and to incentivise the optimum allocation of capital, three essential features are required to inform and guide decision-making: first, a more consistent approach to carbon taxes so that we do not misallocate resources; secondly, investment metrics and reporting that accurately capture carbon-adjusted returns; and thirdly, a comprehensive risk management framework that can help navigate the inevitable transitional challenges of achieving net zero. I will take each in turn.

We saw in yesterday’s Budget both an acknowledgement of how carbon taxes are an important signal for allocating resources and how difficult it is for Governments to introduce consistency in the face of special interest groups. For example, independent research shows that cars face an effective carbon tax of £109 per tonne, whereas home devices pay £41 for using electricity and gas-fired heating comes with an effective subsidy of £14 per tonne of carbon. The Chancellor has recognised these anomalies with the proposal to equalise the climate change levy paid by companies between electricity and gas.

However, widespread exemptions have been maintained on the subsidy for red diesel, especially for agriculture and fishing. Unless we take a braver approach to reflecting the true price of carbon and converging carbon taxes, we will miss the opportunity to incentivise behavioural change and continue to misallocate resources. I therefore hope that the Treasury’s net-zero review, scheduled for later this year in advance of COP 26, will address this fundamental issue of consistency.

Secondly, the whole field of climate metrics has gained critical mass through the work of the Task Force on Climate-related Financial Disclosures, known as TCFD, with its widespread adoption by major banks, insurance companies, pension funds, asset managers, credit rating agencies and accounting firms. The provision of consistent and comparable market standards for disclosure should enable providers and users of capital to capture their current carbon footprints and set out their future trajectory and strategy in a way that can be continuously measured and monitored. For example, the ability to attach a degree of warming to an individual security or index can not only encapsulate in very stark terms the scale of the challenge, but facilitate measurement of progress. Currently, the FTSE 100 is heading towards 3.9 degrees of warming, according to the analytics firm Carbon Delta, and similar analysis carried out by Aviva showed its equities portfolio on track for a 3.4 degree rise. The next logical step will be to make TCFD mandatory rather than voluntary.

Thirdly, I turn to risk management—not just specific risks for individual entities, but system-wide risks from adopting different paths to net zero, both on timescales and pace of change and incorporating any feedback loops. This is an area where the Bank of England is leading the way and will become the first regulator to stress test its major banks and insurers against different climate pathways, ranging from business as usual to meeting net zero by 2050 and everything in between. One of the risks that has been highlighted is a belated policy response, leading to a Minsky moment with a collapse in the value of carbon-positive assets, which become stranded, leading to a disorderly transition. For the UK, as a pioneer in climate stress tests, a positive outcome for COP 26 would be for every central bank to adopt a similar approach.

In conclusion, in recent weeks we have seen how important it is to mobilise the entire country in an emergency response, in the present case to a major pandemic unfolding before our eyes. Notwithstanding the concerns expressed today by Sir David Attenborough, I hope we can also deploy a similarly co-ordinated and timely response to the climate emergency in the coming years, showing the same respect towards expert scientific advice and having the confidence to take bold measures when required to protect the public interest. To extend the analogy further, we are already beyond containment and delay on climate response; we need to move directly to mitigation and adaption. Green finance has a pivotal role to play in what Mark Carney has termed the three Rs: reporting, risk management and return. In fact, we are fortunate to have the outgoing Governor of the Bank of England take up the role of financial adviser to the Prime Minister in the lead-up to COP 26. We should take full advantage of our status as the world’s leading international financial centre to ensure that green finance plays the fullest possible role in delivering a green economy.