Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance...

100
ACCELERATING GREEN FINANCE MARCH 2018 A report to Government by the Green Finance Taskforce

Transcript of Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance...

Page 1: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

ACCELERATING GREEN FINANCE

MARCH 2018

A report to Government by the Green Finance Taskforce

Page 2: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across
Page 3: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

ACCELERATING GREEN FINANCE

MARCH 2018

A report to Government by the Green Finance Taskforce

MARCH 2018

Page 4: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Accelerating Green Finance

2

Page 5: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Contents

11. Preface 4

11. Foreword 5

11. Executive summary 6 The Report’s Recommendations 8

1. Introduction 10 TheopportunityforUKgreenfinance 11 Challengestoexpandinggreenfinance 15 OpportunitiesfortheGovernmentandfinancialservicestoworktogether 18

2. Key Recommendations 20 Theme 1. RelaunchUKgreenfinanceactivitiesthroughanewunifiedbrand 21 Theme 2. Improveclimateriskmanagementwithadvanceddataandanalytics 26 Theme 3. ImplementtherecommendationsoftheTaskForceon

Climate-relatedFinancialDisclosures 35 Theme 4. Drivedemandandsupplyforgreenlendingproducts 40 Theme 5. Boostinvestmentintoinnovativecleantechnologies 48 Theme 6. Clarifyinvestorrolesandresponsibilities 53 Theme 7. Issueasovereigngreenbond 59 Theme 8. Buildagreenandresilientinfrastructurepipeline 63 Theme 9. Fosterinclusiveprosperitybysupportinglocalactors 69 Theme 10.Integrateresilienceintothegreenfinanceagenda 74

3. More ambitious reforms for the Future 80 1.Providefurtherincentivesforsterlingissuersofgreensecurities 82 2.GobeyondTaskForceonClimate-relatedFinancialDisclosureswith

Sustainability-relatedDisclosures 83 3.Increaseallocationsintoilliquidassetclassestofacilitatelongterminvestments 84 4.Addressingbarrierstosustainableinvestment 85 5.Considerhowtheprudentialregimeforbanksandinsurersmightbetterreflect

thedifferentfinancialrisksassociatedwith‘green’and‘brown’assets 85

4. Next Steps 86

Annex 1 89 MembersoftheGreenFinanceTaskforce 89 Observers 89 Secretariat 89 Acknowledgements 90 Disclaimer 92 GreenFinanceTaskforcetermsofreference 92 Annex 2 94 Researchproposals 94

A report to Government by the Green Finance Taskforce

3

Page 6: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Preface

Howwemanagetheworld’snaturalenvironmentisoneofthemostpressingissuesofourtime,associatedwithclimatestress,pollutionandaprodigiousneedforcleanenergy. Untilrecently,however,thishastendedtobeseeninterms ofcostratherthaninvestmentandreturn,ofriskmanagementratherthanforward-lookingriskmitigation.

Inparticular,theglobalchallengeofraisingthetrillionsneededtomeetthetwodegreesorlessscenarioagreedinParis2015,areasgreatastheconsequencesappeargraveifwedon’t.Thesheerscaleofcapitalrequireddictatesthatthiscannotbedriventhrougheitherpublicorprivatesectorsworkingalone–weneedaninternationalalignmentofinterests,incentivesandpolicies.ThatiswhywesetuptheLondonGreenFinanceInitiativein2016,tobringthesegroupstogetherandseewheretheUK’sgreatfinancialacumencouldmakeitscontribution.

Allfinanceconcernsintermediationbetweensaversandborrowers–andpricingandmanagingriskaccordingly.Thisshouldensurethatcapitalisallocatedefficientlyandproductivityisdulymaximised.Whenitcomestogreenfinance,it is clear that this process is at an early stage of development andshowshugepotentialforgrowth.However,therisksimpliedinclimatesciencemodellingarenotyetbeingtransposedfullyintofinancialmodels.Climate-relatedriskisunderstoodtoexistbyallfinancialactorsbutitisnotyetpricedintolongtermfinancialthinking.Shorttimehorizonsininvestmentdecision-making,informationasymmetries,misalignedincentives,financialmis-educationandperhapsmostcrucially,alackofavailabledata,co-conspiretounder-allocatecapital.Itisthisvaluechainthatmustbeuntangled.

Thisiskeyifwearetounlocktheprivatecapitalneededbecausebydoingso,wecanmakegreenfinancemuchmorewidelyavailable,throughoutsociety.Wecanmakeagreeninvestmentthesameasanyother–wherethereisaneedforcapitalfromissuerstherewillbeanopportunityforinvestors.ItisthisthattheUKGreenFinanceTaskforcehasbeenaddressingandwhichIhavebeenhonouredtochair.

Lookingacrosseveryaspectoffinancialservices,fromdataanddisclosureinourTCFDwork,throughtothenationalcapital raising plan, to incentives for green real estate, to the caseforaUKsovereigngreenbond,wehavesuggestedasetofproposalsthat,whenimplemented,willrepresentacomprehensiveandholisticpackageofmeasuresthatcanmeetourcapitalneedstomovetoaneconomybasedonlowcarbonenergy.

Partsofthisreportfocusonspecificsectorssuchasenergyefficiencyforbuildings,wherethereisgreatpotentialfordecarbonisationandgreeninvestment.Werecognisethattherearefarmoreopportunitiesforfinancialmarketstosupportalowcarbonandresilienttransitionforthosesectorswhicharethebackboneoftheeconomy,suchastransport,retail,utilitiesandindustrialprocesses.WewouldwelcomefurtherthoughtsfromGovernmentonspecificchallenges andopportunities.

TheTaskforcehastwofurtheraimsatitscore.ThefirstistofurtherLondonastheleadingworldcentreforgreenfinanceandtoensureourexistingcapabilitiescontinuetoevolvetograspthiscommercialopportunity.Thesecondismoreimportantstill,anditistodeliveragainsttheCleanGrowthStrategytoenableUKplctobenefitfromtheprofoundopportunitytogreenoureconomy.

Thispublicationisthebeginning,nottheendofthiswork.TheGreenFinanceInitiativewill,aswellascontinuingitsdetailedworkprogramme,setupanewimplementationcommittee,chargedwithtrackingprogressonTaskforcerecommendations,conductingfurtherresearchwhereitisneeded and continuing to champion this agenda amongst financiersandconsumersalike.Thankyoutothemanycontributorswhohavehelpedtomakethisreportcomeabout.

IbelievethatthegreenfinanceagendacanreaphugeeconomicbenefitsfortheUKaswellashelpingtomeetourownobligationstoprotecttheenvironment.

Sir Roger GiffordSEBUKSeniorBankerChair,GreenFinanceInitiativeChair,GreenFinanceTaskforceappointedbyHMGovernment

Accelerating Green Finance

4

Page 7: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

The Rt Hon Claire Perry MPMinister of State for EnergyandCleanGrowth

John Glen MPEconomic Secretary to the Treasury

Foreword

ThefinancialsystemisoneofthejewelsinthecrownoftheUK economy, and has a vital role to play in the transition to a lowcarboneconomy.

Wearethefirstgovernmentevertoclearlystateourcommitmenttoleavingthenaturalenvironmentinabetterstatethanwefoundit.Wearedeterminedtoachieveourglobalanddomesticclimatechangecommitments,includingreducingemissionsandavoidablewaste.Todeliverourambitions,wehavetoensurethatwehavetherightkindoffinancetosupportthechangesweneedtomake.

ThetransitiontoalowcarboneconomyisamajoropportunityfortheUK.Overthelasttwodecades,wehaveledtheworldin demonstrating that cutting our emissions does not mean sacrificingthestandardsoflivingforhard-workingfamilies.Since1990,wehavereducedouremissionsbymorethan40%,whileoureconomyhasgrownbytwothirds–thebestperformanceintheG7.

AswesetoutintheCleanGrowthStrategy,ourworld-leadingfinancialsystemiskeytothattransition.Itishometounrivalledexperience,expertiseandinnovation.Wecouldnotmeetourcarbonbudgets,orindeedthetargetsoftheParisAgreement,withoutprivatesectorinvestmentinlowcarbontechnologyandinfrastructure.

Capitalwillneedtobechannelledtowardssustainableprojects,andenvironmentalrisktobefactoredintofinancialdecision-making.Inshort,alowcarboneconomycannotbeachievedbyGovernmentalone.

TheUKishometotheworld’smostdevelopedandinternationalfinancialcentre,andwhilsttheUKhasplayedakeyroleinthedevelopmentofthegreenfinancesector,werecognise there is more to do domestically to achieve our ambitionsofgloballeadershipforthissector.ThisiswhyweestablishedtheGreenFinanceTaskforce–composedofleadingexpertsinacademia,financeandcivilsociety–toencouragecapitaltomovetowardsgreenerandcleanersectorsintheUK,andtoensurewecontinuetoleadtheworldingreenfinance.

Thechallengesofthetransitiontoalowcarboneconomyaregreat,buttheopportunitiesaregreater.WearegratefultotheGreenFinanceTaskforcemembersandChairman,andthehugerangeofcontributorsfromacrossthefinancesector,fortheirworkinproducingthisreport.WelookforwardtoworkingtogetherwithindustrytocreateagreenerworldforthepeopleandbusinessesofBritain,nowandinthefuture.

A report to Government by the Green Finance Taskforce

5

Page 8: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Accelerating Green Finance

6

Page 9: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Executive summary

ThegloballowcarbontransitionwillredefinetheUKeconomy.Fromthelargestinfrastructureprojectstothefabricofourhomes,thattransitioncreates a huge opportunity for the UK to lead the worldincuttingemissionswhiledrivinggrowth–buildingonourworld-leadingperformancetodate.

The UK Government’s Industrial Strategy recognisesCleanGrowthasoneofthe‘GrandChallenges’fortheUKeconomy.Thiscreatesan enormous opportunity to maximise the advantagesforUKindustryfromtheglobalshifttocleangrowththroughtothedevelopment,manufactureanduseoflowcarbontechnologies,systems and services that cost less than high carbonalternatives.

