UK Green Finance Inquiry Report released
The UK cross-party Environmental Audit Committee has today released a first report on Green Finance following an Inquiry launched in November last year.
The report focuses on mobilising investment in clean energy and sustainable development to address falling investment, now at its lowest since 2008.
The legally binding commitment in the Climate Change Act 2008 to reduce the UK’s emissions of greenhouse gases by at least 57% from 1990 to 2032 is estimated to require investment of £22 billion.
A 42% reduction on 1990 levels by 2016 put the UK above other G7 countries. And a record 50.4% of the UK’s electricity came from ‘low-carbon’ sources in 2017.
So what's the problem?
Mary Creagh MP, Chair of the Environmental Audit Committee, criticised the UK Government’s Clean Growth Strategy as being “long on aspiration, but short on detail.”
Investment has stalled and it's not due to a lack of projects. Rather, the evidence received by the Green Finance Inquiry blames sudden changes in policy in 2015 and the privatisation of the Green Investment Bank.
Changes in policy by HM Treasury, included: closing the Renewables Obligation to onshore wind a year ahead of schedule; removing the Climate Change Levy exemption for renewables; reduced Feed-In-Tariffs for small scale renewable generation; cancellation of the Zero Carbon Homes policy due to come into force in 2016; and, cancellation of the £1 billion Carbon Capture & Storage competition.
Not surprisingly these changes have shaken investor confidence.
The report criticises the privatisation of the Green Investment Bank.
The concern is that the effect of declining investment now will have a long-term impact and that the carbon budgets set out in the Climate Change Act 2008 won’t be achieved. And they are not enough to limit global average temperature rise to 1.5 degrees in light of the aspiration of the 2015 Paris Agreement.
The report criticises the privatisation of the Green Investment Bank. Since its sale to Macquarie and rebranding as the Green Investment Group with an international focus only one of its first four investments has been in the UK.
There is concern that Brexit will put the UK’s carbon pricing at risk and reduce finance available for riskier infrastructure projects. The report sees merits in the UK aligning with the European Commission’s Action Plan on Sustainable Finance.
And what's the solution?
The report stresses that keeping costs to consumers down must not exacerbate the low level of investment problem. It recommends that the carbon price should be increased and consideration be given to extending it over the whole economy.
The Inquiry heard that carbon pricing would be an effective way of shifting investment away from carbon intensive energy generation.
Green bonds are also part of the recommended solution.
The report urges the Government to maintain a relationship with the European Investment Bank post Brexit to secure sources of finance for riskier, early stage, UK green infrastructure projects.
The report suggests partnerships with local authorities which enable cities to access green finance.
Green bonds are also part of the recommended solution – including a Sovereign Green Bond linked to the Clean Growth Strategy. The UK is currently lagging behind other economies in their issuance and the report warns that better certification is needed to demonstrate the environmental credentials of such bonds.
A second report promised ‘shortly’ will recommend interventions to achieve wider systemic changes aimed at incorporating environmental risks into financial decisions across the economy.
The aim of this second set of recommendations will be to reduce cost and increase availability of capital to address the Government’s climate change and sustainability goals. It will consider how the Government can implement the recommendations of the Task force on Climate related Financial Disclosure (TCFD).
Ahead of its release, the Chair of the Environmental Audit Committee, Mary Creagh MP, has already written to the Rt Hon Michael Gove MP, Secretary of State for Environment, Food and Rural Affairs calling for recommending that the Government require the Pensions Regulator, Financial Conduct Authority and Financial Reporting Council (FRC) to produce adaptation reports to consider the implications of climate change for their respective areas of regulatory oversight.
The letter provides examples of complaints against the FRC for failing to challenge a lack of climate change reporting in mandatory Strategic Reports. Stephen Haddrill, Chair of the FRC, has indicated his willingness to produce a report examining the risks of climate change relevant to their purview. My submission to the Inquiry on these matters is available on the UK Parliament's website.
Mary Creagh MP has also written to pension fund Trustees seeking their views on climate change risks and the TCFD recommendations. We can expect the Environmental Audit Committee’s second report to address these matters.
Carol Adams CA is a Professor of Accounting at Durham University Business School and writes on her website at www.drcaroladams.net