Finance will be essential for Britain’s decarbonisation. The Government needs to encourage more private capital to invest in renewables projects and other net zero technologies. Simultaneously, companies whose assets are at risk from climate change must plan for the transition to protect their workers, shareholders, and supply chain partners. This is a particularly crucial issue for the UK, which hosts both a major global financial centre and one of the biggest and most advanced oil and gas sectors in Europe.
Oil and gas companies have significantly more fossil fuel assets on their balance sheets than are likely to be compatible with the Paris Agreement objective of limiting global warming to 1.5°C or 2°C. This ‘production gap’ between fossil fuel production and our climate targets is set to grow as fossil fuel exploration continues.
Of course, this isn’t a problem unique to the United Kingdom. Globally, to be aligned with the Paris temperature objectives, production of coal, oil and gas needs to decrease by 11%, 4% and 3% respectively every year until 2030, but a UN Environment Programme report estimated that production of each of these fuels will instead grow by 2% annually.
As host of COP26 and as a country with relatively low national economic dependency on fossil fuel production, failure to address our own production gap would undermine the Government’s clear foreign policy priority, expressed in the Integrated Review of Security, Defence, Development and Foreign Policy, to lead the world on climate change. We must lead by example.
In the economic recovery from Covid-19, the Government is already embracing the global trend toward ever more competitive and cheap renewables. The decline of the UK’s oil and gas industry predates the pandemic and is unlikely to be reversed post-Covid.
The Government has also made some progress on sustainable finance. Last year, the Chancellor announced the UK’s intention to be the first G20 country to mandate climate disclosures by large companies and financial institutions across our economy by 2025, with many coming into force by 2023, going beyond the Taskforce for Climate-related Financial Disclosures’ recommendations. And the Pension Schemes Act has made the UK the first major economy to make the TCFD’s recommendations a statutory requirement for pension schemes.
These are trailblazing measures which set examples for other countries to follow, and we ought to be proud of them. But they are just the first steps our financial sector must take on our journey to net zero.
As I have written in the Conservative Environment Network’s new essay collection, North Sea Transition, I hope that the Government will build on its progress by moving towards mandatory ‘climate transition plans’. This would require all listed companies to develop strategies for aligning their investments and activities with the goals of the Paris Agreement, with the strategies put to a distinct shareholder vote at a company’s Annual General Meeting.
While the divestment movement has raised awareness of the role of finance in tackling climate change, meaningful improvements on the ground are more likely to be achieved through climate-concerned, environmentally-conscious investors engaging with fossil fuel companies and pushing them to change their strategies. Oil majors such as BP and Shell have recently responded to investor pressure to publish climate strategies which, while not perfect, mark a significant step forward.
Through mandating companies to produce climate plans with roadmaps for becoming sustainable, we can also harness the skilled workforces and capital of oil and gas companies to deliver a successful and fair transition for North Sea communities. Mandatory climate plans would be another arrow in the Government’s quiver for COP26 in Glasgow.
Given our prowess in financial services and the City of London’s position at the apex of the global financial system, such a policy may inspire and embolden other countries, thereby expediting the flow of global finance away from fossil fuels and towards renewable energy.
Greening the financial system is crucial if we are to transition away from fossil fuels to a cleaner, more resilient future. The Government must work with the private sector to improve planning for climate change and the net zero transition, and in the process safeguard the stability of our financial system, economy and the livelihoods of workers.
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