Meetingthatambitionwillrequireunprecedentedlevelsofinvestment.Greenfinance–i.e.investment in environmental technology, infrastructure and services – is therefore central to thefutureoftheUKandglobaleconomy.TheUK’sstatusashosttoaworld-leadingfinancialservicescentre means that the UK has direct access to the investment our economy needs, and the chance toseizetheeconomicopportunitiesthatitoffers.

In recognition of that opportunity, the Government establishedtheGreenFinanceTaskforce–anallianceofindividualsandorganisationstaskedwithprovidingrecommendationsfordeliveryofthepublicandprivateinvestmentweneedtomeetourcarbonbudgetsandrelatedenvironmentalandresilience goals, and maximise the UK’s share of theglobalgreenfinancemarket.

TheGreenFinanceTaskforcehasmetthatobjectivebyworkingwithover140organisationstodeliveraseriesofrecommendationsonhowtheGovernmentandtheprivatesectorcanworktogethertomaximisetheUK’sroleinmobilisingthegreenfinancetheUKandglobaleconomywillneed.TheTaskforcewillnowworkcloselywiththe Government and other players to support consideration and implementation of these recommendationsandsecurethebenefitsofcleangrowth.

A report to Government by the Green Finance Taskforce

7

Page 10: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 1.Relaunch UK green finance activities through a new unified brand

1. TheGovernmentandtheCityofLondonshouldestablishanewGreenFinanceInstitutebrandunderwhichstrengthenedGreenFinanceInitiativecapacityisestablished.

2. ThisnewInstituteshouldsetupaGreenFintechHub.

3. TheGovernmentandthenewInstitute shoulddeliverajointdiplomaticstrategyongreenfinance.

Theme 2.Improve climate risk management with advanced data and analytics

4. Privatesector,academiaandthe GovernmentshouldestablishaCentreforClimateAnalytics.

Theme 3.Implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)

5. CompaniesandinvestorsshouldusetheTCFDframeworktodeveloptheirfinancial,corporategovernanceandstewardshipdisclosures,andGovernmentshouldconductareviewofdisclosurein2020tomonitorandencouragemarketadoptionamongstbothissuersandusers.

6. RelevantfinancialregulatorsshouldintegratetheTCFDrecommendationsthroughoutthe existing UK corporate governance and reportingframework.

7. TheGovernmentandrelevantfinancialregulators must clarify in their guidelines thatdisclosingmaterialenvironmentalrisks,including physical and transition climate-related risks,isalreadymandatoryunderexistinglawandpractice.

Theme 4.Drive demand and supply for green lending products

8. TheGovernmentshouldextend2035EPCtargetsfromresidentialpropertiestocommercialpropertiesbytheendof2018,andintroducearequirementforoperationalenergyratingsfrom2020.

9. The Government should introduce Green BuildingPassportsforresidentialandcommercialpropertiesby2020.

10. The Government should complete research to understand the opportunities and costs ofusingarangeoffiscalmeasurestoboostdemandforenergyefficientretrofitsin2018,andpilotfiscalmeasuresalongsidemortgageproductsfrom2019.

11. The Government should provide short-term incentives to pump prime the green consumer loansandgreenmortgagemarkets.

12. UKlendersshouldworktowardspromotingawarenessandmainstreamingaconsiderationof‘green’factorsintoalltheirmortgagelendingdecisions.

Theme 5.Boost investment into innovative clean technologies

13. The Government should set up a Green InvestmentAcceleratorforearlystagetechnologygrantfunding.

14. TheGovernmentshouldestablishadedicatedpublic-privategreenventurecapitalfund.

15. Increase commercial opportunities forUKbusinessesthroughpublic procurement opportunities

The Report’s Recommendations

Accelerating Green Finance

8

Page 11: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 6.Clarify investor roles and responsibilities

16. Relevant regulators should ensure fiduciarydutyclearlystatestheimportance ofESGissues.

17. TheGovernmentshouldrequirethattheStatementofInvestmentPrinciplesincludestatementsontheextenttowhichsocial,ethical and environmental issues (including climatechange)areconsidered.

18. Government should clarify that trustees shouldengagewiththeirbeneficiariestounderstandtheirbeneficiariespreferencesandcanmakeinvestmentdecisionsthatarebasedonthesepreferences.

19. The Government should clarify that investmentconsultantsshouldhavesufficientexpertiseandcompetencyonESGissues.

20. Investmentadvisorsshouldaskclientsabouttheirsustainabilitypreferences,andinvestmentfundsmarketeddirectlyto individuals should clearly state the environmentalandsocialimpactsofthefund.

21. TheGovernmentandprofessionalbodiesshould develop competencies across a widergroupofsocietalstakeholdersthrougheducationtools.

22. TheFinancialConductAuthorityshouldrequirethatcorrespondingrequirementsareputinplaceforcontract-basedschemes

Theme 7.Issue a Sovereign Green Bond

23. The Government to issue a Sovereign Green Bond.ThisshouldbeoftheorderoftheFrenchsovereigngreenbond,whichwas€9.697billion,andbeconsideredasoneofthe measures of a comprehensive UK Green CapitalRaisingPlan.

Theme 8.Build a green and resilient infrastructure pipeline

24. TheGovernmentshouldpublishaNationalCapitalRaisingPlanexplicitlydesignedtoalignUKinfrastructureplanningwiththedeliveryoftheCleanGrowthStrategyandthe25YearEnvironmentPlan.

Theme 9.Foster inclusive prosperity by supporting local actors

25. TheGovernmentshouldsetupaLocalDevelopmentFinancefund

26. Boostdemandfrompublicbodiesandtheirpensionprovidersfordiverseplace-basedlowcarboninvestments.

27. The Government should set up Clean GrowthRegenerationZones.

28. Awarenessraisingofgreenfinanceopportunitiesamonglocalauthorities.

Theme 10.Integrate resilience into the green finance agenda

29. TheGovernmentshouldestablisha national resilience unit to coordinate and champion climate resilience and ensure Governmentinvestmentis‘futureproofed’ toclimatechange.

30. TheGovernmentshouldpublishanaction plantodeveloptheresiliencemarket.

The Report’s Recommendations

A report to Government by the Green Finance Taskforce

9

Page 12: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

1.Introduction

Accelerating Green Finance

10

Page 13: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

The opportunity for UK green finance

There has never been a more urgent need for investment to reduce emissions; adapt to be resilient to the effects of climate change; and seize the opportunities and manage the risks of the low carbon transition.

The signing of the Paris Agreement on Climate Change in December 2015 marked a milestone for the global economy. Combined with the 2015 Sustainable Development Goals it demonstrates the worldwide commitment to achieving a low carbon future – and signals a universal shift towards a less carbon intensive and more climate-resilient economy. The UK played a key role in delivering both these agreements.

Article 2 of the Paris Agreement1 requires an alignment of financial flows with a 1.5/2°C trajectory and implies a fundamental reorganisation of both the financial system and the economy it serves. The Sustainable Development Goals - which set out specific goals to be achieved in the next 15 years to end poverty, protect the planet and ensure prosperity for all - also imply a significant rethink of the UK’s current economic development model.2

The 2014 New Climate Economy Report estimates that some US$90 trillion will be needed between 2015 and 2030 to achieve global sustainable development and climate objectives.3 This will require a significant increase in global investment, and momentum is building.

1 TheUnitedNationsFrameworkConventiononClimateChange(UNFCCC)ParisAgreement(2015)http://unfccc.int/paris_agreement/items/9485.php

2 UNSustainableDevelopmentGoals(2015)http://www.un.org/sustainabledevelopment/sustainable-development-goals/#

3 TheGlobalCommissionontheEconomyandClimate(2014)TheNewClimateEconomyReport:BetterGrowthBetterClimatehttps://newclimateeconomy.report/2016/wp-content/uploads/sites/2/2014/08/NCE-Global-Report_web.pdf

Over US$3.3 trillion of private climate finance4 has been mobilised to date;5 the global green bond market in 2017 reached US$155.4 billion new issuance in the year, compared to US$81.6 billion in 2016 (Chart 1);6 global sustainably managed assets under management have increased by 25% from 2014 to 2016;7 and annual global investment in clean energy has grown seven-fold from US$47 billion in 2004 to US$335.5 billion in 2017.8

Many developing economies, particularly China, India and in Latin America, are growing quickly and will account for a greater proportion of global Gross Domestic Product (GDP) and trade flows in the future. It is in these same developing economies where demand for green finance expertise is greatest – generating significant trade opportunities.9 In China alone it is estimated the transition to an ‘ecological civilisation’ will require annual green investment of between US$474 billion and US$633 billion in the period 2015-2020, at least 85% of which needs to come from the private sector.10

4 UNFCCC(2016)BiennialAssessmentandOverviewofClimateFinanceFlows;definesclimatefinanceas“financethataimsatreducingemissions,andenhancingsinksofgreenhousegasesandaimsatreducingvulnerabilityof,andmaintainingand increasing the resilience of, human and ecological systems to negative climate change impacts” and references ParisAgreement(2015)Article2.1(c)“makingfinancialflowsconsistentwithapathwaytowardslowgreenhousegasemissionsandclimate-resilientdevelopment”.

5 Cumulativeinvestment2004to2017:BloombergNewEnergyFinance(2018)CleanEnergyInvestmentTrends,2017https://about.bnef.com/clean-energy-investment/#toc-download

6 ClimateBondsInitiative(2017)GreenBondHighlights2017https://www.climatebonds.net/files/reports/cbi-green-bonds-highlights-2017.pdf

7 GlobalSustainableInvestmentAlliance(2016)GlobalSustainableInvestmentReviewhttp://www.gsi-alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf

8 BloombergNewEnergyFinance(2018)CleanEnergyInvestmentTrends,2017https://about.bnef.com/clean-energy-investment/#toc-download

9 GreenFinanceInitiative(2017)15StepstoGreenFinancehttp://greenfinanceinitiative.org/fifteen-steps-to-green-finance/

10 UNEPFinanceInquiry(2017)EstablishingChina’sGreenFinancialSystem:ProgressReport2017http://unepinquiry.org/publication/establishing-chinas-green-financial-system-progress-report/

A report to Government by the Green Finance Taskforce

11

Page 14: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

London is already a world leading hub for green finance – backed by deep and liquid capital markets and a strong reputation for innovation. Asthemarketgrows,theCity’sinstitutionshaveagreatchancetobethefirstchoice for structuring and arranging green infrastructurefinanceandissuinggreenbondsacrosstheglobe.Intandem,opportunitiesforUK-basedinvestorstoinvestintheglobalgreeneconomyshouldalsobepromoted.Whilstsomeseetherebeingcompetitionbetweenfinancialcentresforgreenfinance,globalcoordinationandcooperationiscritical.IndeeditistheglobalnatureandoutlookofLondon’scapitalmarketinteractions,aswellasthedeepexpertiseingreenfinanceandsustainableinvestmentthatpositionsitsowelltohelpdriveandcatalysethegreeneconomytothebenefitofsocietiesandfinancialcentresaroundtheworld.This means that enhancing London’s global offer in green finance will have a global impact aswellashelptheUKmeetitsverysignificantdomesticinvestmentobligations.

