Green Finance

Baroness Kramer Excerpts

Thursday 18th January 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I suspect that everybody in this Chamber and most people who will read Hansard are incredibly well aware of how countries across the globe—not just the traditional green players but new powerhouses, notably China and India—are now absolutely determined to achieve green economies. Our first two speakers, my noble friend Lord Teverson and the noble Lord, Lord Barker, gave us a sense of the extraordinary size of the investment that is necessary to back up that ambition. We recognise that we ourselves cannot possibly achieve our environmental goals, and those countries certainly cannot achieve theirs, unless we unleash the power of the financial markets to underpin green policies. Mark Carney has warned us that if sustainable strategies fail, our own economic future will be threatened. We therefore have every interest in making sure that the green finance agenda is a success.

So far, London has played an important role in developing green finance. There are 64 green bonds listed in London, raising over $20 billion in seven currencies. However, we need to be honest: it is not a dominant role. In 2017, London listed 27 new green bonds, raising $10 billion, but across the globe the issuance of green bonds totalled $120 billion. Part of that was purely domestic—not all of it was international—but it makes it clear that the dominance London is often used to in the sectors in which it leads is not yet established in this field. We have expertise in renewable infrastructure funds and in green indexes offered through the FTSE Russell, and we are known for our ability to innovate. But this is a wide-open market. Hong Kong, Luxembourg, Paris, increasingly, and New York are all players; the Irish and the Swedes are taking initiatives in this area. I wish to see London confirmed as the leading international financial centre for green finance. Of course, the Government’s green finance task force is looking at these issues, but let me recommend four actions the Government could adopt sooner rather than later that would be game-changers in confirming London’s role.

First, the Government should issue their own green sovereign bond. This would act as a mechanism to finance the UK’s own portfolio of commitments to green infrastructure. Clearly, the money could be used for energy-efficient home building and indeed for zero-carbon homes—an opportunity for the Government to bring back a programme that, frankly, they should never have abandoned. It could underpin pilot programmes in carbon capture and storage. It could be used for the long list of green transport, land management and energy projects the Government have signed up to. Just as significantly, it would be a prestige instrument, attractive to a wide range of investors, educating and pump-priming the market. The noble Lord, Lord Barker, talked about the importance of pump-priming technology. It is just as important to pump-prime new financial instruments, and this is an illustration of that. For those who say that this is slightly off the wall, my goodness, China, France, Nigeria and even Fiji have issued green sovereign bonds. We have a lot of catching up to do to be a major prestige player.

Secondly, for London to lead we need to develop the retail market in green finance—instruments small enough and local enough to attract the ordinary investor. We are seeing some action at the retail level: Triodos, Ecotricity and Belectric are three examples. Abundance is a world-leading platform that allows small investors to put their money into green projects—I was looking at its website this week—from a solar farm to the green use of whisky residues. However, it will require work from the Treasury to make IFAs and other advisers aware that they can recommend such options to clients who desire them, and broader public education is critical. Financial education—financial literacy, if you like—must extend to cover the green investment sector.

Undoubtedly there is potential for tax policy to support both the green bond and retail markets. The US offers tax incentives for bonds financing green buildings and renewable energy. For people who think that the US is well behind the curve, this is an example of where it is ahead of it. Brazil allows tax-free bonds to be issued for wind. China is working on proposed tax incentives for green bonds generally. Mexico and India have tax incentives for green bonds at municipal level. Even Singapore has a grant scheme to cover the costs of green bond verification.

What about a green mortgage scheme? Barclays has issued its first bond secured against mortgages on homes that meet energy specifications: what an effective way to drive both energy-efficient new build and retrofit. There should not be one or two instruments from one bank or another; they should be widely issued. Central and, especially, local government could play a significant role in helping this market by encouraging or even sponsoring similar instruments. The US, never slow to seize an opportunity, is pioneering a range of green securitisations well beyond mortgages, and Fannie Mae—going back to something close to the mortgage market—has completed one of largest ever issues to back energy-efficient housing retrofits.

Other noble Lords have said that this has to be underpinned by investor confidence that the projects financed through green instruments are genuinely green. This is an area where the UK, because its regulators are so highly respected, can lead.

All around the globe, various different entities have sprung up to provide verification for green projects. Some of them are not-for-profit, some are charities. But frankly, it is such a diverse and complex arena of verifiers that we can legitimately ask whether people and investors understand the standards they establish. Who verifies the myriad verifiers? So far, no one is playing that kind of role. That is a serious role for the FCA—verifying the verifiers and assuring standards for any green issuance in the UK. It would enhance the UK’s global status. We all recognise that in contrast, nothing would kill the market faster than a suspicion of falsely green claims.

This is not a time to be complacent. The climate change agenda is urgent and we must support it in any way we can. But if we can do it in ways that also enhance the UK’s global role in finance, that would be a second prize worth winning.