Transparent markets, greener future
A Westminster debate tackled the issue of greenwashing and promoting funding for greener markets.
There is a shortfall of between £44bln and £97bln in additional funding to achieve the UK’s key nature-related outcomes by 2030, flagged a report published by Ryan Jude’s team, the Programme Director for Green Taxonomy Work at the Green Finance Institute. The publication, produced alongside the Broadway Initiative and Finance Earth, reports that the largest gap in funding is related to climate mitigation through bio-carbon and the protection and/or restoration of biodiversity.
Regionally, the largest gap is in England, of around £21bln to £53bln needed over the next 10 years. Globally, this gap is estimated to be over US$8trln.
Despite this, at a recent Westminster Forum event on ‘Next Steps for UK Green Finance’, Fayyaz Muneer, Deputy Director, Green Finance and Prudential Policy, HM Treasury, highlighted how the UK has been a major early backer of the IFRS Foundation – a not-for-profit organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.
Muneer noted that the UK pushed for reference to IFRS in the 2021 G7 Finance Ministers’ statement and continues to champion the need for global baseline standards to maximise international operability.
The financial services and markets have a central role to play in the transition to a low-carbon economy. 'This is one of the most important debates going on in the sector right now and the banks are at the absolute cutting edge of it,' asserted Muneer.
Call for clarity
There was consensus on a need for greater clarity and certainty in the market.
'We want to see a future market where consumers aren’t dazzled or misled by greenwashing,' said Yasmin Raza, Manager of the ESG Market Intelligence & Engagement Team at the UK’s Financial Conduct Authority (FCA).
The speakers highlighted that tackling greenwashing to enhance confidence in investment will help mobilise capital towards sustainable economic activities. 'If you can identify something as truthfully green, you’re more likely to put your money towards it,' insisted Jude.
Delegates heard that the value of a taxonomy, or a green finance dictionary, rests on it being credible and practical, and a useful tool for regulators, companies and investors.
According to Muneer, the EU taxonomy setting has not been smooth sailing, but the UK is still supportive of international operability through membership of the International Platform on Sustainable Finance.
The International Sustainability Standards Board is a work in progress. It has a draft exposure standard to which the UK has provided feedback. At the moment, the Task Force on Climate-Related Financial Disclosures (TCFD) is the global standard – it has got the biggest buy-in and Muneer thinks TCFD has been 'brilliant', 'a real success'.
Meanwhile, investors also need long-term political certainty. Some initiatives have been adopted and dropped due to changing government priorities.
Helen Barber, Associate Director at AECOM, lamented, 'Even doing things under a one- or two-year timescale just isn’t enough.' She expressed the need for a framework cutting across the political divide, ensuring this long-term certainty.
There is a real need, according to Barber, for clear government policy and direction, like the initiative to scrap diesel cars.
The other issues are the sources of revenue, the disincentives to invest in nature, and the need for more certainty for pricing risk – then the pipeline of projects will come, according to David Young, Senior Fellow at the Broadway Initiative.
The fact that the City of London is well regulated is a strength he wants to see extended to green financial products – bringing together the science of environmental improvement with the efficiency of markets, and the legal certainty necessary to provide investment.
Both regulators and non-state actors lack clear legal definitions of what greenwashing entails. It’s not been adequately defined by the financial industry at large, making it hard to call out and prosecute according to Sarah Kemmitt, Lead Secretariat, Net Zero Banking Alliance, United Nations Environment Programme Finance Initiative.
She thinks we can close greenwashing loopholes and preserve, or even enhance, the trustworthiness of our financial institutions ensuring delivery on promises of a net-zero future.
The scale of the taxonomy work covers the whole range of habitats from land to marine. It’s right across the board.
In partnership
Another key theme was how to work with public projects. An area where Jo Wall, Strategic Director – Climate Response at Local Partnerships LLP, has experience.
She noted, 'It’s always the public sector partner that ends up splattered across the newspaper…And it’s pretty uncomfortable when it happens.'
'We only work with public sector organisations on a not-for-profit basis, and we share our intellectual property.'
She felt it was important to build understanding to clear up this issue.
She highlighted that the public sector has access to long-term cheap finance at a flat rate, which is much easier to draw down than private sector finance. However, private sector debt is much more dynamic in many respects. Refinancing can happen cyclically as it did with Public Finance Initiative (PFI) projects, causing confusion for the public.
Grants can start to build scale and pace, she noted. They are used to prove a concept, build investor confidence and advance learning through a pilot process. Wall said they are needed to stimulate a particular section of the market, on occasions when government cannot invest directly. They are filling the gap of underlying market failure.
She emphasised the need to consider what will be financed by the state, but also how to unlock other private funding and recognising associated barriers.
There is plenty of money 'nascent in the market that’s ready to deploy, or could be raised'. She says it’s just a question of getting to the point of market certainty and scale where it can engage.
Several speakers identified housing stock as an issue in the UK, as it is very old and needs initiatives for retrofitting. These issues needed to be addressed from a perspective of mortgage holders and social housing, as well as regional differences.
'It feels to me at the moment that we’ve got one, if not two, hands tied behind our back,' observed Councillor Matthew Bird, Cabinet Member for Sustainability, Lewes District Council. The evidence and case to move forward is established he said, from work with universities and whole range of organisations, but the funding is not there locally.
Wall advises a regional approach to retrofitting goals, with 'the best of the public sector and the best of the private sector to actually help drive some of that forward'.
In her work with local authorities, Wall sees widely varying practice in different places. At one end of the spectrum, some face difficulties through overextending themselves and going beyond what’s in their powers, causing damage to the sector reputation.