The UK’s 2008 Climate Change Act,thefirstsuchpieceoflegislationeverpassedglobally,includesalegally-bindingtargettoreduceUKcarbonemissionsbyatleast80%comparedto1990levelsby2050.11 To meet this, the Governmentisrequiredtosetoutitsplantomeetan interim greenhouse gas reduction target of 57%by2032.Thiswaspublishedasthe Clean Growth StrategyinOctober2017.

11 UKClimateChangeAct(2008)Chapter27,Part1,Article1.1:“ItisthedutyoftheSecretaryofStatetoensurethatthenewUKcarbonaccountfortheyear2050isatleast80%lowerthanthe1990baseline”

180

160

140

120

100

80

60

40

20

02013 2014 2015 2016 2017

CHART 1. Green bond annual issuance ($billion)Source:ClimateBondsInitiative*ClimateBondsInitiativeestimatedvaluefor2017

Accelerating Green Finance

12

Page 15: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Clean Growth Sectors Ambition set out in Clean Growth Strategy

How green finance can help deliver

Innovation Investingover£2.5bninlowcarboninnovation

Increasing venture investment to support the commercialisation of innovative clean technologies Theme 5

Business and Industry Improvebusinessenergy efficiencybyatleast20%

Developingnewgreenlending products that can facilitate widespreadandaffordableenergyefficiencyimprovementsTheme 4

Homes Aspirationforasmanyhomes tobeEPCBandCby2035

Power Phasingoutunabatedcoalby2025 Mobilisingincreasedinvestmentinlargeandsmall-scalepowerThemes 6, 7 and 8

Transport Endthesaleofnewconventionalpetrolanddieselcarsandvansby2040

DrivinginvestmentandfinancethatcanreducethecostoflowemissionvehiclesbothformanufacturersandconsumersThemes 4 and 5

Natural Resources Deliverbetterenvironmentaloutcomes Ensuringthefinancialsectorisresilientto climate change, and that investors consider environmental factors Themes 3 and 10

Public Sector Voluntarypublicsectortargetof30%reductionincarbonemissionsby2021

Maximisingthecarbonreductionimpactofpublicspending,throughtargetedinvestmentandflexibleprocurement Theme 9

Five Foundations Green Finance Recommendations

IdeasTheworld'smostinnovativeeconomy

Theme 2: Accesstoclimatedatacanboostfinancial innovationsuchasfintechTheme 5: Channel venture capital into cleantech

PeopleGoodjobsandgreaterearningpowerforall

Theme 8:Boostcompetencyonclimaterisksandopportunitiesinthefinanceindustry

InfrastructureAmajorupgradetotheUK'sinfrastructure

Themes 7, 8, 9 and10: Channel investment into low-carbon,climate-resilientinfrastructure

Business environmentThebestplacetostartandgrowabusiness

Themes 3:Upgradefinancialregulationsothat sustainabilityisattheheartofinvestment

PlacesProsperouscommunitiesacrosstheUK

Theme 9:Ensuringourapproachtogreenfinanceis inclusiveandplace-based

FIGURE 2. Five foundations of the Industrial Strategy and green finance

FIGURE 1. Clean growth and green finance

ICON!

ICON!

ICON!

ICON!

ICON!ICON

! ICON!

A report to Government by the Green Finance Taskforce

13

Page 16: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

TheCleanGrowthStrategysetsoutaboldvisionnotjusttodeliverreducedgreenhousegasemissions,butalsocleanerair,lowerenergybillsforhouseholdsandbusinesses,anenhancednaturalenvironment,goodjobsandindustrialopportunity.12 Of the sectors covered transport, homes,businessandindustryrepresent62%ofcarbonemissionsintheUK.13TheCleanGrowthStrategy’sprojectionsspeakforthemselves–theGovernment estimates that to meet our targets by2030,businessesandindustryshouldbemoreenergyefficientbyatleast20%;by2032,sixtoninemillionhomeswillrequirenewinsulation;andby2050almosteverycarandvanintheUKwillneedtobezeroemissions(Figure 1).14

TheCleanGrowthStrategyrightlyrecognisesthatprivate sector investment is central to delivering this ambition.Asaresult,greenfinanceishighlightedasapriorityarea,with£180billionalreadyinthe pipeline for clean electricity and supporting infrastructure.TheStrategygoesfurthertooutlineanumberofpoliciesandproposalstodevelopexpertiseandseizeopportunitiesfromnewgreenfinancesolutions.ThisincludesworkingwiththeBritish Standards Institution (BSI) to develop green andsustainablefinancialmanagementstandardsandworkwithmortgagelenderstodevelopgreenmortgageproducts.15

12 DepartmentforBusiness,EnergyandIndustrialStrategy(2017)CleanGrowthStrategyhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/651916/BEIS_The_Clean_Growth_online_12.10.17.pdf

13 Ibid.

14 Ibid.

15 Ibid.

Inaddition,theGovernmentpublishedinJanuary2018its25-Year Environment Plan onenvironmentalquality,protection,andenhancement.16ThePlansetsoutacombinationofstrategies, targets, mechanisms and commitments inordertomeetitsbroadgoalsofimprovingtheenvironment,namely:cleanairandcleanplentifulwater;thrivingplantsandwildlife;sustainableresourceuse;reducingtheriskofharmfromenvironmentalhazards;andconservationandenhancementofthenaturalenvironment.ItalsostatesthattheGovernmentwill“takeallpossibleactiontomitigateclimatechange,whileadapting toreduceitsimpact”anddelivera‘green’Brexit that puts environmental policy at the heart of domesticandinternationalpriorities.

Finally,theIndustrial Strategywillbeakey driverandpolicyframeworkforfutureUKindustrialandeconomicgrowth.TheIndustrialStrategyrecognisesthattheshifttocleangrowthisoneofthemostforeseeableandsignificantglobaleconomictrendsandissettotransformmanysectorsoverthecomingdecades.17Forthis reason, the Industrial Strategy announced aCleanGrowthGrandChallenge:tomaximisetheadvantagesforUKindustryfromtheglobalshifttocleangrowth–throughleadingtheworldin the development, manufacture and use of lowcarbontechnologies,systemsandservicesthatcostlessthanthehighcarbonalternatives.Again,greenfinancewillbecentraltodeliveringthis (Figure 2).InvestmentbyGovernments,businessesandhouseholdswillplayacriticalroleinacceleratingcleangrowthinmanysectors,facilitatedbythefinancialsector.TheIndustrialStrategy recognised this in its commitment under theCleanGrowthGrandChallengeto‘maketheUKtheglobalstandard-setterforfinancethatsupportscleangrowth’.

16 DepartmentforEnvironment,FoodandRuralAffairs(2018)25YearEnvironmentPlanhttps://www.gov.uk/government/publications/25-year-environment-plan

17 DepartmentforBusiness,EnergyandIndustrialStrategy(2017)IndustrialStrategyhttps://www.gov.uk/government/organisations/department-for-business-energy-and-industrial-strategy

Accelerating Green Finance

14

Page 17: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Activemeasurestopromotegreenfinance can help manage the uncertainty around delivery of the UK’s domestic policy agendas, support the internationaltransitiontoalowcarboneconomy,and help deliver a successful Brexit process – all whilesecuringsignificanteconomicbenefitforthe UK

Thiswouldbuildupona groundswell in support from financial institutions for ‘greening’ finance–catalysedbyworkledbytheBankofEngland.TheestablishmentoftheG20GreenFinanceStudyGroupinlate2015,co-chairedbytheUKandChina,andlaterestablishmentoftheFinancialStabilityBoardTaskForceonClimate-relatedFinancialDisclosures(TCFD)hassignificantlyadvanceddetailedthinkingonbothwhyandhowthefinancialsystemshouldbe‘greened’.Over238companies,withacombinedcapitalisationofUS$6.3trillion,including150financialinstitutionsrepresentingUS$81.7trillion,publiclysupporttheTCFD’srecommendations.18

18 TaskforceonClimate-relatedFinancialDisclosures(2017)MikeBloombergandFSBChairMarkCarneyAnnounceGrowingSupportfortheTCFDontheTwo-YearAnniversaryoftheParisAgreementhttps://www.fsb-tcfd.org/wp-content/uploads/2017/12/TCFD-Press-Release-One-Planet-Summit-12-Dec-2017_FINAL.pdf

Challenges to expanding green finance

Globally the green finance sector is growing, but not fast enough.19Thegreenbondmarketfor2017reachedUS$155.5billion,20roughly2%oftheUS$6.7trillionofbondsissuedinthesameyear.21Comparatively,US$87billionwaslentbytheworld’s37topbanksforfossilfuelextractionin2016,withUS$437billioninvestedbytheoilandgasindustry.22Thisfinancinggapisseenby manyinfinancialservicesasachallengebutalsoasanopportunity.

