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The kaleidoscope of global green finance is being shaken- can the UK regain its lead?

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Recent weeks have shown a real momentum for climate change action in the UK. Ironically, one of the UK’s leading industries – finance – risks being left behind as other financial centres rapidly develop as green finance hubs. The key difference between the UK and other countries is not know-how, but rather political will to implement the necessary measures towards greening the financial system.

It’s been a busy few weeks for the UK Government. The climate has changed in Whitehall and Ministers and MPs are now feeling the heat. This comes from four very high-profile moments: Greta Thunberg’s audience with a cross-party group of MPs, the Committee on Climate Change’s net-zero report, the IPBES summary on species extinction and Extinction Rebellion’s two weeks of protests.

These moments have served a double dose of evidence and public opinion which is overwhelmingly in favour of taking systemic action to address climate change. The Government now must act. Finance is already known to be the keystone in addressing climate change, but with time slipping away it requires some careful and urgent masonry if it is going to help deliver what’s needed.

London stands as one of the leading financial centres of the world, but its position risks being undermined.  It has already been overtaken by New York in the The Global Index Financial Centre from Z/Yen and has failed to capitalize on its strong position in finance. Despite Chancellor Phillip Hammond's speech last year at London’s Mansion House setting out the UK’s aspiration to be the global leader on green finance, the Government has yet to formally respond to the comprehensive recommendations for action made by the Green Finance Task Force.

This is particularly unsettling as the UK has yet to translate its prestige in traditional finance into a leadership role for green finance. A complacency permeates the government, formed around the misconception that green finance does not require any special architecture or approaches. But this false assumption places London’s future in jeopardy.

France has leading environmental regulation and proactive branding (Finance for Tomorrow), whilst China is also encouraging Green Finance with Guidelines for Establishing the Green Financial System. In a sign of how quickly others are reacting to the shift, the European Commission took just two months to respond to the EU High Level Expert Group’s recommendations, publishing the Sustainable Finance Action Plan. Singapore has published a Roadmap on Green Finance at the request of the Monetary Authority of Singapore. Ireland has a national initiative to position itself as the global leader on green finance, Finance Green Ireland (FGI). In Canada the government – inspired by the UK’s Green Finance Task Force – set up an expert group and will shortly respond to its recommendations. New Zealand is one of the latest to announce a similar initiative. In all these cases, there is clear and visible political support for the implementation of reforms to boost Green Finance at the highest levels

In principle, the UK should be ahead of the curve. Last year, the Green Finance Task Force – sponsored by HM Treasury and the Department for Business, Energy and Industrial Strategy - came up with a comprehensive set of proposals to advance green finance, and clear actions that can be implemented within two years. With the Green Finance Strategy set to arrive this summer, recent public and political developments mean there will be no excuses if Whitehall doesn’t hit the mark.

The UK is extremely well-positioned to take advantage of the growth in green finance. London’s finance sector has a reputation for innovation and is backed by deep and liquid capital markets. Its global reach is surpassed only by New York and Beijing. As such it is regarded as a leader in regulatory practice worldwide, with a strong brand backed by soft power. This gives it the necessary knowledge cluster to leverage these benefits and become a green finance leader.

UK leaders across Government must resolve to leverage the UK’s reputation and grasp the opportunity  whilst also building collaborative partnerships with international partners. This will create new markets in climate resilience and sustainable infrastructure. E3G recommends six steps to achieve this:  

  1. Implement the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) on a mandatory basis by 2022.
  2. Align UK export finance and development finance via the CDC Group (UK Development Finance Institution) with the Paris Agreement and the UN Sustainable Development Goals.
  3. Create a new infrastructure financing mechanism with a clear net-zero and climate resilience mandate.
  4. Align the Whole of Government Accounts (WGA) with the Paris Agreement, and disclose the UK’s WGA exposure to climate-related risks using the TCFD.
  5. Develop UK policies for frontloading investment in three priority areas: natural capital, climate resilience and energy efficiency.
  6. Systematically invest in the UK’s capabilities to supply the data, information and analysis required to green the financial system.

A well implemented Green Finance Strategy offers the opportunity to reinvigorate the financial sector in the UK and future proof it against systemic disruption. The UK has all the necessary tools to achieve this. The onus is now on politicians to demonstrate the political will to match the clear and popular support for a net-zero economy. Doing so will ensure London’s finance centre is well positioned to maintain its global pre-eminence.