UK proves Tariq Fancy right about sustainable financing

Empty seats: is Britain’s rail network one of the government’s missed opportunities to influence climate policy? (Photo by Chunyip Wong via iStock/Getty Images)
  • UK sustainability policy focuses heavily on financial disclosure, but less on concrete, practical action.
  • More attention should be paid to areas such as transport and housing, which are responsible for at least 40% of domestic emissions.
  • The government can afford to take more effective policies with the £16bn ($19.3bn) of green debt it raised last year – and another £10bn on the way.

The UK appears to have based its sustainability policy on Tariq Fancy’s recommendations on what not to do.

BlackRock’s former head of sustainable investing argued — in his three-part essay last year denouncing the model — that so-called sustainable finance was counterproductive because it distracted from influential government policies.

That’s more or less what’s going on in Britain.

As of this fiscal year, all companies, banks and insurers with more than 500 employees – and all pension funds – in the country must report in line with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD).

These reports show how companies are taking into account the risks that climate change poses to their business and will soon be expanded to include all the recommendations of the International Sustainability Standards Board.

Next comes taxonomy reporting, in which companies must indicate to what extent their business operations match the green taxonomy drawn up by the Treasury.

Meanwhile, the Bank of England is leading the way in conducting – and publishing the results of – climate stress tests to assess how prepared banks and insurers are for climate change.

According to the government’s Greening Finance roadmap, such disclosures are necessary so that investors can decide whether companies are truly green and company-level data can be used to verify financial institutions’ sustainability claims.

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However, it is not clear whether this actually makes something more sustainable. The idea that shareholder engagement can have a meaningful impact on corporate sustainability has yet to prove itself. And we haven’t seen evidence yet that improved corporate sustainability makes equity and debt financing so cheap that it provides strong financial incentives.

Shortcomings in UK sustainability policy

The cost of living crisis – the significant drop in ‘real’ incomes that Britain and other countries have experienced since late 2021 – has exposed the shortcomings of the UK’s approach to sustainability policy. That is, the lack of concrete practical measures that would reduce costs for households.

Even the US has recognized this with its new Inflation Reduction Act, which will provide tax credits for home energy efficiency upgrades such as heat pumps and insulation – despite the recent fierce political anti-ESG backlash.

The UK could afford to take similar measures. Last year, it raised £16 billion ($19.3 billion) from two green bonds: a 12-year issue in September and a 32-year issue in October. It reopened these issuances in May and plans to sell a further £10bn of green debt this fiscal year.

At a conference hosted by the International Capital Market Association last month, Robert Stheeman, head of the UK’s Debt Management Office, said that demand for UK green bonds was strong and that they would become a permanent feature of government debt.

“We didn’t want this [green bond] to be a one-off… we wanted to make it part of a program,” he added.

The 12-year issue attracted the largest number of different investors ever to participate in a syndicated gold offering for the UK, Stheeman said, including some buying gold plating for the first time.

Other sovereign green bond issuers tend to put their money into railways and making buildings more energy efficient, shows capital monitor analysis.

Most of France’s green bond proceeds go towards providing interest-free loans to improve energy-efficient homes. In Belgium, the vast majority has gone to rail subsidies and investments. Chile, one of the most prolific green bond issuers, has invested 92% of its yield. And Singapore last week sold a sovereign green bond with the longest maturity ever – a 50-year issue that raised S$2.4 billion ($1.74 billion) for new rail lines.

Transport and real estate offer opportunities

The UK should consider following suit to ensure a very long-term, stable source of funding for green projects.

Transport is the country’s most polluting sector, accounting for 24% of greenhouse gas emissions, according to the Department for Business, Energy and Industrial Strategy. Within transport, 69% of emissions are caused by cars and vans and 18% by trucks. Real estate is another major polluter. Household combustion contributes 16% to emissions, mainly from gas boilers.

If the government focused on these areas instead of putting so much emphasis on financial reporting, it could quickly reduce both emissions and the cost of living.

Instead, we have the Williams-Shaps plan, which will bring much of Britain’s fragmented rail network under the control of a new agency called Great British Railways. It focuses on savings rather than trying to lower ticket prices, expand services, or do other things that can attract passengers and help reduce car use.

Then there’s the Energy Company Obligation (ECO) scheme, which aims to provide fuel-poor people with home improvements, with £4bn set aside to help 450,000 homes over the next four years. This is part of a total of around £8.2 billion in government funding through 2026 for energy efficiency and low-carbon heat retrofits in low-fuel homes.

But the UK Climate Change Committee’s 2022 report to parliament, published on June 29, states: “Recent record increases in energy prices mean that this allocation is unlikely to be sufficient, as it was based on fuel poverty estimates that predated price increases.”

The ECO scheme is paid for by energy companies who recoup the costs by charging customers more. The government should support a wider roll-out of the scheme with public funds.

Need more green gilts

Sustainable finance can make an impact by helping green projects attract the capital they need at a volume and cost they could not otherwise achieve.

Rather than spend its time imposing sustainability disclosure requirements on the private sector, the UK government should strive to be a major source of green projects. After all, it has a lot of potential to ramp up the issuance of green bonds, which make up only a small part of UK government debt. And investor demand is there: According to HM Treasury, the green gilt program is 12 times oversubscribed.

Admittedly, the remaining two contenders to replace Boris Johnson as prime minister — notably frontrunner Liz Truss — have no promising climate policy records or plans. Let’s hope the successful candidate recognizes the need to improve it.

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