Green Finance

Baroness Featherstone Excerpts

Thursday 18th January 2018 Lords Chamber

[Baroness Featherstone (LD)]

My Lords, I congratulate my noble friend Lord Teverson on securing this debate. I usually stand here to warn that the Government are not going far enough or fast enough—they are not—to deliver our emission reductions commitments from the Paris Agreement and the Climate Change Act. However, today’s debate is really about the economic opportunities of the low-carbon economy and the low-carbon world. We have the opportunity to make the UK the green and sustainable investment capital of the world, but only if we move swiftly and take the right actions. There will be, and already is, fierce competition from other countries to lead and capitalise on this agenda, so we need to move decidedly; we need to signal to the world that we are serious, not half-hearted, not little and late, but bold and courageous if we are going to capture this market.

The potential—as we heard from many sides of the House—for green finance is huge: trillions over the next decade. It is easy to see how, within a few short years, every listed company on the planet will face calls from shareholders to explain how they plan to adjust to a decarbonising economy and escalating climate risks.

With a rising population pursuing higher levels of wealth on a finite planet, green and sustainable investments should facilitate the transition to a more sustainable economy and avoid many of the risks associated with transition. If we do nothing to create a sustainable future, we stand to lose out through enormous shocks to our economy and financial system, and then, as other noble Lords have said, there is Brexit. Sir Vince Cable, in a recent op ed for City A.M., said:

“The prospect of Brexit threatens to cause serious damage to the UK’s financial services industry. Paris, Frankfurt, Dublin and even Luxembourg are all circling like hungry jackals waiting to pick off the weakest members of the herd. London will need to develop a distinctive and competitive offer to investors. I believe we can find it … in the expanding world of green finance”.


I think noble Lords on all sides of the House agree.

The financial system is there to serve the real economy which, in turn, is there to help society thrive. We do not have the green, zero-carbon economy today that society needs, so we also do not have a green financial system channelling capital towards it. Both those things need correcting at the same time to secure progress. The financial system is just that: a system. It has multiple actors, all of whom have different incentives and roles to play. Therefore, action needs to be taken across the whole system. To categorise broadly the interventions that are needed, they are those that relate to the supply of capital; the demand for capital; and the connective tissue between supply and demand. Across all three categories, we have to ensure that the financial system is resilient, both to huge environmental change and the economic change necessary to avert it, and that we redirect capital towards activities compatible with a zero-carbon economy.

We heard from my noble friends Lord Teverson, Lady Kramer and Lord Fox on the supply of capital. All those with professional responsibilities for governing institutional pots of money on behalf of others—for example, pension fund trustees—have fiduciary duties and must take seriously climate risk and the changing economics of things such as renewable energy. Regulation can require this, training can support it and government-run pots of money can set the example. Doing so will result in large sums of money seeking green. Banks should be supervised using existing prudential regulatory powers so that we are confident that they are taking seriously the financial risks of climate change or a failure to transition quickly enough. Doing so will result in more bank capital seeking green. Insurers should be empowered to be a go-to source of investment in zero-carbon infrastructure. They have to find long-term investments to match their long-term liabilities, and they have a clear vested interest in bringing down overall levels of climate risk. If zero-carbon infrastructure investment cannot work for them, who can it work for?

As we heard from my noble friend Lady Kramer, the investing public are often forgotten, yet they are the customers of the above institutions and the citizens who stand to thrive or struggle in a green climate-changed world. The average saver or investor is quite open to doing good with their money, but the system they put money into cannot answer the most basic of questions: what environmental impact is my money having? The public have to be able to access this information and the investment advice related to it as a matter of course. If necessary, government savings products for the public should surely kick-start the market for simple, impactful financial products.

There is also demand for capital. As we heard from my noble friend Lord Fox, the Government have issued their clean growth strategy, but investors remain pretty unclear about where their capital can be put to best use to help deliver it. What about clean growth investment plans by the Government and industry to start focusing investor attention on the biggest needs? There are significant, but often overlooked, regional or local agendas here. Clean, zero-carbon infrastructure is needed right across the UK, and very often local authorities and councils could be playing a catalytic role in attracting green finance from the private sector. However, their knowledge and skills as to how to do so are lacking, so what about building capacity to issue clean growth investment plans for particular regions or green bonds for cities and regions? Indeed, the sovereign bond would not go amiss either.