The Committee on Climate Change (CCC) has estimated the total investment needed to meet theUK’sfifthcarbonbudgetatapproximately£22billionperyear(1%ofGDP),23withpublicinvestmentof£2.2billion(0.1%ofGDP)neededannually alongside a much larger private investment programme (Figure 3).24

19 RainforestActionNetwork,OilChangeInternational(June2017)BankingonClimateChangehttps://d3n8a8pro7vhmx.cloudfront.net/rainforestactionnetwork/pages/17788/attachments/original/1504737269/RAN_Banking_On_Climate_Change_2017_final.pdf?1504737269

20 ClimateBondsInitiative(2018)GreenBondHighlights2017https://www.climatebonds.net/files/reports/cbi-green-bonds-highlights-2017.pdf

21 ThomsonReuters(2018)DebtCapitalMarketsReview:FullYear2017https://www.thomsonreuters.co.jp/content/dam/openweb/documents/pdf/japan/market-review/2017/dcm-4q-2017-e.pdf

22 Reuters(2017)NewOilProjectstoDoublein2017,WoodMacsayshttps://www.reuters.com/article/oil-production-spending/new-oil-projects-to-double-in-2017-woodmac-says-idUSL5N1F03US

23 WorldBanknationalaccountsdata(accessedMarch2018)UKGrossDomesticProduct2015https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2016&locations=GB&start=2008&view=chart

24 CommitteeonClimateChange(March2017)Theinfrastructureneedsofalow-carboneconomypreparedforclimatechangehttps://www.theccc.org.uk/publication/briefing-note-the-infrastructure-needs-of-a-low-carbon-economy-prepared-for-climate-change/

A report to Government by the Green Finance Taskforce

15

Page 18: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

ForupgradestotheUK’sinfrastructure, theInfrastructureandProjectsAuthority(IPA)hasforthefirsttimebroughttogetheraspendingplanwithprivateinvestmentsettingoutmorethan£500billionoftotalplannedinvestmentin our economic and social infrastructure up to 2021.25 In the longer term, the UK energy and transportsectorsareforecastbytheIPAtoneed£255billionand£134billionofinvestmentrespectivelyoverthenext15years.Ofthis,approximately90%willneedtocomefromprivatesources.26Thereisasignificantopportunitytobuildinupgradestothisinfrastructuretoensureitisresilienttoachangingclimate.

SincetheestablishmentoftheUKGreenFinanceInitiativein2016muchhasdeveloped.Increasingly other countries are taking a lead–bothinshapingtheglobalpolicyagendaandondevelopingandmarketingnewgreenfinanceproducts.

Inmanyrespectsthisisawelcomeglobalrecognition of the challenges and opportunities oftheglobaltransition.ButitalsocreatesariskthattheUKfallsbehind,asthepaceofinnovation,investment and policy changes accelerates globally.TheUKisaworldleaderinthestructuring,underwritingandthelistingofinternationalgreenbonds.However,thereismuchmoretodointerms of domestic (including pound sterling) green bondissuance.AmongG7countries,Francehasissuedthemost,withUS$33.7billionlabelledgreenbondstrackedbyClimateBondsInitiative

25 InfrastructureProjectsAuthority(2016)UKInfrastructureInvestmenttoReachRecordHighhttps://www.gov.uk/government/news/uk-infrastructure-investment-to-reach-record-high

26 TheInfrastructureProjectsAuthority(IPA)2030projectionsof£255bnforenergyand£134bnfortransportincludenon“green”infrastructure,butdonotcapturetheincrementalspendingneededforenergyefficiency,areplacementoftheresidentialheatingnetworkandthemovetoelectriccars.ThelastofficialforecastbyDepartmentforEnergyandClimateChangein2014forecast£45-60bnresidentialenergyefficiencyinvestmentandanother£18bnforbusinesses.TheIPAhighlightsenergyasthesectorwhichneeds90%ofcapitalfromprivatesector.

■ Public ■ Private

£22bn Annual InvestmentInvestment needed to meet the fifth carbon target

Source: Committee on Climate Change 2015The infrastructure needs of a low carbon economy prepared for climate change.

Private Public

FIGURE 3.

Accelerating Green Finance

16

Page 19: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

since2009,includinganoticeableUS$13billionfor2017.ItisfollowedbytheUnitedStatesandGermanywithUS$15.3billionandUS$13.6billionrespectively27.TheUKdidnotmakethetop10nationsforgreenbondissuancein201728.OnlytwosterlingdenominatedgreenbondswerelistedontheLondonStockExchangebetween2012and2016.Severaldomesticgreenbondswereissuedin2017,includingbyAnglianWater,SSE,BarclaysandThamesTideway.29

Figuresshowsimilartrendsforgreenlending.Japanese entities are the most dynamic in terms ofidentifiedgreenlending,representingatableshareof16.7%for250dealsovertheperiod2012-2017.30WithUS$17.2billionandUS$17.0billionrespectively,FranceandGermanyare leadingthegreenlendingmarketinEurope.31

Therecentlypublished,inauguralGlobalGreenFinancialCentresIndexfromZ/Yen32,ranksLondonasnumberone,butrespondentsfeltthattheUKwasindangeroffallingbehindunlessfurtheractionistaken.Forexample,France,havingestablishedthe‘FinanceforTomorrow’forum,introducedthefirstmandatoryclimatechange-relatedreportinglawsforinstitutionalinvestors

27 I4CE,PwC,Climate-KIC(2017)Benchmarkingthegreennessoffinancialservices[Provisionalversion]https://www.i4ce.org/wp-core/wp-content/uploads/2017/12/Climate-KIC-I4CE-PwC-benchmak-greenness-financial-centres.Provisional-Version.pdf

28 ClimateBondsInitiative(2018)GreatBritainIssuance2017https://www.climatebonds.net/2018/01/2017-gb-issuance-usd1555bn-new-record-all-2017-numbers-count-our-green-bond-highlights

29 LondonStockExchangeGroup(2016)GreenBondsontheLondonStockExchangehttp://www.londonstockexchange.com/specialist-issuers/green-bonds/greenbondspresentation.pdf

30 I4CE,PwC,Climate-KIC(2017)Benchmarkingthegreennessoffinancialservices[Provisionalversion]https://www.i4ce.org/wp-core/wp-content/uploads/2017/12/Climate-KIC-I4CE-PwC-benchmak-greenness-financial-centres.Provisional-Version.pdf:Inthisreport,greenlendingwasdefinedasloansprovidedbybankstofinancerenewableenergyandenergyefficiency.

31 I4CE,PwC,Climate-KIC(2017)Benchmarkingthegreennessoffinancialservices[Provisionalversion]https://www.i4ce.org/wp-core/wp-content/uploads/2017/12/Climate-KIC-I4CE-PwC-benchmak-greenness-financial-centres.Provisional-Version.pdf

32 ChinaDevelopmentInstituteandZ/Yen(2017)GlobalFinancialCentresIndex22http://www.longfinance.net/images/GFCI22_Report.pdf

in2015andestablishedasovereigngreenbondprogrammein2017,sofarraising€9.697billion33, isrecognisedasaleaderingreenfinance.Chinawasalsothefirstcountryintheworldwithclearlystated Government policy support to create an all-encompassinggreenfinancialsystemandhasestablishedfivegreenfinancepilotzonesacrossthecountry.34

Lastbutnotleast,TheEuropeanUnionispursuingaleadershipstrategyongreenandsustainablefinance.InMarch2018theEUpublisheditsActionPlanonSustainableFinance,settingoutastrategyforafinancialsystemthatsupportstheEU’sclimateandsustainabledevelopmentagenda.TheActionPlanlistsanumberofimportantinitiativesbasedontherecentlypublishedrecommendationsoftheHigh-LevelExpertGroup(HLEG)onSustainableFinanceandincludesreformsthatarerelevanttotheUK’sownambitionsoncleangrowth.

TheUKhasdeepregulatoryandmarketexperienceinmanyoftheseareas,includingonfiduciaryduty,corporatereportingandmobilisingcapitalforcleaninfrastructureandcanmoveaheadwithdomesticreforms.35Inotherareas,UKinterestswouldbebestservedviaalignmentwithEUreformsthataredesignedtoprovidestandardstoserveglobalcapitalmarkets,suchastheproposedtaxonomyofsustainableindustryactivitiesandfinancialproductstandards.AligningwiththeseEUreformswouldbestservetheinterestsofincreasinginternationalinvestmentincleangrowthintheUK,,whilebuildingonitsleadershipasafinancialcentretoachieveglobalalignmentongreenpoliciesandstandardsbeyondtheEU(throughdialoguewithChina,Indiaandotherimportantplayers).

33 EnvironmentalFinance(2017)SecondtaptakesFrance’ssovereigngreenbondtoalmost€10bn.https://www.environmental-finance.com/content/news/second-tap-takes-frances-sovereign-green-bond-to-almost-10bn.html

34 UNEPandTheInternationalInstituteofGreenFinance,CentralUniversityofFinanceandEconomics(2017)EstablishingChina’sGreenFinancialSystem:ProgressReport2017https://wedocs.unep.org/bitstream/handle/20.500.11822/22285/China_Green_Finance_ProgressRep_ES_EN.pdf?sequence=1&isAllowed=y

35 EuropeanCommission(2018)Sustainablefinance:Commission’sActionPlanforagreenerandcleanereconomyhttp://europa.eu/rapid/press-release_IP-18-1404_en.htm

A report to Government by the Green Finance Taskforce

17

Page 20: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Opportunities for the Government and financial services to work together

Making the UK and the City of London a global hub for green finance can bring substantial benefits to the UK.36Butbeingbestinclassgloballyongreenfinanceneedstostartathome.ThetimeisrightfortheGovernmenttotakeamoreactivistapproachtoworkingwiththeprivatesector to help realise expanded leadership and businessopportunitiesfortheUK.

OverthecourseofsixmonthstheGreenFinanceTaskforcehasidentifiedarangeofopportunitiestoachievethis,whicharegroupedunder 10themesasfollows:

1. Relaunch UK green finance activities through a new unified brand

2. Improve climate risk management with advanced data and analytics

3. Implement the recommendations of the Task Force on Climate-related Financial Disclosures

4. Drive demand and supply for green lending products

5. Boost investment into innovative clean technologies

6. Clarify investor roles and responsibilities 7. Issue a sovereign green bond 8. Build a green and resilient

infrastructure pipeline 9. Foster inclusive prosperity

by supporting local actors 10. Integrate resilience into the

green finance agenda

36 GreenFinanceInitiative(2017)15StepstoGreenFinancehttp://greenfinanceinitiative.org/fifteen-steps-to-green-finance/

Several of the recommendations are institutional innature.ThisreflectsthenatureandscaleofthechallengeandopportunitiesfacedbytheUK,incommonwithothercountriesglobally,andwhichrequirepublic-privatecooperationonanunprecedentedscale.Bycreating institutional capacity, an enduring space for collaboration can be created to: develop new metrics, standards and tools; unlock new financial solutions; and ensure the UK can position itself as the visible global leader with go-to expertise.

