A new report from two of the UK’s most prominent green finance think tanks has outlined how the Bank of England (BoE) might use its new green mandate to lead the world in the run up to COP26 while helping the UK recover from the Covid-19 pandemic. Jointly published by the New Economic Foundation and Positive Money, the report offers 11 discrete policy proposals for the BoE and UK financial regulators to go beyond climate risk disclosure and actively contribute to the UK’s legally enshrined climate commitment to reduce emissions by 78% of 1990 levels by 2035.
The UK’s financial system is badly misaligned with national emissions targets, the report finds, largely due to an over reliance on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). A market-led approach to green finance has focused almost exclusively on protecting the financial system from climate-related risks, the authors say, with little attention given to protecting the climate from the risks created by finance. Carbon neutrality is not just another scenario and the UK financial system must go beyond managing climate risk and focus on net-zero as a key goal,” the report argues, echoing the Advisory Group on Finance for the UK’s Climate Change Committee.
The report offers 11 specific policy proposals for how the BoE and UK financial regulators might work towards aligning the financial system with emission reduction goals. It proposes adapting targeted lending facilities towards green activities, repurposing the BoE’s Covid Corporate Financing Facility to help capitalise the newly-established UK Infrastructure Bank, and the introduction of climate-calibrated capital requirements and climate systemic risk buffers. Financial regulation must go beyond climate risk disclosure to require credible plans to reach Paris-aligned targets, and climate-related financial regulation should be encouraged at an international level, the report finds.
The report also proposes that the UK establish a “Green Finance Action Task force” to govern climate finance and that it establish a ‘dirty taxonomy’ of carbon-intensive activities to complement existing work in the development of a UK green taxonomy.
“The government is committed to reaching net-zero emissions by 2050, but UK banks Barclays and HSBC alone have poured more than £185 billion into fossil fuels since 2016 – more than three and a half times what it would cost to power all UK homes with offshore wind by 2030,” said report co-author David Barmes, Senior Economist at Positive Money. “If the government is serious about ‘building back better’ and ‘levelling up’, then the financial system needs to change fast.”
New Economics Foundation Chief Executive Miatta Fahnbulleh highlighted the need for green lending into the real economy. “The set-up of the current UK financial system and the government’s Build Back Better agenda are not geared towards providing the vital patient finance needed to support jobs, businesses, and local communities as part of a green recovery,” she said. “In the context of a significant green finance gap, a primary issue is the quantity and pricing of lending. The Bank with support from the Treasury can help accelerate a socially just green recovery through targeted lending schemes aimed at lowering the cost of borrowing of green activities, particularly those undertaken by SMEs and households.”
The report comes less than four months after the UK Treasury expanded the BoE’s mandate to “reflect the importance of environmental sustainability and the transition to net zero.” The BoE is currently conducting a public consultation exercise seeking feedback on a discussion paper outlining the tools available to reduce the emissions associated with the bank’s Corporate Bond Purchase Scheme. However it has not yet indicated how it might use its new mandate in lending and other activities.
This page was last updated June 24, 2021
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