Environmental Audit Committee

Kerry McCarthy Excerpts

Thursday 7th June 2018 Commons Chamber

[Mary Creagh (Wakefield) (Lab)]

I begin by thanking the Backbench Business Committee for allocating time today for me to present the Environmental Audit Committee’s recent report on greening finance. We launched our green finance inquiry in November to examine how the UK could mobilise investment in clean energy and encourage greater consideration of climate risk in financial decision making to avoid a carbon bubble. We held hearings with investors, asset owners, experts, financial regulators and Ministers. We also wrote to the 25 largest pension funds in the UK—responsible for nearly half a trillion pounds of assets—to see whether and how they are incorporating climate risk into their investment decisions.

The situation is vital to us all. The Committee on Climate Change estimates that we need to spend up to 1% of GDP, or £22 billion a year, to meet our carbon budgets. The Environmental Audit Committee found a dramatic collapse in low-carbon energy investment since 2015 that threatens the UK’s ability to meet its carbon budgets and tackle climate damage. Last year, Britain generated twice as much energy from wind as from coal, but green investment is faltering. In cash terms, investment in clean energy fell by 10% in 2016 and 56% in 2017. Annual investment in clean energy is now at its lowest level for 10 years. Is that a trend or a blip? It is too early to tell.

The Government must publish further details in time for the 2018 Budget on how they intend to secure the investment they need to meet our carbon targets. Providing clarity on the future of fixed-price contracts for renewables will be key to ensuring a pipeline of projects. We also need continuing access to development finance. The UK Government should negotiate to maintain the UK’s relationship with the European Investment Bank to provide funding for riskier, early-stage green infrastructure projects in the UK.

Let me set out how we want to see a green thread running through the investment chain. The 2008 financial crisis revealed the dangers of short-termism in our financial system. Climate change already poses material threats to our economy, our investments and our pensions. Seventeen of the 18 hottest years since records began have occurred since 2001. That means more droughts, heatwaves and wildfires and more extreme rainfall and flooding. Those risks will grow. In the time it takes today’s young people to reach retirement, the physical risks from sea level rise and more extreme weather will grow. That will affect investment in food, farming, infrastructure, home building and insurance, to name just a few.

Companies that do not make a timely low-carbon transition could also face costly legal or regulatory action. Some companies will be left behind by firms with cleaner, more efficient new technologies. Fossil fuel companies could be left with stranded assets in an overvalued carbon bubble—oil and coal deposits that they cannot burn—if we are to keep global temperature rise to less than 2° C. They also face increasing liability risks. The city of New York is taking legal action against five fossil fuel firms to recover the costs of protecting the city from flooding from rising seas caused by climate change.

The direction of travel for the global economy is clear from the Paris agreement and from what scientists are telling us about the risks of climate change. Despite that, the short-term horizons of many financial institutions, businesses and investment managers mean that sustainability risks are not always factored into financial decisions. The quarterly earnings cycle and structure of remuneration for investment consultants and fund managers encourages the pursuit of short-term returns rather than long-term considerations. Institutional investors can be prevented from acting on climate change due to confusion about the extent to which pension trustees have a fiduciary duty to consider environmental risks. KPMG’s 2017 corporate responsibility survey found that almost three quarters of large companies worldwide do not acknowledge the financial risks of climate change in their annual reports. More than half of institutional investors surveyed by HSBC said they were receiving “highly inadequate” information from companies about their approach to climate change.

The disclosure of climate-related risks would help financial markets work more efficiently. It would enable UK institutions and investors to position themselves ahead of the market to benefit from the low-carbon transition. My Committee is calling on the Government to clarify that pension schemes and company directors have a fiduciary duty to protect long-term value and should consider climate risks. Pension savers should be given opportunities to engage with decision makers about where their money is invested. Ministers must make it mandatory for large companies and asset owners to report their exposure to climate change risks and opportunities by 2022.

The UK’s existing framework of financial law and governance could and should be used to implement climate-related risk reporting. The Government should issue guidance making it clear that the Companies Act 2006 already requires companies to disclose climate change risks where they are financially material. Companies with high exposure to carbon-intensive activities should already be reporting on climate risks in their annual reports. UK financial regulators such as the Financial Reporting Council, the Pensions Regulator and the Financial Conduct Authority should amend their codes, rules and guidance to require climate-related financial disclosures. Companies and asset owners need time to develop how they report, but only if reporting is mandatory are we likely to see comprehensive and comparable climate risk disclosures. Embedding climate risk reporting in UK corporate governance and reporting frameworks could negate the need for new legislation. However, if regulators fail to implement that, there may be a need for new sustainability reporting legislation, such as France’s climate reporting law: article 173.

To those who ask whether we must do this, I say yes, we must. Climate change poses material financial risks to our pensions and our investments. To those who ask whether we are doing this, I say yes. The transition to a low-carbon economy presents exciting opportunities in clean energy, clean transport and tech that could benefit UK businesses. And to those who ask whether we will do this, I say that London is the centre of global finance, so let us make it a global centre for green finance.

I commend the report to the House.

[Kerry McCarthy (Bristol East) (Lab)]

I congratulate the Chair of the Environmental Audit Committee on, as always, doing a sterling job of steering us through the inquiry.

The Overseas Development Institute said in its evidence to our inquiry that the UK’s clean growth strategy is “undermined and contradicted” by our continued support for fossil fuel production overseas through UK Export Finance, which has been averaging £551 million a year in recent years. Does my hon. Friend agree it undermines our international climate commitments and our efforts to decarbonise our economy if we continue to support fossil fuel investment by British companies overseas?

[Mary Creagh]

I pay tribute to my hon. Friend’s always excellent and assiduous attendance and contributions. She is a real trailblazer and we are lucky to have her on our Committee.

My hon. Friend is absolutely right that the Overseas Development Institute has stated that our international approach is being undermined by UK Export Finance, and there is a case for this House, perhaps through a joint meeting of Select Committees, to examine where we are investing overseas, because, first, they may not be smart business investments and, secondly, they are undermining our stated international policy commitments.

There is perhaps a role for the Select Committee on International Development. The UK Government are doing brilliant work through the international climate fund and the UN. That work must not be undermined by businesses that are selling old technology, instead of taking this opportunity to leapfrog and, for example, put solar panels on mud huts in South Sudan, which is something I saw at a conference yesterday. There is an opportunity to leapfrog and not to make the same mistakes we made in our electricity generation.

My hon. Friend makes an excellent point with which I can only passionately agree.