Thesethematicrecommendationsaredrawnfromalongerlistofover100,developedbytheGreenFinanceTaskforceinconsultationwithleadingexpertsintheareaoveraperiodofsixmonths.EachGreenFinanceTaskforcememberwasselectedbasedonrelevantexpertiseongreenfinanceandcontributionstotheagendatodate.Intotal,300peoplehavecontributedtothiswork,representingover140organisations.MoredetailsonhowtheGreenFinanceTaskforcewassetupandrunareincludedinAnnex1.

TheGreenFinanceTaskforcebelievesthatimplementingtheserecommendationswillbringsubstantialbenefitstotheUKthroughunlocking inward investment, promoting diverse trade opportunities for the financial services sector and building on UK leadership on climate change and London’s existing reputation as a leading global financial centre.37

37 AccordingtheGlobalFinancialCentresIndex,in2016Londonwasrankedtheleadingfinancialcentre–aheadofNewYork,HongKong,SingaporeandTokyo:ChinaDevelopmentInstituteandZ/Yen(2016)TheGlobalFinancialCentresIndex20http://www.longfinance.net/images/gfci/20/GFCI20_26Sep2016.pdf

Accelerating Green Finance

18

Page 21: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

A report to Government by the Green Finance Taskforce

19

Page 22: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

2.Key recommendations

Accelerating Green Finance

20

Page 23: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 1. Relaunch UK green finance activities through a new unified brand

The size of the opportunity

Raisingthecapitalneededtocombatclimatechangeisaglobalchallenge,andanunparalleledopportunityforanyfinancialcentrethatretainsglobalambitions.Asnotedabove,morethanUS$90trillionofinvestmentisrequiredby2050todelivera’twodegreesorless’scenarioasagreedattheUNClimateChangeConferenceinParisin2015.Repositioningconventionalmarketinfrastructure, regulation and private sector businessmodelstocapturethisgrowthwillbeessentialifLondon’sleadingpositionasaglobalfinancialserviceshubistoberetained.

Building on UK strengths

TheCityofLondonhasalreadybenefitedfromagrowthingreenfinanceactivity.In2017, 27greenbondswerelistedinLondon,raisingUS$10.09billion,comparedto14greenbondswhichraisedUS$5.65billionin2016.Intotal,there are 64 green bondslistedinLondonthat have raised over US$20.67 billion in aggregate terms across seven currencies.38 ThirteenrenewableinfrastructurefundswithanaggregatedvalueofoverUS$7billionarelistedonLondonStockExchange,inadditionto23exchangetradedfunds(ETFs)trackingsustainabilityindexes.LondonStockExchangeGroup’sgreenindexesofferedthroughFTSERussellhavesignificantlyoutperformedtheirbenchmarkoverafive-yearperiod.Examplesinclude:FTSEBalancedClimateFactorIndex(+5%),andFTSEDivest.

38 Lovisolo,S.,LondonStockExchangeGroup(2018)UK-ItalyFinancialDialoguehttp://www.minambiente.it/sites/default/files/archivio/allegati/sviluppo_sostenibile/Lovisolo_UK_Italy_Green_Finance_25022018.pdf

Therenewablesmarket–asubsectionofthelowcarboninfrastructuremarket–isalreadyestimatedtobeworthUS$290billion,39withglobaltradeinaselectionoflow-carbongoodsandservicesprojectedtoincreasefromaround£150billionin2015to£1–£1.8trillionin2030,andto£2.8–£5.1trillionin2050.40KeyexportmarketswillincludeIndia,Kenya,MexicoandBrazil.41

Butwhileglobalgreenbondgrowthhasbeenstrong, it still only represents a fraction of the globalbondmarket.Greenbondsandnewproducts,suchastransitionandsocialbonds,offernewopportunitiesforissuersandinvestorstoshowtheircommitmenttothetransitiontoalowcarboneconomy.Further,climaterisksandopportunitiesneedtobeappliedandintegratedacrossallassetclassesincludingequitiesandbondsmorebroadlyoutsideof“green”definedsecurities.Londontocaptureitsshareofthatgrowthingreenfinancialandprofessionalservices, is a necessary condition of its future successasaglobalcentre.

Londonhasconsiderablestrengthsinconventionalfinance,allofwhichhaverelevanceforgreenfinance.Thelatterisafterall,aspecifickindofintermediationbetweenbuyersandsellers,investorsandsavers,whichneedfinancialservicestoraiseinvestmentandgeneratereturns.

39 RenewableUK(2017)ReportrevealsmassiverangeofUKwind,waveandtidalenergyindustries’exportshttp://www.renewableuk.com/news/341845/Report-reveals-massive-range-of-UK-wind-wave-and-tidal-energy-industries-exports.htm

40 Carvalho,M.,FankhauserS.(2017)UKExportOpportunitiesinthelow-carboneconomyhttp://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2017/04/Carvalho-and-Fankhauser-2017.pdf

41 InternationalTradeAdministration(2016)2016TopMarketsReport:RenewableEnergyhttps://www.trade.gov/topmarkets/pdf/Renewable_Energy_Top_Markets_Report.pdf

A report to Government by the Green Finance Taskforce

21

Page 24: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Depth and scale–Londonhasafull-serviceofferinfinancialandprofessionalserviceswithworldleadingassetmanagement,insurance,bankingandprofessionalservices.Forexample,theUK’sinsurancemarketisthelargestinEurope,andfourthlargestintheworld42.

Deep and Liquid Capital Markets – The UK is hometowhatisonseveralmeasurestheworld’sdeepest and most internationally-oriented capitalmarket,providingaccesstofinancingand investment opportunities for many overseas companies,banksandinvestors.ItsexpertiseandconnectivitypositionsLondonwelltoinfluence thedevelopmentofgreenandsustainable financeglobally.

Global Regulatory Leadership – The UK has provided strong regulatory leadership through the G20GreenFinanceStudyGroup,co-chairedwithChina,andBankofEnglandGovernorMarkCarney’sroleasFSBChairmanleadingtothecreationoftheTaskForceonClimate-relatedFinancialDisclosures.Further,theUKlauncheditsmarketleadingCorporateGovernanceCodein1992anditsmuch“exported”Stewardshipcodein201043.In2013,throughamendmentstotheCompaniesAct2006,theUKintroducedlegislationmandatingcarbonreporting for all UK listed companies, thus pre-emptingtheEUNon-FinancialReportingDirective.

Global Reach –TheUKhassoft-powerassetsitcanleveragetoboostcapitalflowthroughitsextensivetradingrootsinAsiaandacrosstheCommonwealth,makingthemostoftheCorporationofLondon,theForeignandCommonwealthOfficeandtheDepartmentforInternationalTradeglobalnetworks.

42 AssociationofBritishInsurers(2018)UKInsuranceandLong-termSavings:StateoftheMarkethttps://www.abi.org.uk/globalassets/files/publications/public/data/abi_bro4467_state_of_market_v10.pdf

43 FinancialReportingCouncil(2018)OriginsoftheUKStewardshipCouncilhttps://www.frc.org.uk/investors/uk-stewardship-code/origins-of-the-uk-stewardship-code

Academic and Civil Society Excellence – TheUKhasfiveoftheworld’stop25universities44.Oxford,CambridgeandLondonSchoolofEconomicsallhavegloballyrecognised,interdisciplinaryresearchcentresinthisfield.InstitutionssuchastheMetOfficeHadleyCentreandtheNaturalEnvironmentResearchCentrearegloballeadersinclimatescienceandareleadingcontributorstotheIntergovernmentalPanelonClimateChangeprocess.Londonisanotablecentre of civil society expertise in green and climatefinanceissues,hosting,amongothers,E3G,ClimateBondsInitiative,UNPRI,CarbonTrackerInitiative,CarbonDisclosureProject(CDP),ClimateDisclosureStandardsBoard(CDSB),ClientEarthandShareAction.

Challenges to overcome

Londonhasacredibleleadingofferinexpertisein:o integrationofgreenandsustainability

intoinvestmentstrategies;o greenadvisoryservices;o financingclimatemitigation,promotingtheUK

as a centre of excellence for structuring and arrangingfinanceforgreeninfrastructureandinvestingintheglobalgreeneconomy;and

o financingclimateadaptation,includingpromotingthedevelopmentanduptakeof insurance products to increase climate resilienceglobally.45

LackofconsistentandcomparabledataisabarriertorealisingmoregreenfinanceopportunitiesintheUKandglobally.Itcanpreventinvestorsfrommanagingrisksaswellasseizingopportunitiesthatclimatechangepresents.

Informationisthelife-bloodoffinancialmarketsandthereisavastdatadisclosureandbenchmarkingexercisenowunderwaytoenablemoreaccurateassetpricing.Itisforthisreason

44 FinancialTimesGlobalMBARanking(2018)http://rankings.ft.com/businessschoolrankings/global-mba-ranking-2018

45 GreenFinanceInitiative(2017)15StepstoGreenFinance.E3Ghttp://greenfinanceinitiative.org/fifteen-steps-to-green-finance/

Accelerating Green Finance

22

Page 25: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

that the TCFD project must be implemented globally; otherwise market failures will continue, with exposure to climate change risk and opportunity continually mispriced and capital misallocated as a result.

Whilethemarketforgreenbondsremainsrelatively sophisticated, this is not true for loans andasset-backedsecuritiesandthereislittleinthewayofcommonsstandardsingreencorporatelending, real estate or securitisation, either domesticallyorinternationally.

