Greening Finance to Build Back Better: UK Roadmap Ahead of COP26

With a new green mandate and COP26 approaching, the Bank of England (BoE) has a unique opportunity to become a global leader in greening finance as it recovers from the Covid-19 pandemic, finds this report from Positive Money and the New Economics Foundation. The UK’s financial system is currently badly misaligned with the UK government’s legal commitment to a 78% reduction in greenhouse gas emissions by 2035, the study finds, offering a series of policy proposals to expand green investment, regulate private finance and reform the institutional ecosystem.

Due to its vast scale and influence, finance is one of the most important sectors to get right in the global effort to reduce emissions, the report finds, yet market-led approaches to green finance focus almost exclusively on climate risk identification and give little attention to protecting the climate from the risks created by finance. “There is a significant difference between ‘engagement’ and actually shifting capital allocation,” the authors say, suggesting that an over-reliance on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) largely explains the lack of progress in actually greening the financial system.

To align emissions outcomes with the growing rhetoric and engagement on climate, the report offers 11 discrete policy proposals that the BoE and UK regulatory authorities could take to make meaningful progress on transitioning financial flows away from high carbon projects and activities and towards sustainable alternatives. The proposals are designed to “unleash” green investment, regulate private finance and develop the necessary institutional framework to deliver a green recovery from the Covid-19 pandemic and a just transition to a net zero world.

To dramatically increase green financial flows, the BoE should lower borrowing costs in its targeted lending schemes for green activities, especially those undertaken by SMEs and households, the report proposes. The Bank’s Covid Corporate Financing Facility should be repurposed to help capitalise the newly-established UK Infrastructure Bank, and bonds issued by carbon-intensive sectors should be excluded from the corporate bond purchases. Monetary-fiscal coordination is also vital for ‘building back better’, the report says, suggesting that “the Treasury has significantly more fiscal potential than previously thought.”

Since a stable climate is a policy goal and not just one future scenario among many, financial regulation must go beyond climate risk analysis and disclosure to require “credible Paris-aligned targets and plans to reach them”, the report finds. Climate-calibrated capital requirements should be introduced, it proposes, with existing fossil fuel exposures subject to a 150% risk weight and new fossil fuel projects made ineligible for bank lending not fully backed by equity. Climate systemic risk buffers should be introduced and climate-related financial regulation should be encouraged at an international level.

Finally, the report proposes the establishment of a “Green Finance Action Task Force” to govern climate finance, with representation from a variety of UK public bodies. The task force would design, develop, monitor and review green finance policies and would help build the capacity and the institutional infrastructure necessary to adapt the UK’s financial system to a net zero world. The report also calls for a dirty taxonomy of high carbon activities to complement work on a green taxonomy, and for the development of metrics and targets on progress in shifting the UK financial sector alignment with the Paris Agreement.