The new British Government must prioritise climate finance, driven by the upcoming COP29 and the need for economic growth through a low-carbon economy. A whole-of-government approach and a revised vision for financial regulators, including a new climate mandate for the Bank of England, are essential. Additionally, innovative ideas like unlocking pension fund capital and modernising IPO regulations to account for carbon budgets are crucial for supporting the transition to green technologies and aligning financial flows with climate goals.
CTI is delighted to share a new climate finance policy playbook for the new UK government, Accelerating Transition: Climate Finance Policies to Prioritise in the First 100 Days, featuring the following essay written by Amy Owens and Richard Folland.
The new British Government taking office on 5 July will have several immediate domestic and international priorities – ranging from cutting NHS waiting lists to providing continued support to Ukraine. While climate finance will not feature as a first-order issue for the new government, polling consistently indicates that action on climate change matters to a significant portion of the public. The government should therefore respond to this by setting out its climate strategy without lengthy delays.
Specifically, there are two drivers for prioritising climate finance:
- The COP29 convening in November 2024 (in Baku, Azerbaijan) is being increasingly talked up as the “climate finance COP”; hence, the UK – now departed from the European Union offer post-Brexit – will need to show its hand on this agenda;
- More importantly, given the sluggish performance of the UK economy, the new administration will want to focus on areas that promise economic growth. Moving to a low-carbon economy and enabling the UK’s financial services sector to become a hub for green and transition finance would provide clear opportunities to support this growth; this would need to be underpinned by an industrial strategy and investment plan supporting investment in these areas.
This article outlines two innovative ideas for accelerating low-carbon investment. First, we set out the overarching policy approach that will be necessary to underpin the step-change.
A Whole-of-Government Approach
Over recent years, the consensus has been that climate finance has become “mainstream”. The reality is that this remains a work in progress, certainly in the UK. The lead climate department, Energy Security and Net Zero (DESNZ), has not carried sufficient political weight for a long time, and has suffered from a turnover of ministers who have sometimes been more preoccupied with short-term hobbyhorses than a longer-term strategy – to the detriment of the climate agenda.
By contrast, the government department with the most muscle and focus on economic growth – HM Treasury – has tended to treat climate finance as a marginal issue. This needs to change. Ultimately, the lead must come from the top (i.e. the Prime Minister’s team supported by the Cabinet Office) for the mainstreaming of climate finance to translate into genuine economic growth.
A Real Economy Philosophy
Mention of the real economy is a reminder that the new government should be thinking about more than Whitehall restructuring; a whole-of-government approach should also be coupled with a fresh philosophy on climate finance.
Greenwashing is regularly levelled at energy companies and financial institutions. Carbon Tracker has substantial evidence of pension funds and asset managers enthusiastically promoting their net-zero targets. Unfortunately, financial institutions are simultaneously reluctant to acknowledge that reaching those targets will demand policies utilising both arms of the scissors – namely, (i) a proactive and open approach towards the opportunities that the low-cost renewables and clean energy technologies can unlock; and (ii) an unambiguous acceptance that keeping 1.5C warming within reach means that the phase-out of oil, gas and coal as energy sources is inescapable, and that this phase-out must be accelerated.
The new government can take the lead here, building upon the Green Finance Strategy’s support for ‘green’ activities to tackle ‘brown’ activities more comprehensively. A real economy policy towards climate finance will require a forensic, sector-based approach that recognises the support and care required by hard-to-decarbonise, high-carbon sectors as they transition the coming industrial revolution. This should not overlook the opportunities of a new economy based on high-quality skills and innovative technologies that low-carbon sectors can seize.
Innovate to Deliver
The transition will require a systems transformation (alongside the revolution of AI) to deliver a new industrial economy for the UK that will enable it to compete against the big industrial blocs of the United States, China and the European Union. We have two proposals that can make a difference. Both of these complement Carbon Tracker’s mission to mobilise capital markets to accelerate the transition and reach our goal of a globally decarbonised economy.
Unlocking the capital in pension funds
According to the Office of National Statistics, the value of private sector pension funds is nearly £2 trillion. Imagine the power of these capital funds tilting powerfully in the direction of the low-carbon economy. Equally, imagine the further domestic and overseas investment that this capital could unlock. To do this, however, financial policymakers and regulators must be prepared to discard a business-as-usual approach and deploy their powers to drive systems change.
The new approach must start from the top. UK Treasury needs a revised vision for its regulators. The Bank of England at present does not have climate change and sustainability embedded in its core mandate. Likewise, the Financial Conduct Authority (FCA) – while steadily updating its rules to improve its climate-related financial decision-making – still fails to prioritise climate as it should.
We therefore recommend early action by the Treasury to reset the Bank’s mandate on climate and sustainability. This would send a shock wave through the financial ecosystem, asserting the urgent need to prioritise and respond to climate risk. It could also transform the Bank’s approach to climate scenario modelling. As Carbon Tracker’s Loading the DICE against Pensions and other reports have demonstrated, this currently undervalues the physical impacts of climate change. This is significant as its modelling provides the basis of investment consultants’ advice to pension funds, which, in turn, frames the cautious approach that their Trustees adopt on the transition. A fresh Bank mandate on climate therefore has the potential to change the game for pension funds, by increasing the cost of doing nothing and decreasing the cost of doing something. In this way, pension funds can be in the vanguard of making Article 2.1.c of the Paris Climate Agreement into a reality, moving capital away from risk into areas of opportunity; in the Article’s words: “making financial flows consistent with a pathway towards low greenhouse gas emissions…”.
Making IPOs fit for the modern age
Our second proposal on financial regulation could support the transition away from fossil fuels and usher in a new era of low-carbon investment. At present, there is a major loophole in the regulatory framework that oversees the fossil fuel sector. We therefore suggest the consideration of new regulation on reserves reporting in order to embed a requirement for companies wishing to develop new coal, oil and gas reserves to disclose how these reserves are viable within the constraints of the carbon budget.
We have a ready-made set of ideas to form the basis of this new regulation. It would involve the establishment of petroleum engineers and geologists in the formal IPO prospectus process in the UK (we note this approach could also apply in other jurisdictions). This revamped process could explore whether climate constraints and the “carbon budget” as a ceiling to future production could be factored into new disclosure requirements, in the form of an “atmospheric viability” test on company reserves. This would be a significant step forward for the joined-up policy approach that we recommended earlier.
Conclusion
We acknowledge this agenda represents a vaulting and complex challenge. But we cannot ignore the fact that existing financial regulation fails to recognise any ceiling on what fossil fuels can be produced. This approach cannot be right as it is at odds with the goals of the Paris Agreement. Nor can it be right that overall financial policy and regulation are not set up for the new economy and for the industries that will be critical to powering this economy. We hope the new government can see this and grasp the opportunity.