International competition

Asnotedearlier,Londonistheleadinggreenfinancecentrecurrently,thereisgrowingcompetitionfromotherfinancialcentresaimingtogainmarketshareingreenfinance(seeBox1).Howeverseeinggreenfinanceasapurelycompetitiveissue,istoonarrowasthetransitiontoagreeneconomyhashugeglobalcrossdependencies.London’ssuccessinsupportingthisareawillbebeneficialfortheglobaleconomyandforotherfinancialcentres.Otherfinancialcentresarealigningtheircapitalmarketsoffer,withnationalcapitalraisingactivity,aswellasgreenfinanceregulation.Inparticular,FrancehascreatedastrongbrandinFinanceforTomorrowestablishedinJune2017asaninitiativeofParisEuroplace.ThisprovidedaplatformtoshowcaseboththesovereigngreenbondandtheParisgreenbond,aswellasprominentenvironmentallegislationsuchasArticle173,whichamongotherthings,mandatescarbonreportingfromawiderangeofinvestorsincludingassetmanagers, insurance companies and pension funds.Thispackage,combinedwithvisiblepoliticalsupportatthehighestlevel,makesforacompellingoffer.Incomparison,theUKneedstodevelopclose,formalcooperationbetweencentralGovernmentDepartmentsandtheirinternationalnetworks(viatheForeignOffice,DepartmentforInternationalTrade,HMTreasuryand others), academic institutions and the private sector.Given the UK’s prominent role in the UN, World Bank, IMF, G7 and G20 on this agenda, this should not become a missed

BOX 1.

OTHER FINANCIAL CENTRES ARE SHOWING LEADERSHIP ON GREEN FINANCE

o France: strong brand through Finance for Tomorrow; leading environmental legislation such as the Energy Transition Law, which includes the well-known Article 173

o Singapore Roadmap on Green Finance – from the Singapore Institute of International Affairs on the request of the Monetary Authority of Singapore

o ASEAN Green Finance Opportunities – a collaboration with the region’s largest bank, DBS, the first quantification of the green finance opportunities across the region

o China Green Finance Progress Report – a collaboration with the Central University for Finance and Economics in Beijing, the first published review of progress in China on green finance set against the State Council’s 35 recommendations on green finance adopted in August 2016

o A number of national financial system ‘roadmaps’ or action plans have been introduced, e.g. in Argentina, China, Italy, Singapore and South Africa

o EU HLEG report recommends using full institutional force of EU to promote sustainable finance internationally.

o World Bank Roadmap on Sustainable Finance – the results of a major collaboration with the United Nations Environment Programme Finance Initiative

A report to Government by the Green Finance Taskforce

23

Page 26: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Recommendations

RECOMMENDATION1 GovernmentandtheCityofLondonshouldestablish a new Green Finance Institute brand under which strengthened and rebranded Green Finance Initiative capacity is established.

Londonistheworld’sleadingfinancialcentreandindeed has conditions that are hard to replicate, notablyafull-servicefinancialandprofessionalservicesofferanddeepcapitalmarkets.However,inthefieldofgreenfinance,theUKisnotyetmakingthemostofexistingassetsandleveragingitsfullsetofexpertise.Moreover,itlacksastrong,internationally-recognisedbrandunderwhichgreenfinanceexpertisecanbepromotedandexported.Toaddressthis,theGreenFinanceTaskforceproposes that a new Green Finance Institute brand under which strengthened and rebranded Green Finance Initiative capacity is established.

Operatingasacompellingnewbrandthe InstitutewouldbringtogethertheUK’sexistingcapabilities,createnewbusinessopportunitiesandcommunicatetothewidermarketwhatLondon’sofferisingreenfinanceandinsurance.

BuildingonthestrengthsoftheGreenFinanceInitiative,itwouldrepresentabestinclass public-privatecollaboration.Frominceptionitwoulddeliverasmart,public-privatediplomaticstrategy, leveraging commercial activity here, the UK’scivicnetwork,anditsdiplomaticnetwork,to deliver real commercial opportunities in green finance.Assuchitwouldfacilitateandcaptureemergingopportunitiesingreenfinanceinthe UKandglobally.

Itwouldachievethisthrough:o Havinganumbrellabrandforallgreenfinance

activitywithaclearcommunicationsstrategy;o assistingwithmappingandpromotinggreen

and climate-resilient investment opportunities in the UK (see Themes 8 and 10 on Building a

GreenandResilientInfrastructurePipeline and IntegratingResilienceintotheGreenFinanceAgenda);

o providing advice to UK Government and othersub-sovereignissuersofgreenbondson management and use of proceeds – contributingtothedesignandmanagementoftheUKGovernmentGreenBondFramework(see Theme 7);

o engagingthefinancialsectortohelpdelivertheBritishStandardsInstitution’sworkongreenandsustainablemanagementstandards;

o providinggreenfinancetrainingmodules forembassyposts;

o beingacentreforcorescientificinputfordifferentformsofenvironmentalproject;

o deepeningexistingkeystrategicpartnerships(i.e.ChinaandBrazil)andcreatingnewones(i.e.India,NigeriaandMexico)andensuretheseareeffectivelyresourcedwithcleardeliverables;

o workingwiththeCentreforClimate Analyticstopromoteworldclassinvestor and issuer-orientated research (see Theme 2 onImproveclimateriskmanagementwithadvanceddataandanalytics);

o improving policy communication and regulatory onboardingforinvestorsintheUK;

o promoting the UK’s green infrastructure specialism,i.e.supportingChina'sBeltand Roadprojects;

o providingacentralrepositoryforgreenfinanceprojectknowledgeandlearning,standardiseddocumentation,informationaboutsourcesofGovernment funding for green infrastructure projects;and

o function as the forum for ongoing discussion andcollaborationbetweenGovernmentand private sector to provide governance structureandaccountabilityfortheimplementationoftheGreenFinanceTaskforcerecommendations.See Figure 4.

Accelerating Green Finance

24

Page 27: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

TheInstitutecouldbe,inthefirstinstancehousedattheCorporationofLondon.Seed funding from Government of the order of £2 million wouldneedtobesupplementedwithprivatesectorsubscriptionsandmatchedfundingfromtheCorporationofLondonissuggested.Match funding from the private sector sources will be key to get to and sustain scale and is key to aligning interests.

SourcingfundingfrommultiplepotswouldaffordtheInstitutemaximumflexibilitytopursuecommercialopportunities.TheClimate Finance Accelerator and Centre for Climate Analyticswouldbeseparateinstitutionsfundedbyseparatemeansandwouldhavetheirowngovernance structures and mandates, under oneUKGreenFinancebrand.

RECOMMENDATION2 ThisnewInstituteshouldset up a Green Fintech Hub

AnearlyprojectfortheGreenFinanceInstitutewouldbetosetupaGreenFintechHub(GFH).TheGFHwouldbuildonandsupport

UKleadershipinfinance,space,fintech,andsustainability.Secondly,comparedtoalternativessuch as company reporting, digital technology solutionscanbesignificantlylowercostroutestoamasssuchdataatscaleacrossthefinancialsector.Finally,digitaltechnologycanenablethedemocratisationofgreenfinance,empoweringtheinvestingpublicwiththeinformationtoredirecttheirowncapital.

AGreenFintechHubwouldserve as the national centre for businesses, data and solution providers and researchers tocoordinateandcollaboratetodevelopcommerciallyviablegreenfintechsolutions,withdirectaccesstoGovernmentwherenecessarytounlockmarketdevelopment.SuchaHubwoulddirectlyaddresstwoofthefourGrandChallengesidentifiedintheGovernment’sIndustrialStrategy,namelygrowingtheArtificialIntelligenceanddata-driveneconomyandCleanGrowth.

TheGFHwouldfocusonthreeareas:marketdevelopment;standardisation;andapplicationdevelopment.Detailsofeachofthesearebelow(and see Figure 5).

FIGURE 4. Institutional arrangements for the proposed Green Finance InstituteHowgreenfinanceactivitiescouldfitunderasinglebrand

A report to Government by the Green Finance Taskforce

25

Page 28: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

1. Market developmento Provideplatformsandcomputingpower

tosupportbigdataanalysisandmachinelearningapplicationsrelevanttogreenfintech;

o support the creation of algorithms and processes to match datasets, particularly intermsoflinkingasset-leveldatawithownershipinformation;

o provideaccessto/aggregatedatabeyondremotesensingthatcanunlockgreenfinanceinnovation,e.g.existingasset-linkeddata;

o usetheGovernment’sconveningpower tocrowdin/leveragethebestsources ofdatacapture/processing/accessfor aspecificchallenge;

o interfacewithregulatorstoremove barrierstodeployment;and

o promotegrowthofgreenfintechmarketintheUK,crowdingininvestorsandstart-upcompaniesinthisspace,withtheaimofbeingthegloballeaderingreenfintech.

2. Standardisationo Establishtherules,principles,and

technologiesrequiredtocreateaglobaldatabaseofassetownershipbasedonobservationaldata;

o develop approaches using novel datasets andmethodologiestotagallpubliclytradedsecuritieswitha‘shadeofgreen’;

o develop methodologies to measure environmentalrisksandimpactscurrently andinthefuture;

o developaglobalmonitoring,reportingandverification(MRV)systemforremotelymeasuring the point source of emissions of individual facilities and land use changeglobally;

o defineordevelopdatadefinition standards;and

o developopen-sourcemethodologies.

3. Application developmento Developdistributeddatabasesand

blockchaintechnologythatcansupport the creation and development of asset-level databasesandinformationsharingbetweenpublicandprivatesectors;

o pioneerapplicationsofgreenfintechforpolicymakersandregulatorsintheUK andinternationally;and

o Provideprocessexpertisetoremove frictions,e.g.intellectualpropertyownership.

SuchaHubshouldofferacollaborationspace–leveragingexistingrelevantfacilitiesifpossible–andaccesstoavirtualnetworkofallotherrelevantscience,technology,innovationandbusinessclusters.Acoreteamcouldstructureaseriesofbusiness-ledinnovationprocesses.

The Hub will increase the likelihood that the UK secures a position as a truly global leader on green fintech.Existingmarketexperienceacrossusecasessuchasenvironmentalriskmanagementbyinvestors,financingofsustainablecommodityproductionandtradeinglobalsupplychainsandfinancingofenergyefficiencyimprovementsinthebuiltenvironmentallindicatethatthereareclearopportunitiesforgrowth.