Finance flows mostly in rational directions—mostly. As was mentioned by the right reverend Prelate, we still have a raft of perverse subsidies, for instance fossil fuel subsidies, which make it economically sensible for money to flow into exactly the kind of activities that we are trying to wean ourselves off. The debate about needing to see an end to renewable subsidies always misses this point, yet it is a huge distortion in the market.

Then there is the connective tissue of data. Data has a transformative impact on how capital is deployed. The whole success of the green bonds market—tiny but growing—arguably boils down to just one difference between a conventional bond and a green bond: data, specifically data about how the proceeds of the bond will be used for green. Making that data available to investors has revealed enormous demand, and since demand is so often outstripping supply, issuers of green bonds are now seeing material pricing benefits in their favour.

The TCFD, the Task Force on Climate-related Financial Disclosures—it trips off the tongue, that one—plays directly into the data agenda. Disclosure must be mandatory, as we have heard from several speakers today, and as advised by Aviva, the insurance giant. It must be made mandatory as soon and as smoothly as possible, and feed into all relevant existing disclosure legislation. If we get that right, the expertise we will accrue will be exportable as a service.

As for green fintech: digital technologies are transforming how financial services are delivered. If we think peer-to-peer platforms and payment systems like PayPal right through to blockchain—add in machine learning and big data analysis techniques—digital technologies are a formidable force. For green finance, they can be used to get massive amounts of data on green into the financial system, at scale and at low cost, allowing investors to differentiate between green and brown in whole new ways.

The digital revolution can make the financial system more accessible and accountable to consumers. Green fintech is a nascent area, but the UK has powerful strengths in fintech, green finance and innovation. We have such a huge opportunity to lead the world in this area, and the Government should be looking for ways to spur that market innovation.

We have had an excellent debate; I want to touch on a few of the points that have been made. The speech of the “reliable eco-warrior” behind me was a tour de force. He emphasised that all finance is really green finance and that it is win-win for the climate and the economy. I suppose if you boiled that down you would say, “We can save the planet and make money”. He also reiterated the point about mandatory reporting. My noble friend Lady Kramer talked about the size of the green bond market and how we need to educate and pump-prime new financial instruments. She advocated a green sovereign bond. She said that we need to educate the public that financial literacy is a must. She also talked of green mortgages and the verifying of the verifiers. The right reverend Prelate reminded us of the Christian commitment to the stewardship of our planet. I think it is a favourite saying of the noble Lord, Lord Mountevans, that business is playing its part in addressing climate change; it is an opportunity for business to show its green credentials. My noble friend Lord Fox talked of resilience and transparency, and said we needed to set the standards of transparency. He lamented, as do many on our side and, I am sure, others, the loss of the Green Investment Bank. That is one of the stupid things that we in this country do: develop something brilliant and then sell it off.

I shall touch briefly on divestments, which I was hoping would be covered by someone else. Divestment is moving hugely in this country. When New York moves, the World Bank moves, Aviva moves, the Dutch bank ING moves, Norway’s sovereign fund and Black Rock move—they all get this. There is a huge and growing reputational, financial and operational risk that Governments and investments are associating with fossil-fuel assets. They are going to become stranded assets at the same time that it is becoming clear that the economy will become low carbon.

Happily, we do not need to reinvent the wheel but we need to ensure that we are ahead of the curve. We have the European Commission high-level expert group recommendations, the Prudential Regulation Authority’s initial report on the impacts of climate change for the UK’s insurance sector, the UNEP inquiry into the design of a sustainable financial system, the Environmental Audit Committee inquiry into green finance and the conclusions of the financial stability task force on climate-related financial disclosures, and in March we will have the recommendations of the Government’s green finance task force. So we are not lacking in advice, but what we need is strong action. I am looking forward to hearing from the Minister. I hope he is going to say that the Government will act with urgency, clarity and boldness. If we want this market, there really is no time to lose.