Why UK banks could lead the world’s green strategy

The sheer size of the City of London puts it in pole position to spearhead action on climate change. Alexandra Leonards reports.

It’s not the computer power, offices, or schmoozy client dinners that make banking and investment so carbon intensive – that only represents a fraction of the industry’s total exposure to global emissions. In fact, the emissions produced by the sector’s investing, lending, and underwriting activities are 700 times greater than its own, according to recent research from CDP.

That’s because virtually every carbon-emitting activity across all industries– in part or wholly – relies on money from the private finance sector. Banks, investors, and other financial institutions are contributing to climate change with every decision they make, from owning shares in a company and lending money to mortgage owners, to financing fossil fuel infrastructure and high-carbon industries like oil and gas.

Despite this, the CDP report finds that under half of disclosing financial institutions report actions to align portfolios which are well below the 2-degree Celsius commitment set out in the Paris Agreement.

What role does the UK play?

Climate change is a global problem, but with British banks’ investors responsible for nearly twice the nation’s annual carbon emissions, the UK financial sector has a lot of work to do.

“Our recent report showed how in 2019 UK banks and asset managers, through their investments, were responsible for 805 million tonnes of CO2 – this is almost double the UK's annual carbon emissions,” says Charlie Kronick, climate finance adviser at Greenpeace UK.

The City of London is responsible for funding such a high level of carbon production, that if it were a country, it would be the ninth biggest emitter of CO2 in the world. To put this into perspective, the UK’s capital city is ranked higher than the whole of Germany in terms of carbon emissions.

This is largely due to the sheer size of the UK financial industry, which is made up of many different sub sectors, from banking, insurance, and reinsurance, to fund management, commodities trading, and FinTech.

“Ultimately, the capital allocated through London’s financial sector continues to drive global investment towards the old, destructive ways of doing business, fuelling the climate and nature crisis,” says Karen Ellis, director of sustainable economy at WWF.

Britain’s financial services market has a responsibility to address its vast contribution to climate change. But this also presents the UK banking sector with an opportunity to set an example.

“As a global financial hub, the City of London can be an incredible force for positive change, but only if it reallocates that capital elsewhere, through a wholesale shift to sustainable investments,” explains Ellis.

While the global financial system must get on board, she says, having such a large financial sector gives the UK a “unique opportunity” to lead on delivering the changes necessary to keep the worldwide temperature rise to less than 1.5 degrees.

As the host of this year’s United Nations Climate Change Conference – COP26 – in November, the UK government can also play a crucial role in pushing for global action.

Call for legislation

Ahead of the conference, the UN has called for financial institutions around the world to ensure that every decision they make takes climate change into account. That includes private investment decisions, as well as spending decisions that countries and international banks and investors make as they roll out stimulus packages to rebuild the economy post-pandemic.

It also asks companies for transparency about the risks and opportunities that climate change and the shift to net zero economy pose to their business, while banks, insurers and other financial firms must commit to ensuring their investments and lending is aligned with net zero.

“Lenders take their responsibility to wider society very seriously and, together with the Government and Bank of England, are playing a leading role in the shift to net zero finance,” says a spokesperson from UK Finance, which represents around 300 British financial firms. “In April the UK’s six largest banking groups were among the founding members of the UN’s new Net Zero Banking Alliance, committing to net-zero emissions from their portfolios by 2050 or sooner.”

In October last year, HSBC set out its plans to meet the net zero ambition shared with other leading banks in the UK. At the time, the bank said it planned to intensify its support for customers to switch to more sustainable ways of doing business.

Earlier this month, Halifax Home Insurance partnered with Ideavate to help customers save energy in the home. While in July, Lloyd’s of London revealed plans to help the insurance sector collaborate with critical industries to accelerate the transition to a low carbon economy.

But Greenpeace UK says that while there have been some ambitious commitments to tackle climate change, the UK finance industry is still funding carbon intensive activities.

It believes that while the UK has the potential to be the first in the world to align with Paris Agreement targets, existing voluntary pledges aren’t working.

According to the Climate Policy Initiative (CPI), while the number of private UK financial institutions exhibiting some level of response to climate change has increased quickly in the past few years, it still “falls far short of alignment with Paris Agreement goals.” The Think Tank has a dashboard which tracks actions by over 1200 private institutions in the UK, representing more than $24 trillion in assets.

“While this many institutions taking some action on climate change is a positive sign, many institutions have made only a limited response,” it says.

The CPI warns that achieving climate goals will require significant additional action across the board.

“The UK government and regulators must not assume that voluntary high-level pledges to achieve net zero by 2050 will be enough – we need to see clear plans in place as to how these goals will be met,” says WWF’s Karen Ellis.

She believes that while momentum for change in the form of voluntary pledges grows, financial institutions need to go further, and faster.

“That will require governments, including the UK government, to ensure the regulatory framework is in place to incentivise banks and investors to do the right thing by changing their investment approach to curb emissions and bring the global economy into line with Paris climate goals,” urges Ellis. “Since the Paris Agreement was signed in 2015, the world’s largest 60 banks have provided trillions of dollars in funding to the fossil fuel industry, and many financial institutions continue to finance activities that contribute to nature loss around the world.”

She says that, given this record, it’s clear that robust action from the government is necessary.

“Voluntary approaches will not be enough,” she adds.

Further regulation could help push other sectors and companies to take action, mobilising the financial support needed for the transition to net zero.

“Legislation is the only way we’re going to be able to put the brakes on destructive practices and ensure that banks and financial institutions align their activities with the goals of the Paris Climate Agreement,” says Charlie Kronick, Greenpeace UK. “We have seen some success on climate action come from shareholder pressure, but this alone won’t force these organisations to go far enough, fast enough.”

He agrees that the UK needs laws that require all UK regulated financial institutions to adopt and implement a transition plan.

“The UK government should announce this ahead of the UK hosted global climate summit, COP26, and must use its presidency to encourage other countries to adopt the same approach,” says Kronick.

As a global financial hub, Britain is in a unique position to set an example for other countries around the world in green investments and sustainability. As the Glasgow-based COP26 fast approaches, it’s yet to be seen if the government and financial sector will step up with concrete actions to support the UK in becoming a climate change leader.

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