How are Rishi Sunak’s plans to turn the UK into the world’s first net-zero financial services hub coming along? That ambition formed the centrepiece of his speech at Mansion House in the summer and will be a major part of his appearance at Cop26, where finance ministers from across the world are meeting to discuss how they and global financial institutions can contribute to the net-zero target.
Sunak will appear alongside former Bank of England governor Mark Carney to announce two things. The first is that, here in the UK, listed companies will be required to publish plans about how they will limit their emissions, while the second will be the up-to-$130trn worth of private capital that Carney’s Glasgow Financial Alliance for Net Zero has pledged towards funding the transition to a greener world.
There are a couple of important caveats though. The first is that, as so often in politics, when you see the words “up to” right before a sum of money, you can safely substitute in “less than”. The second is what happens on the other side of the ledger: because green finance isn’t just about what you do fund, it’s also about what you don’t fund – in this case, coal, oil and gas companies. As the FT revealed last month, banks have resisted making commitments to end financing of all new oil, gas and coal projects by the end of the year.
Sunak’s aspirations for the UK’s financial services sector matter for two reasons. The first, of course, is the existential threat posed by climate change: every degree of warming above 1°C makes the world uninhabitable for another billion or so people, and as more and more of the world becomes uninhabitable, so too will the rest of the planet become more unstable, more prone to conflict between nations great and small, and so forth.
But the second is this: assume for a moment that a combination of regulatory change, economic change, individual behaviour change and technological development do succeed in meeting the global climate challenge. In that scenario, banks and other financial institutions will then be left holding a lot of essentially worthless assets, increasing the chances of a financial crisis. That’s been Carney’s big argument for a long time: it’s not just that banks shouldn’t be financing coal exploration to be good global citizens, it’s that they shouldn’t be financing further coal exploration if they want to remain viable at all.
That reality is one reason why Sunak’s proposals for the UK make the Financial Conduct Authority responsible for enforcing this stuff – because at its heart it’s an issue of financial stability as much as one of our climate targets.
The trouble is – and the reason why the world’s banks have been reluctant to sign up to these ambitious targets – that financial institutions don’t think that global governments are serious. They’ve seen how hedge funds that crowded into dirty industries have made a killing in recent months thanks to the turmoil in the energy market. They see, too, that Sunak’s plans for capital expenditure in the comprehensive spending review are relatively modest and fall far short of what we might expect, given the required transformation in our infrastructure over the next decade. Further afield, they see that the European Union is set to include gas among its list of green investments.
The big test for Sunak and the rest of the world’s finance ministers isn’t just in how sharp a stick they are willing to wield to force financial institutions to think green – it’s whether or not their actions are doing enough to convince investors and banks that when push comes to shove, they really are willing to rewire our economy to punish dirty investments and reward clean ones.
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