Green Finance

Lord Teverson Excerpts

Thursday 18th January 2018 Lords Chamber

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[Lord Teverson]

That this House takes note of the case for the United Kingdom to remain a global leader for green finance, and for the United Kingdom’s financial sector to be resilient to climate change.

[Lord Teverson (LD)]

My Lords, I declare my interest as a trustee of the Green Purposes Company, which is the green shareholder for the Green Investment Bank. Regrettably, it is an unremunerated position.

An interesting thing that happened when the appointment of myself and my four fellow trustees of the Green Purposes Company was announced was that the five of us were described in one publication as “reliable eco-warriors”. This took us rather by surprise because we had never really thought of ourselves in that sort of role. Certainly, and probably unfortunately, I have never been on a Greenpeace ship in the Southern Ocean protecting the orange roughy from being exterminated.

What the five of us also had in common, apart from that description, was that we had all been involved in various ways in the finance sector. It struck me then how many in the outside world see a contrast, if not a contradiction, between high finance, or finance generally, and those who are concerned about and campaign for the environment; they are seen very much as separate bedfellows. If I want to do one thing in this debate, it is to show that it is vital that those two characteristics—those skills, those markets, those interests—are indeed bedfellows in the way that the future of our planet develops.

The background to this debate is, inevitably, the Paris agreement of December 2016. Its headline purposes were to reaffirm an international agreement on the target for a maximum planetary temperature change of 2 degrees, but the island nations of this world in particular aspired to an increase of only 1.5 degrees. When I secured this debate, I wondered what the financial size was of the commitment to meet the Paris agreement. The numbers are very difficult to envisage but I shall give the House two of them. The first is that $100 billion a year is needed by 2020 to support climate action just in the developing countries—that does not even include the developed world. Secondly, the International Energy Agency estimates that $26 trillion of additional investment is needed in renewables and energy efficiency between 2015 and 2040 to achieve even the two-degree target, and that is just in clean energy efficiency and generation. However, it is not just about those areas. We also have a need for energy storage, recycling and circular economy systems, right the way down to the minutiae of smart meters, home insulation and research and development into new technology. It is blindingly obvious that public sector money has no chance of getting anywhere near those totals, so private sector investment is vital.

That is merely around the mitigation of climate change. In terms of adaptation, major weather events demand major upgrading and the provision of public and private infrastructure, the most obvious element being coastal defence. The key role here is that of the insurance industry in covering the costs of flooding, storm damage, firestorms and droughts. The numbers show that insured losses have increased from an average of around $10 billion per annum in the 1980s to an average of around $45 billion per annum—a fourfold increase so far by this decade. Overall losses are up threefold over the past 30 years: there are some four times the amount of insured losses.

Taking those mitigation and adaptation imperatives to meet the climate change challenge, and then connecting with the world of finance, we meet head-on the challenge of financial stability and resilience. Two threats are seen here. One is transition risks, which are about the reallocation of assets from dirty to clean technologies. The challenge is to do that in an orderly market transition. The remedies are classic: green investment finance; transparent corporate reporting around assets, not least the potential stranded assets; and corporate environmental performance. Then there is the adaptation side—the physical risks of climate events, which are very much down to the insurance and banking sectors.

Why is this important to us? As we know, the UK, particularly London, is a global financial centre. Let me give some of the numbers again, although many people here for the debate will know them. The City and the financial sector generally in the UK offer, and provide, £125 billion of gross value added. That is some 7% of total UK GVA. Its trade surplus is something like £26 billion, it employs 1 million people—some 3% of all jobs—and gives a tax take of more than £70 billion, which is some 11% of Treasury receipts. Only 50% of that GVA is in London. Another 10% is in the south-east and 7% in Scotland, which is another important centre.

Why is green finance an opportunity? As well as being an important economic hub, the UK has an important financial ecosystem. First, we have world-class commercial legal practices, English contract law, the London Stock Exchange, AIM and other world-class financial exchanges, top global universities and business schools, and a vibrant fintech sector. We can also provide the full range of financial services, not just the obvious Green Investment Bank-style investment finance and green bonds—although I recognise and congratulate HSBC and Barclays on the issuance of foreign currency green bonds that we already have in this country. There are also the insurance and reinsurance markets, including catastrophe bonds and resilience bonds, carbon trading, private equity and venture capital, crowdfunding and, right down at the retail end, green collective investment schemes and green mortgages. All have a place in the financing of a clean future.

Secondly, the UK is an environmental hub. We have international NGOs such as WWF, Greenpeace and Friends of the Earth headquartered in London. We have superb environmental consultancies such as E3G, university centres of excellence such as Imperial College’s Grantham Institute and—more down my way in the south-west—we have the internationally renowned Met Office, based in Exeter.

We also have environmental leadership. That came partly out of the Climate Change Act, which we as a Parliament passed 10 years ago. The original Stern report is still highly regarded. We have had, and still have, leadership in the European Union on climate change. Our sherpas were key in delivering the Paris result. We also have the leadership shown by Governor Mark Carney and the Bank of England, co-chairing with China the G20 Green Finance Study Group, and Carney’s leadership within the Financial Stability Board. I congratulate him on the work that he has done, and on what he has brought to international attention in the financial sector.

