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Getting to green

11 May 2021

A new treasury committee report raises more questions than answers on the UK’s approach to green finance, finds Andrew Holt.

A far-reaching green finance report published by a House of Commons cross-party treasury committee has raised many issues surrounding green finance, including the cost of the net-zero objectives.  

Establishing its questioning tone about the UK’s green approach, the report stated: “The overall cost of achieving net zero is uncertain. The government should set out the principles upon which the UK will fund its transition to net zero. It should also set out its own cost assessments of achieving net zero by 2050, its methodology and highlight where the uncertainties lie.”

It also stated: “HM Treasury’s Net Zero Review final report [to be published this Spring] should include clear sectoral pathways towards decarbonisation and should address the key policy decisions as to the future of high carbon industries.”

Joel Moreland, a green finance consultant, told portfolio institutional: “With these two suggestions the committee almost reaches the most important conclusion: The government should adopt, or have its own transparent net-zero plan with short-term targets – Boris Johnson’s recent 2035 target is too far away – and an escalating carbon price of some form to back them up.” 

Costs of net zero

On the potential cost of instigating green measures, the report noted: “There are a number of different estimates of the cost of achieving net zero by 2050. However, the government has not yet committed to its own cost estimates and should set these out as soon as possible.

“The government should include in the Net Zero Review final report its own methodology on costs; and it should set out clearly where the uncertainties lie. The treasury should also include a range of scenarios on how net zero might be achieved, and the associated cost for each scenario.”

Here Moreland countered: “If this committee and government compared the costs of a low carbon transition with inaction, then it would lead to better decisions.” 

Green finance

The report also questioned the very nature surrounding some green finance measurements. “It is clear that in some cases the labels or descriptions of ‘green’ or ‘climate-related’ indices do not necessarily match legitimate consumer expectations of what they would commonly be understood to mean,” warned the report.

In an interesting take on the government’s commitment to green bonds, the report noted that it should also reveal how much of a premium it was willing to offer investors to buy new ‘green’ government bonds, rather than conventional debt.

On the proposed framework for the new UK Infrastructure Bank, the report noted that the chancellor, Rishi Sunak, should clarify its governance arrangements, how investment decisions will be made, and how it will ensure that it attracts sufficient private capital. In particular, the report stated: “It should clearly set out how the bank will meet the government’s commitment to net zero.” 

Pension choice

The report also stated there is a high level of inertia among defined contribution pension scheme members, with most remaining in the default fund. “The treasury has been robust in its view that default funds should not be required to move to more green alternatives, but at the same time maintains that consumers should not have to switch out of the default fund to invest sustainably. The Government should resolve this apparent contradiction,” the report said.

At present, the treasury is relying on a blend of disclosure, regulation and public investment to foster a transition towards more sustainable investment, observed the report. The government should therefore report “on the proportion of pension holders in defined contribution pension schemes who remain in the default fund, and the extent to which those default funds are aligned with a path to net zero”.

Divestment debate

In an interesting section, economic secretary John Glen discusses investment in green terms, coming out against divestment as an approach. “Uncoordinated divestment will not help us reach our net-zero goal, as the stock could be bought up by other investors and emissions will not be curbed. Pension scheme trustees and savers will remain exposed to the consequences of those high emissions whilst having less ability to hold the emitters to account,” Glen said.

This is an on-going debate for institutional investors: to engage and shift a company narrative on climate and green issues, or divest and send a shock wave message to the company and other potential investors.  

Moreland contested the perspective of this section of the report: “This is very dangerous as it assumes investor engagement will solve climate change. It can only ever be second fiddle to government action on emissions.”

The report also called for carbon foot printing of indices. “This is a start, but a footprint is not the same as climate risk, so is potentially misleading,” Moreland said. And he added: “It would be better to have multiple disclosures including a temperature score, absolute emissions, intensity and fossil reserves, for example.” 

The report also noted that action to develop green finance in the UK could have consequences internationally, because of the global nature of the City – as the City of London hosts and finances companies which account for a minimum of around 15% of potential global CO2 emissions.

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