RECOMMENDATION3GovernmentandthenewInstituteshoulddeliver ajointdiplomaticstrategyongreenfinance

Market DevelopmentVia data capture, access and processing

Via standardisation and government sponsorship

Via multi-stakeholder innovationApplication development

Design for scale

FIGURE 5. Fintech hub design

Accelerating Green Finance

26

Page 29: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

The UK Government is recognised for its leadership incommercialdiplomacyandisuniquelyplacedtomakeaglobalcontributionincarryingthebestpracticesrecommendedintheGreenFinanceTaskforceReportintotheglobalenvironment,throughinternationalplatformssuchastheUN, G7andG20,andviatheindependentregulatorsinglobalstandardsettingbodiessuchasInternationalOrganizationofSecuritiesCommissions(IOSCO),InternationalAccountingStandardsBoard(IASB)andInternationalAssociationofInsuranceSupervisors(IAIS)tostepupandsetbasicglobalminimumstandardsonsustainablefinanceinallmajormarkets.

CentralGovernmentDepartments,andthenewGreenFinanceInstitute,shoulddevelopagreenfinancediplomaticstrategy.Therecommendationsofthereportcouldbepromotedbilaterally(e.g.througheconomicandfinancialdialogues)andmultilaterally(e.g.throughtheG20UK/Chinastudygroupongreenfinance).Moreover,theUKshouldensureitputsforwardaconsistentnarrative–fromboththeGovernment and private sector – at international events.Thiscouldbeanopportunitytoshowcaseconcreteprogressandpublic-privatecollaboration.

This approach could also encourage international collaborationonsustainablefinancetoharmonisepractices(e.g.buildingontheBSI’sworktoestablishanISOstandardonresponsibleinvestment)andbringtogethercountriestocollaborateinreformingglobalfinancialpolicytopromotesustainability.ThiscouldpotentiallycontributetosupportingaproposedUNResolutiononSustainableFinance,whichwouldestablishnewnormsandpracticesforfinanceinachievingtheUNSustainableDevelopmentGoals(SDGs)46.

Achieving impact

TheGlobalGreenFinanceInstitutewouldpositionLondonasaglobalstandardsetterthroughboththoughtleadershipingreenfinanceandthesciencebehindit,aswellasthehubtofacilitateaccessto

46 https://sustainabledevelopment.un.org/

commercialexpertise,capitalandinsurance.TheaimoftheInstitutewouldbetoultimatelyresultinincreasedmarketshareforLondoningreenfinance,forexamplethroughgreaterissuanceandunderwritingofgreenbonds,greenassetsundermanagementandsecuritisationofgreenloans.

Increasing end investor demand and demonstrating UKleadershipgloballywillpotentiallyalso:

o Create additional commercial opportunities fortheCityofLondontomeetadditionaldemandforresponsibleinvestment,therebyhelpingtocontinuetopositionLondonaheadofotherglobalfinancialcentres,suchasNewYorkandSingapore;

o support more long-term investment and processesincapitalmarketsandprovidingbusinessleaderswiththeopportunitytoinvestinlong-termareassuchasR&D,workforcetrainingandskills,whichincreaseproductivity;

o provide opportunities for the UK to export its highstandardsabroad–whetheronembeddingenvironmental, social and governance (ESG) practices into investment decisions, clarifying fiduciaryduty,theBSIstandardsongreenfinancemanagementorrecalibratinglong-termriskintoprudentialrequirements.Thiswillhelptoensurethat the UK is a rule setter rather than a rule takerglobally;

o providepositivegloballeadershiponthisissueandshowstrongUKinternationalengagementandnegotiationonaproactiveagenda,withexpertiseembeddedalongitsdiplomaticchannels,supportedbyanengagedprivatesector;

o showcasesustainabilityasaBritishassetandastrongbrandandplayittoitsmaximumeffect–thiswillhelpgiveakeycompetitiveadvantage,ahallmarkforquality,integrityandreliability;

o supporttheUK'sstatusasagreattradingnation,opentotheworldthroughtheexchangeofideasandinnovationatthegloballevelonsustainablefinance;

o supportitspositioningasacountrywithglobalreach,globalpartnershipsandaglobaloutlook;and

o joinuptheUK’sdomestic,internationalandpublicandprivatesectoragendasongreenfinanceviatheGreenFinanceInstituteandthegreenfinancediplomacystrategy.

A report to Government by the Green Finance Taskforce

27

Page 30: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 2. Improve climate risk management with advanced data and analytics

The size of the opportunity

Riskmanagementpracticeiscommonplaceacrossbusiness,andtheterminologyofrisk andresilienceisfamiliartothefinancecommunity.Fundmanagers,insurersandcapitalmarketsactorsreadilyaccountforrisksanduncertaintyinmarketsandensurethatportfolioscanberesilienttoexternalshocksorstresses.However,ithaslongbeenrecognisedthat environmental externalities, such as climate risk,arepoorlyincorporatedintofinancialandbusinessriskmanagementpractices,valuationsanddecisionmaking.

Theserisksarepresentandexhibiting changingfrequencyandseverity,including:o Increased or decreased rainfall

(leadingtofloodordrought);

o highertemperatures(leadingtoheatwaves);o sea level rise (leading to coastal

erosionorcoastalflooding);ando increasedwindstormintensity

(leadingtogreaterdamageandloss).

In addition, emerging and relating to these issues arerisksrelatingtogrowthofpopulationsandexposedassets,especiallyinmorehazardouslocations (see Chart 2).

WhilerespondingtoclimatechangehastraditionallybeenseenastherealmofGovernmentpolicy,thereisgrowingrecognitionthatthefinancialsystem,includingtheinsurancesector,hasacontributiontomakeinmanagingclimatechange-relatedrisks.Therearesignificantopportunitiesforgrowthanddevelopmentof‘climatesmart’financeassocietyandtheeconomymovetobeingbothlowcarbonandmoreresilienttoachangingclimate.

TheTaskForceonClimate-relatedFinancialDisclosures(TCFD)hasprovidedarefreshed

400

300

200

100

01975 1980 1985 1990 1995 2000 2005 2010

USD

BILL

ION

IN 2

014

Insured lossesUninsured losses

10-year moving average (Total insured losses)10-year moving average (Total economic losses)

CHART 2. Increase in global insurance loss volumes volatility of catastrophic eventsSource:SwissReInstituteandCatPerils

Accelerating Green Finance

28

Page 31: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

impetusinthisarea,withitsdualfocuson‘transitionrisks’and‘physicalrisks’.47 Examples ofotherUKinitiativesincludeClimateWise,aninsuranceindustry-ledglobalinitiativethatsupportstheindustrytobettercommunicateaboutandrespondtoclimatechange-relatedrisks48;andrecentGovernmentandindustrymissions,particularlywithChinawhereinDecember2017theUKcommittedtojointlyexploredevelopmentandfeasibilityofinsuranceproductssuchascatastrophebonds.49

DuetoitsdomesticroleintheUKeconomyanditsglobalroleintheannual$160billionnaturaldisasterre/insurancemarket50theUKbasedre/insurancesectorhassignificantcapabilitiesinevaluating,disclosingandmanagingkeyaspectsofphysicalclimaterelatedriskswithinacomprehensiveandwelladaptedregulatoryframework.Thebroaderfinancesectorwouldbenefitfromthere/insurancemarket’sknowledgeonclimaterisk,especiallyasrelatestoinfrastructureandsupplychainimpacts.51 These establishedcapabilitiesshouldbebuiltuponandacceleratedwithpracticalandintegratedclimateriskanalyticsmadeavailableacrosstheUKandabroadtopromotesustainedcleangrowthandresilienteconomies.

47 TaskForceonClimate-relatedFinancialDisclosures(2017)RecommendationsoftheTaskforceonClimate-relatedFinancialDisclosureshttps://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf

48 ClimateWise,amembershiporganisationwhichsupportstheinsuranceindustrytobettercommunicatediscloseandrespondtotherisksandopportunitiesassociatedwiththeclimate-riskprotectiongaphttps://www.cisl.cam.ac.uk/business-action/sustainable-finance/climatewise

49 UK-ChinaEconomicandFinanceDialogue(2017)9thUK-ChinaEconomicandFinanceDialoguePolicyOutcomeshttps://www.gov.uk/government/publications/uk-china-9th-economic-and-financial-dialogue-policy-outcomes

50 Globalnon-lifereinsurancepremiumsin2016totalledaboutUS$160billion:SwissRe(2017)Reinsurancenon-lifehttp://reports.swissre.com/2016/financial-report/financial-year/market-environment/reinsurance-non-life.html#

51 ClimateWise(2016)InvestingforResiliencehttps://www.cisl.cam.ac.uk/publications/sustainable-finance-publications/investing-for-resilience

Globally,morethan30%ofnaturaldisasterlossesarecoveredbyinsurance,althoughinmost developing and emerging economies the proportionislessthan5%.52Closingthisyawningprotectiongap,whichwillonlybeamplifiedbyclimatechangeimpacts,isagrowingfocusofattentionforinternationalpublicpolicymakers.In2016G7nationscommitted,throughtheInsuResilience programme, to increase current levelsofclimateriskinsurancecoverageby400millionpeople.ThisbecameasharedG20Commitmentin2017.InresponsetothesedemandsandthewiderUN2030SustainableDevelopmentAgenda,theindustrytogetherwiththeWorldBankandUnitedNationshaveformedtheInsuranceDevelopmentForumtosupportdeliveryofthesetargetsandoftheUNSustainableDevelopmentGoals,SendaiFrameworkfor DisasterRiskReduction,andParisAgreementonClimateChange.

ActionstosupporttheseprioritieswillconsolidateUK leadership and promote UK science, engineeringandinsuranceservicesinwaysthathelpscountriesandbusinessesbebetterpreparedtomanagetheimpactsofachangingclimate. Building on UK strengths

TheUKishometoworldclassexpertiseinclimate and environmental science, engineering, computationandactuarialprofessions. This includes expertise in the insurance and reinsurance sectors, including catastrophe riskmodellingfirms,specialistcreditratingsandaccountingteamsandfinancialregulatorsandresearchteams.In2015thePrudentialRegulationAuthorityassessedtheimpactofclimate change on the insurance sector and foundthatfirmsarereasonablywell-equipped

52 Holzheu,T.,&Turner,G.,(2018)TheNaturalCatastropheProtectionGap:Measurement,RootCausesandWaysofAddressingUnderinsuranceforExtremeEvents.TheGenevaPapers,Vol.43,Issue1,pp.37–71.https://link.springer.com/content/pdf/10.1057%2Fs41288-017-0075-y.pdf

A report to Government by the Green Finance Taskforce

29

Page 32: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

RiskandInsuranceFacility,whichprovidedirectinsuranceprotectiontoapproximatelyadozencountrieswithtechnicalassistancealsoapriority.

