Green Finance

Lord Mendelsohn Excerpts

Thursday 18th January 2018 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, I thank the noble Lord, Lord Teverson, for securing the debate. It has been useful and constructive, and I look forward to hearing the Minister respond in kind to some very useful suggestions. I pay tribute to the noble Lord, Lord Teverson, who has done an outstanding job in these areas. I thank him for the unpaid role that he plays as a trustee of the Green Purposes Company, and I thank all his colleagues for the work they do. It is a very important role and we are very grateful to them.

Like others, I noticed that the noble Lord bristles when he is described as a reliable eco-warrior. I certainly think that he is very reliable and, having worked with him on the Green Investment Bank, I think he is also exceptionally constructive, as was his tone in his remarkable tour d’horizon. He raised an important issue that I shall just pick up: the risks involved for the insurance industry in the grand challenge of climate change. No one should underestimate how significant they are. There has indeed been a fourfold increase but the velocity of that increase is changing rapidly and we have to be very conscious of that.

I was very moved by the enthusiasm of the noble Lord, Lord Barker, particularly his phrase that the Government have regained their mojo; that is an important point to make and it is certainly true. We welcome the green finance task force, the City of London green finance leadership group and many other important initiatives that are now starting to take place. Like many others, I regret what happened to the Green Investment Bank. All that did was to take £1.6 billion off the Government’s debt figure. That was an overriding requirement of the transaction but it yielded only £120 million. That was not the deal that I would have done. I declare my interest as having a corporate finance business. Nevertheless, we are where we are, we have to move on and at least there is some enthusiasm to do so.

We do this in the context not just of enthusiasm but of the fact that there has been a downturn, and there are worrying signs of a reduction in investment, as noted by the noble Lords, Lord Teverson and Lord Fox. There are some opportunities available to the UK because we have an excellent outstanding financial centre. Certainly, in the shadow of Brexit, we have to work doubly hard to maximise any opportunities that we have, and during this debate we have heard many interesting and useful suggestions. In introducing the debate, the noble Lord, Lord Teverson, made a crucial point about how we in the UK remain a global leader in green finance. The watchword for this has to be how we ensure leadership.

I want to talk about green finance in a slightly wider context. Many of the contributions have strayed into broader areas—the noble Baroness, Lady Featherstone, made an excellent and quite wide-ranging speech on a number of areas. However, this is not just about a market opportunity. There is an unprecedented availability and uptake of solutions, particularly on treatment and on renewable energy generation and storage. In many ways you could identify that as the largest business opportunity in the world at this time, but it is also a market requirement. Sustainable capitalism, long-term capitalism, inclusive capitalism—however you wish to describe it, it is now a much more important requirement for the world at large. This is about promoting an economic system within which business and capital seek to maximise long-term value creation, and about accounting for material, environmental, social and governance issues. Integral to this framework is the consideration of all costs and benefits regardless of whether they are currently attributed with an economic cost by society.

This sort of sustainable investing is an investment philosophy and approach that allocates capital to companies aligned with these principles, and uses analysis and metrics to do it. Indeed, it seeks a competitive market rate return. It does not compromise financial returns for sustainable outcomes, or the reverse. It applies to the entire investment value chain. This is the way the world is moving—for very good reasons. That reflects not just the requirements of green areas but of all society’s impacts; it also reflects confidence in the private sector itself.

There are many advantages to take, and we have many goals in policy terms. That is not just about the transition to a low-carbon economy, or about more business models leveraging technology that improves asset utilisation, thus conserving resources and other things. It is not just about the maturing field of sustainable finance, but also about a shift in behaviours and attitudes towards sustainability between generations, with more enthusiasm and commitment towards such issues from the millennial generation and the centennials. Indeed, we face the challenge behind that often-quoted phrase, that the future belongs to those who give the next generation reasons for hope—and we have to do that.

This all bleeds into issues around corporate governance, because asset owners, managers and companies need to adopt a more holistic definition of fiduciary duty—one that incorporates sustainability and shapes investment frameworks as a result. We also need to encourage wider consumer behaviours and consciousness of these issues, even to the point of considering how our pension plan might incorporate sustainability as a key consideration, and how we can become more aware of all the consequences of our purchasing decisions. Investors, businesses and consumers alike are now equipped with the economic case for action, and the information on which to take that action.

The Paris Agreement provides a key opportunity, which has led to many calculations of the overall requirements globally. The International Finance Corporation has suggested that $23 trillion of global investment will be needed between 2016 and 2030, and I think that our Government have identified $13.5 trillion in investment in energy alone. We must energise all forms of economic activity and finance.

I shall focus on one or two particular aspects, to try to illustrate some of the challenges. It is important to establish global standards. This is not something that affects the UK alone. The lack of agreed global standards for what qualifies as a green project is fraught with many problems. For example, let me illustrate one of the challenges in the nascent area of green bonds—the crucial point at which climate issues directly meet the financial markets.

Green bonds are a fixed-income instrument used to further the green agenda. This asset class has grown dramatically, and there was more than £100 billion of issuance last year, compared with a minuscule amount only a few years ago. The momentum is extraordinary—yet there is no binding definition of “green”. There is no legal perspective in the European economies as to what constitutes such a bond. There has been a vacuum, filled by some principles from NGOs and industry groups such as the International Capital Market Association, which has a list of acceptable use of proceeds. But there is a glaring lack of an acceptable legal definition. This is not the case globally—China has a legal definition—but we need much more co-operation to create our own in Europe, and a more accepted global standard.

What can the Government do to maintain leadership? We are seeing from around the world what can be done to support growth in green finance. The European Commission has this month indicated support for regulatory incentives that would encourage banks to shift their balance sheets in a green direction, by allowing them to take on more leverage against assets with a positive environmental impact. France last year became the largest sovereign issuer of green bonds, raising €7 billion to fund energy transition. There are other illustrations as well.

We must not miss this opportunity, because the appetite is clearly there. In September a €600-million bond sold by SSE became the largest bond with a green label attached so far issued by a UK company, with the funds being used to finance onshore wind farms. As has been stated before, Barclays sold the first green bond from a UK financial institution linked to assets in the UK. But there is an issue about how some of our rivals are dealing with these opportunities. This is an important challenge for the City of London, and the noble Lord who has had such a distinguished career in the City made a very useful contribution.

Earlier this month, Fromageries Bel, the French multinational cheesemaker perhaps best known for the brand Mini Babybel, extended a credit agreement with a group of banks, comprising a €520 million revolving credit facility made up of a consortium of banks, including Société Générale, BNP Paribas, Crédit Agricole, Commerce Bank, KBC Bank and a few others. It is interesting that this renewed credit agreement includes environmental and social impact criteria linked to the company’s sustainable development strategy. It is a pioneering credit facility tying a credit line to environmental and social performance. These sorts of challenges have been taken up round the world and to maintain our leadership position we have to do more.

We are starting to promote electric vehicles. The right reverend Prelate the Bishop of Durham talked about sales of petrol and diesel vehicles ending by 2040. We have a massive issue with millions of lithium-ion batteries that will need to be recycled or reused each year, as required by existing law. Indeed, we have no such facility in the UK and we have to think about what our requirements will be over time. Perhaps in this area we can show that we have moved on and adopt a more collaborative approach to the way in which the market might be encouraged or supported to meet that challenge within the context of the industrial strategy or other initiatives. The Government take the view that this issue will be for the market to determine. The consensus in the Chamber for more progress, and more co-operation to achieve it, was adequately reflected in the debate. I hope that the Minister will respond in kind.