Active leadership
Young and his team are of the view governments need to play a role in the market design, as effective market design is about the allocation of risk, which currently sits with landowners.
However, a well-designed market, they believe, will sort out the relative roles of the buyers, the suppliers and the intermediaries – where risk falls and accountability lies – allowing markets to happen at scale.
The offshore wind market was put forward as a good example of practical action. It brought in other long-term planning requirements and meant private investors could be convinced to measure and model risk.
Buyers and suppliers can then start to come together a bit like a supermarket, demonstrating environmental improvement from accredited sources. However, you need intermediaries, market mechanisms and market infrastructure to support it. 'And that’s what government has to get off the fence on and start investing in,' argued Young.
Critical mass
Wall asserts, 'People are part of the solution, not part of the problem. And the challenge collectively is to build trust, encouraging and enabling investment, both collectively and on an individual basis, to develop critical mass that drives down cost.'
An FCA 2020 survey found that 80% of consumers interviewed said they would like their money to do some good as well as providing a financial return.
It was felt regulators like the FCA need to step up to deliver on government core objectives of protecting consumers and upholding market integrity. As Raza said, 'There’s no silver bullet.'
On the same theme, Barber highlighted that at AECOM, 'What we’re seeing across the board is a noticeable growing interest in green finance and nature positive economy'.
A big reprioritisation she’s seen is in biodiversity. 'I’ve been working in biodiversity for 25 years, and it’s only the last couple of years, it’s been a massive shift in priority.' She feels this is down to market certainty to allow operatisation.
Barber noted that while waiting for mandatory action through government, business pledges can be made.
The financing gap itself related to climate, biodiversity, and land degradation goals will be tricky to close, said Professor Michael Wilkins of Imperial College Business School, unless investments in nature-based solutions treble by 2025.
According to Wilkins, there is a need for new business models to embrace and integrate natural capital, rather than undermine it, a gap that could and should be covered by public sources. There is significant untapped potential for private investors to ramp up their activities by replicating and scaling promising global models. Agriculture and the food value chain are attractive for investment, to reduce emissions and traditional underinvestment in the sector.
Therefore, five enablers were identified by Wilkins that must be addressed to make the path sustainable and scalable in terms of biodiversity and nature investment.
Firstly, a market for nature investment requires conditions – investments must be repayable either through revenues, or cost reductions. To offset transaction costs, markets need an exchange mechanism, or a demand signal enforceable
by property rights and sizeable deals.
Secondly, financial innovation is needed to attract mainstream investors to nature investments blended finance.
Thirdly, scale will be attained by attracting institutional investors, such as asset managers and pension funds, and enhanced bonds structures may also help.
Fourth, property rights are another condition, the seller of the environmental good must have transparent and stable rights to what is produced.
And finally, legitimacy and equity are critical for a stable long-term market in niche transactions and must be integrated in all investment vehicles. Local engagement and profit sharing are very important here.
For banks, asset managers and asset owners to integrate sustainability disclosures, they need good information from the companies they lend to and invest in.
Thus, it is important to get non-financial reporting onto the same footing as financial reporting in terms of timeliness verification, accreditation and assurance.
We’ve seen a huge growth of assets under management in ESG labelled funds, something like £35trln now, and the market for green bonds is growing exponentially according to Kemmitt.
She stated a bank making a net-zero commitment is hugely important from a signalling perspective. But if private finance and its products don’t deliver the change they promise, 'our society’s trust in them will be dangerously misplaced'.
Another worry she has is while the Net-Zero Banking Alliance gets a lot of attention, it contains 40% of global banking assets. Very rarely do you hear about what the other 60% are doing, 'by sticking your head above the parapet…you’re sort of opening yourself to be shot.
'My concern really is that if the disincentives of raising one’s head above the parapet become too great, then it could lead to a lack of ambition or effort to move towards the 1.5°C goal of the Paris Agreement.'
According to her, the country needs to get behind 1.5 for the banks to do so. Aligning with 1.5 requires a portfolio-wide view, looking at all holdings, all operations in a holistic manner.
Organisations need to disclose both absolute emissions and omissions intensities at a sectoral level – 'a word of caution…not all disclosures are necessarily transparent', warns Kemmitt.
The net-zero commitments from financial institutions like those in the Net-Zero Banking Alliance, paired with supportive direction from regulators and governments, could turn greenwashing into trustworthy, measurable action, according to Kemmitt.
Action
Last year, a warning was sent by the FCA to firms who exaggerate the sustainability characteristics of their products and services.
The proposed Sustainable Investment Labels will help consumers distinguish between sustainable and non-sustainable investment products, and between different types of sustainable investment products.
Raza says these will help consumers to navigate the market effectively. The labels will be underpinned by rigorous criteria, which must be met before firms can use those labels.
Products that don’t qualify for a label or choose not to use them will be prevented from naming or marketing themselves as sustainable or using related terms. Most of these rules will come into force around summer 2024.
The first of the Financial Services and Markets Bill is currently going through Parliament. This includes a new net-zero regulatory principle, requiring the Securities and Exchange Commission and the Prudential Regulation Authority to pay careful attention to the UK’s legally binding climate targets when discharging their functions – a significant step in making the UK a net-zero aligned financial centre.
The Bank of England continues to be at the forefront of Central Bank and Prudential supervisory leadership on climate. They are a leading member of the Network for Greening the Financial System.
Muneer expresses the desire for legislation to 'have teeth'. However, it was argued if those teeth are slightly 'woolly' vague disclosure standards, that is not helpful. Those teeth must be of high standard.
Ultimately, the important thing is to use less according to Wall. 'We can’t do this transition if we all carry on consuming the way we currently consume.' As Barber highlights, there is a 'cost of inaction'.
