Finance Sector Must Align Better to Net-Zero to Support UK Transition 

Advisory group calls for mandatory net-zero targets on path to world’s first net-zero financial system. 

The UK’s financial industry needs to better align itself to net-zero carbon emissions targets, according to ‘The Road to Net-zero Finance’ report, published by the Climate Change Committee’s (CCC) Advisory Group on Finance (AGF). The independent body of experts has outlined how the finance sector can support the UK’s transition to a low-carbon economy through the likes of carbon pricing, policy and regulatory reform to reduce risks and economic incentives to encourage investment. 

“Net-zero is increasingly recognised as an important goal by leaders within the UK’s financial community, but it is not yet embedded into routine decision-making and policy,” said the report, which recommends that the UK commits to becoming the world’s first net-zero financial system. 

The AGF outlined five key recommendations for the financial industry to take into account. These include a shift of mindset from simply managing climate risk to aligning finance with net-zero targets, making real economy policies investable to attract capital and designing future financial policy and regulations with net-zero targets in mind. 

The CCC has estimated that extra net-zero investment needs to grow five-fold from £10 billion a year in 2020 to £50 billion in 2030. However, the committee noted that “smart policy” could cut the cost of capital by over three-quarters, reducing annual spend from £17 billion in 2050 to £3 billion.  

Investors are urged to practice more targeted stewardship to influence the direction of capital to aligns with net-zero targets. The AGF said market frameworks which reward investors who “take net-zero seriously” should be introduced to further incentivise involved stewardship. The UK’s updated Stewardship Code is a “positive step in the right direction and sets high expectations,” the report acknowledged. 

The report welcomed Chancellor Rishi Sunak’s recent announcement that a UK Green Technical Advisory Group has been tasked with establishing a UKspecific green taxonomy to support investment flows, taking the scientific metrics in the EU taxonomy as its basis. “A robust taxonomy of activities aligned with net-zero and wider sustainability goals is needed,” the report said. 

Net-zero should be mandatory 

The AGF said climate risk and net-zero targets should be fully integrated into financial regulations and monetary policies in the UK, including when assessing legacy rules for alignment.  

“Over the past five years, UK financial authorities, notably the Bank of England (BoE), have led the way in integrating climate risks into financial practices. Over the next five years, these efforts need to be deepened, with a closer connection to the net-zero target,” the report said.  

At the recent Green Horizon Summit, Chancellor Sunak announced that Task Force on Climate-related Financial Disclosures (TCFD) guidelines on non-financial reporting would be made mandatory by 2025, starting from early next year. But the AGF argued this does not go far enough and that net-zero targets need to be included in the mandate. 

The report added financial institutions should be asked to deliver reports on net-zero targets every five years, matching the UK carbon budgets, with further annual updates on progress. “From this, the UK could support an evolution of the TCFD framework to more explicitly include net-zero alignment alongside risk and opportunity.” 

At the same summit, the BoE Governor Andrew Bailey revealed that the central bank would be running climate stress tests from June 2021, which the AGF noted is a key way in which the UK’s financial system will be able “to make a first aggregate estimate of its degree of alignment […] with net-zero”. The report called for the BoE to continue monitoring corporate performance in the climate stress tests “on a regular basis”. 

“Looking forward, the BoE could then set out its role in the achievement of net-zero as part of its core mandate for financial and monetary stability,” the AGF added.  

Restructuring existing financial regulations 

The report said the UK’s system of financial regulation needed a considerable overhaul to ensure effective monitoring and management of climate risks. Forward-looking climate factors need to be incorporated into the UK’s risk-weighted capital adequacy rules and monetary policy operations, the report noted, including “collateral frameworks, refinancing mechanisms and asset purchase schemes”. 

“One important focus is to ensure that the UK’s legacy of financial regulations is fit for the net-zero age,” AGF said. “As most of our core financial regulations have not been designed with climate change in mind, it is to be expected that some provisions have an unintended consequence of making the financial transition harder.” 

Education and exposure to net-zero  

Investors, corporates and financial professionals need to deepen their existing skills and capacity in order to support their customers and clients through the transition to a low-carbon economy, the report said.

This means access to education and training, as well as an improvement in the depth and accuracy of climate-related metrics provided by external vendors and company disclosures “that indicate whether investments and assets are aligned with the net-zero target” 

The publication of AGF’s findings was aligned with the release of the UK’s Sixth Carbon Budget, which has called for a 78% reduction in territorial emissions between 1990 and 2035, bringing forward the UK’s previous 80% target by nearly 15 years. 

“The Sixth Carbon Budget is a clear message to the world that the UK is open for low-carbon business. It’s ambitious, realistic and affordableWe deliver our recommendations to Government with genuine enthusiasm, knowing that Britain’s decisive zero-carbon transition brings real benefits to our people and our businesses, while making the fundamental changes necessary to protect our plant,” said Lord Deben, Chairman of the CCC. 

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