We have heard a lot recently about the cost of reaching net zero by 2050. But let’s not forget that failing to reduce our emissions and get climate change under control also carries costs.
The Office for Budget Responsibility (OBR) has said that neglecting to act, or even just delaying measures to tackle climate change would be many times more expensive than acting now. We’d also miss out on hundreds of thousands of jobs in new industries. We’d miss out on export opportunities. We’d have to spend more money treating the health conditions that are worsened by air pollution and draughty homes. And motorists would miss out on cheaper fuel costs from the switch to electric vehicles.
We do, however, need to focus much more on how we can make the net zero transition cheaper for taxpayers, for example by attracting more private investment. The OBR has estimated that private capital could finance around three-quarters of the costs of the transition. This would reduce the burden on the public purse at a time when it is stretched by multiple demands post-Covid and prevent households from shouldering the majority of net zero investment costs.
As Conservatives, we understand that enterprise and business must be the solution to environmental challenges. A net zero transition that is financed and delivered by a multitude of innovative and creative private-sector actors will be much quicker, cheaper, and more likely to succeed, than one planned out in Whitehall and funded solely by the Treasury.
There are also huge opportunities for the financial sector from the push to go green, which I’ve seen for myself as Chair of the Environmental, Social, and Governance (ESG) APPG. The Government’s recent £10 billion green gilt issuance showed that there is significant demand from investors for green options, particularly as they can offer good returns on investment.
To maximise this potential, though, the sector needs guidance from the Government. Last year the Chancellor announced a world-leading commitment to mandate businesses to report on and disclose climate-related risks, which was fantastic news for the industry and put us at the forefront of global green finance regulation. This week’s roadmap takes another very welcome step forwards, requiring financial institutions to disclose their plans for transitioning to net zero or explain to regulators why they aren’t doing so.
Mandatory transition plans, as they are referred to in policy jargon, are a natural successor to mandatory disclosures. It is of course helpful to know what financial risks a company or bank faces as a result of climate change, but investors need certainty about how this risk is being mitigated and finance ultimately needs to be directed into future-proofed, net zero-aligned investments.
That’s where transition plans come in. They help set out exactly how high-carbon, high-risk investments can be decarbonised in line with climate goals, while at the same time providing reliable, independently verified climate data on investment portfolios to tackle claims of greenwashing.
Transition plans empower investors to avoid assets such as those in polluting industries becoming ‘stranded’ as a result of climate change policies, reducing the risk of high-carbon asset bubbles and financial instability. Making them mandatory rather than voluntary provides regulatory certainty, as well as creating a level playing field for financial institutions.
This is an opportunity for the UK to reinforce its global position as a leading financial centre – we’re the second largest investment management hub in the world, with nearly £10 trillion of assets under management. By decarbonising our finance sector we can create a gold standard for investment that other countries have to compete with and, in the meantime, cement the City of London’s global leadership position on ESG and green finance.
It’s important to note that business is leading the call for action. Just last week a group of business leaders, including BT Group, Legal and General, and Santander, wrote to the Chancellor to ask for more guidance from the Government. They particularly highlighted the importance of mandatory transition plans as an indispensable tool needed to achieve our net zero target. In time, regulators may decide to insist that all large companies and financial institutions disclose their transition plans, as they will all need to put one in place.
Climate change is arguably the biggest challenge we face, but tackling it is one of our greatest economic opportunities. And COP26 is the perfect platform to embrace and advance the UK’s leadership position. We’re already established as one of the biggest financial hubs in the world and, given the importance of finance to our net zero journey, it is right that the government has listened to what the sector has been calling for – more guidance and a level playing field. Mandatory transition plans are another major step towards securing London’s pre-eminence as a green finance centre.
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