My point is that this is the perfect match in the making. London is best able to provide us all with a sustainable future, and that sustainable future needs the power and skills of London. When I say London, I mean the broader UK financial community as well. This can be win-win for the City and for our planet. Let us make no mistake: this transition to a clean economy is going to happen. As we have seen across the Atlantic, despite Trump’s efforts to reverse the clock, American states and corporate America continue to move down the path to a clean economy—rather too slowly, but the economics are driving that just as much as the politics are resisting it.

The only questions for us are: are we to remain at the centre of these new opportunities, and how do we consolidate our lead? Scandinavia is already rearing its head in this area, and there will be major investment in Asia in the future. The French have already issued a sovereign green bond worth some €7 billion. We cannot be complacent. We must maintain our position by breaking down barriers, and building on our competitive advantage.

The barriers are generally seen as externalities, such as the total costs not meeting the complete environmental and social costs, maturity mismatch, lack of clarity, asymmetric information and inadequate analytical capabilities. In London we can be really good in most of those areas. But I must say to the Government that we also have barriers in the UK, such as a shrinking home market. This week the Bloomberg New Energy Finance report points out that UK investment in renewables and smart energy technologies fell by more than half—by 56%—in 2017, the biggest fall in any country.

Our access to European Investment Bank money will disappear following Brexit. The EIB has provided loans of more than €37 billion for UK energy infrastructure since 2000. In the UK we have a lack of pace. The Smart Meters Bill will come to us shortly, yet when I came to the House over 10 years ago that was supposed to be urgent. We also have the uncertainty over Brexit and its effect on our financial sector.

What is the answer to this? There is an important agenda. We need action from the Government to achieve the fourth and fifth carbon budgets to make sure we have a good home market, and we need to keep our environmental and financial communities here in London and in the City coherent despite Brexit. I believe that we need to remain a member of the EU ETS. We need to continue welcoming all talent into the City, including from non-environmental areas. We need to create and validate world-class benchmarks and indices. We need to keep standards in our financial affairs that keep out “greenwash”, which is so easily done and will undermine our reputation, and to stimulate retail investment products so that households and individuals can also participate in this market, as well as product development and research. We need more mandatory reporting for UK-listed companies in line with the recommendations in the excellent report of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. As a former trustee of a local authority pension fund, I know we need to show that fiduciary duty does not always mean conventional investment in huge pension funds.

I welcome the Government’s green finance task force but we need to seize the moment now. The good news is that this programme requires little public money to implement but does require legislation and some regulation. We need to reinvigorate our environmental leadership and remain outward-looking as much of the investment will be in the developing world. Therefore, I ask the Minister to take very seriously the recommendations of two excellent reports among many: the City of London’s Fifteen Steps to Green Finance and the report of the FSB’s Task Force on Climate-related Financial Disclosures. Will the Government move forward those recommendations—not least, as a starter, the City’s demand for the establishment of a new UK green standards board? Will the Treasury issue a green savings bond, like the French?

The Clean Growth Strategy and the 25-year environmental plan are welcome but do not contain enough action. We need action now. This is a golden green win-win opportunity. In Cornwall we say, “This is the moment to ride the wave”. I challenge the Government not to miss that opportunity. I beg to move.

--- Later in debate ---

[Lord Teverson]

My Lords, I thank the Minister for his response. It is last business on Thursday so I will obviously need to be brief. To put this beyond doubt, I should say that I and my fellow eco-warriors feel it entirely appropriate that we are not remunerated as trustees of the Green Purposes Company.

I pay tribute to the noble Lord, Lord Barker, for his work over many years on distributed energy and the work he did in the coalition. The Minister is right: we worked very well together in this whole subject area as part of the coalition. The enemy was the Treasury, but I suspect that that is government, whether in coalition or not.

I congratulate the noble Lord, Lord Mountevans, on having achieved this Green Finance Initiative and the report Fifteen Steps to Green Finance. It is eminently readable and sensible and is a superb agenda that a Government of whatever colour should be able to deliver. My noble friend Lady Kramer drilled down and offered challenges. The right reverend Prelate spoke about social responsibility and particularly the role of DfID, which I did not mention but is incredibly important. The noble Lord, Lord Fox, talked about transparency. I do not know what I can say to the noble Lord, Lord Dykes. I think that microwaves are pretty efficient. Unfortunately the real enemies are probably people like me who are Aga owners—I think we are the real enemies of megawatt hours when it comes to preparing food. I also thank the Front-Bench spokespeople, particularly my noble friend Lady Featherstone, and of course the noble Lord, Lord Mendelsohn, for his usual insights. Of course, they have to be here, given the weighty positions they hold as Front-Bench spokespeople.

I say again to the Minister and to the Government: catch this wave. There is that opportunity: it is a sweet moment, so let us get on and do it. I have one disappointment, but I recognise that the noble Lord is not a Treasury Minister. The one thing we could and should do to lay down a marker as a nation—as the City—is to have a green sovereign bond. If we do not, we are saying we are out of this important market, so I ask the noble Lord to take that back and discuss it further with his Treasury colleagues.

I thank all your Lordships for your contributions.

Motion agreed.