TheUK’sILSregimeisduetocomeintoforcein2018,creatinganewmarketintheUKforILSdeals.ILS,alsoknownascatastrophebonds,enableinsurerstotransferlargeandcomplexrisks,suchascatastrophicrisksarisingfromnaturaldisasters,tocapitalmarketsratherthanthroughreinsurers.CapitalbackingILSstandsataround$90billionglobally.ResearchbyEYestimatesthatthismarketcouldgrowtoavalueof$224billionby2021–28%ofreinsurancecapitalasawhole.

Leveragingbothadviceinmodellingandunderstanding climate change impacts and expertisetodesignandsellinnovativenewproductswouldbuildtheUK’sreputationasa centre of excellence on climate resilience andinsuranceaswellaspromotenewtradingopportunitiesglobally.

International competition

EITClimate-KIChassupportedanumber ofEuropeaninitiatives:

o TheFinancialMarketsandAccountingInitiative56 supports corporate disclosure of climateriskbydevelopingmetrics,standardsandinstruments.Thisinturncanadvancefinancialdecision-making,benchmarking ofperformanceanddevelopingnewinvestmentandfinancialinstruments;and

o TheClimateRiskInformationInitiativehasdevelopedanonlinemarketforclimateriskdataandmodels.ThishasalsoreceivedHorizon2020fundinguntil2020.ThisislinkedtoOasisHub57whichprovidesarangeof freeenvironmentalriskdata,toolsand servicesforcommercialusers.

56 Climate-KIC(2018)Decisionmetricsandfinance:OurInitiativeshttp://www.climate-kic.org/areas-of-focus/decision-metrics-finance/our-initiatives/

57 EITClimate-KIC(2018)OasisHubhttps://oasishub.co/

tomanagethecurrentlevelofphysicalrisks53, although in future – if climate change is not limitedtosafelimits–thiswillchange.

Inaddition,throughbodiessuchastheCommittee on Climate Change, the Environment AgencyandFloodRe,theUKisagloballeaderin delivering institutional solutions to clearly apportionrisksbetweenthepublicandprivatesectors.Forexample,theUKisoneofthe fewcountriesgloballywherefloodriskinsuranceisavailable.

Astheclimatecontinuestochangeandaffectnations, the importance and value of this expertise inhelpingGovernmentsandbusinessesacrosstheglobeunderstandandmanageclimateriskswillgrow.

The UK’s insurance and reinsurance sectors arewellplacedtomeetthisdemandthroughdomestic innovation and exporting its services abroad,developingandpromotingnewclimateresilienceinsuranceproducts.ThiscapabilityhasbeengivenopportunitytoexpandviatherecentpassageoflegislationenablingInsuranceLinkedSecurities(ILS)-financialinstrumentssoldtoinvestorswhosevalueisaffectedbyaninsuredlossevent,includingcatastrophebonds and otherformsofrisk-linked securitisation–tobeissuedintheUK.52

AtthesametimetheDepartmentforInternationalDevelopment(DfID)haslaunchedtheCentrefor54 GlobalDisasterProtection.55ThisCentrebuildsuponitsdecadelongengagementwithinsurancemechanisms,suchastheCaribbeanCatastrophe

53 BankofEnglandPrudentialRegulationAuthority(2015)TheImpactofClimateChangeontheUKInsuranceSectorhttps://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/impact-of-climate-change-on-the-uk-insurance-sector.pdf?la=en&hash=EF9FE0FF9AEC940A2BA722324902FFBA49A5A29A

54 HMTreasury(2017)BusinesssettobenefitfromnewInsuranceLinkedSecuritiesruleshttps://www.gov.uk/government/news/business-set-to-benefit-from-new-insurance-linked-securities-rules

55 Artemis(2017)LondonCentreforGlobalDisasterProtectionannouncedatG20byPMMayhttp://www.artemis.bm/blog/2017/07/10/london-centre-for-global-disaster-protection-announced-at-g20-by-pm-may/

Accelerating Green Finance

30

Page 33: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

TheInsuResilienceGlobalPartnershipforClimateandDisasterRiskFinanceandInsuranceSolutionswaslaunchedatCOP23in2017.ThisinitiativeinvolvestheG20nations,civilsociety,private sector, academia and international organisationstoenablecountriestocarryoutmoretimelyandreliablepost-disasterresponses,andtoenablethemtobetterprepareforclimateanddisasterriskthroughtheuseofriskfinanceandinsurance.

Challenges to overcome

Many corporates and Governments are only atthebeginningofunderstandinghowtoassess,measureandmanageclimaterisk.Asaconsequence,thereisstillasignificantknowledgegapaboutthepotentialsizeandscaleofclimateriskandalackofdemandforadequateinsuranceprotection.Significantmarketfailuresarecreatedbythechallengesoftranslatingscience and data and applying it productively in corporatecontexts.

Thisisinpartbecauseoftheneedforgreaterengagementbetweenclimateimpactsexpertsandriskdatausers(businesses)tounderstandandcommunicatethelinksbetweenclimateimpactpathwaysandcorporatedecision-making.Thismayrequirequantifiableobjectives(cf.minimumliquidityandcapitalratiorequirementsassetbytheBaselIIIframework)orothermechanismstofacilitateengagementwithclimateriskdata.

Aninstitutionalsolutionisrequiredtoovercometheseexistingbarriersbecauseactiveandcloseintegrationisneededtodevelopworkablesolutionsbetween:science,socialscienceandengineeringagencies;financialprofessionalsandinstitutions;andinnovativetechnologycompaniesandstart-ups.

Bydrawingtogethersuchskillsandexpertise-whichareheldinthepublic,academicandprivatesectors - the UK’s expertise in data, analytics, researchandinnovationcanbechannelledintoprovidinghighutilitypublic-privatefacilitiesthat

cantranslateclimateintocorporateriskandindoingsoenabletheCityofLondontogenerateandprovideadvancedgreenfinancialproductsandservicestomanagethatrisk.

Recommendations

RECOMMENDATION4Private sector, academia and Government should establish a Centre for Climate Analytics

Building on the methodologies and metrics employedbytheinsuranceandreinsurancesectorsandtheirregulatorsandwiderstakeholders(includingcatastropheriskmodellingand annual average loss) the UK Government should help create an industry led, user-focused andUK-basedcentretoworkattheinterfaceofacademicandindustryinnovation.Theroleofthiscentrewouldnotbetoundertakeclimatescienceanalysis,butrathertodeveloptoolsandmetricstointegrateclimateandweatherdataandoutputsintowiderriskmodellingframeworksthatcanbeusedwithinmainstreamfinancialsystems.

Thekeyfunctionsproposedfora‘hubandspoke’CentreforClimateAnalyticsdescribedas“theCentre”–establishedundertheoverallbrandoftheGreenFinanceInstitute(see Figure 6)are:

o Supportthewidespreadandopensourceunderstanding of current UK and overseas climaterisksandtheresilienceofassets andpopulationstothoserisks;

o generateexpandedmethodstoenablea widerrangeoffinancialservicesactors(including investment and asset management)toapplytheseintheirown riskevaluationsanddecision-making;

o developandincorporatetractable methodsandtoolstoenabletheassessmentoffuturerisksconcerningevolvingpatterns of climate, exposed assets and populations andtheirvulnerabilities;

o understand domestic and institutional consumers attitudes and responses toriskandresilience;and

A report to Government by the Green Finance Taskforce

31

Page 34: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

o provideamagnetfor:technologyand fintechcompanies;innovators;andthe venture capital community to engage in thisinsuranceecosystem.

TheCentreshouldbestructuredinawaythatexplicitlyaddressesthemarketbarrierstodateandbesetuptoproducebothappliedresearchandalliedproductsandservices.Thecurrentmarketfailuretodevelopclimateriskassessment applications includes increasing data and processing costs, limited applied technicalexpertise,andsilo-workingindifferingcommercialspacesthatpotentially‘reinventsthewheel’anddoesnotbenefitfromscaledupandvalidatedapproaches.Astep-changeofanalyticsdevelopmentisrequiredwhichbuildson mature insurance industry tools to innovate climate-conditioned methodologies, datasets andproductsthatsupportbroaderfinancialandpublicsectorneeds.TheCentrewouldeffectivelyprovide a pre-competitive space generating open source and thus more easily validated and communicatedproducts.Significantcompetitiveadvantagewouldsubsequentlybeextractedbyextentandeffectivenessofindividualcompanydeploymentofsucheasilyexamined,widelyacceptedanddefactostandardproducts.

TosupporttheCentre’smission,twolinkedbutseparate entities are needed that can actively facilitate the partnerships that can translate climatechangeresearchintoriskquantificationtoolsandnewinsuranceproducts.The first is an applied research department, which could be embedded within a UK University, called here the Centre for Applied Climate Risk Analytics.

Corefunctionswouldincluderesearch,teachingandpartnershipcreationasfollows.

Research and teachingwouldcoverallaspectsofnaturalhazardrisk,vulnerability,exposure,improvedmathematicalmodellingtechniquesandassociatedtopics such as humanitarian and economic impactsofdisastersandbroaderpolicyissuesandobjectives.TheCentrewillneedtoestablishlinkswithexistingcentresofexpertiseinthesetopicsacrossUKacademicinstitutions.Thekeysupportingdisciplinesfortheappliedclimateriskresearchentityare:mathematicsandstatistics;computationandsoftwaredevelopment;engineering;economics,accountingandfinance;lawandpublicpolicy.Climateandenvironmentalscience,perse,wouldbea relatively small proportion of the Centre’s expertise andwouldfacilitatecollaboration,integrationand

Green Finance InstituteA new UK brand for green finance activity

Centre forClimate

Analytics

Centre for Applied Climate Risk Analytics

Research & teachingMathematical

modelling, social sciences, economics, policy, climate science

Partnership creation

Academia and centres worldwide

Insurance-linkedsecurities

Resilience and catastrophic bonds

TCFD implementation

Off-the-shelf tools and models

Products and ServicesCompany

FIGURE 6. Institutional arrangements StructurefortheCentreforClimateAnalytics

Accelerating Green Finance

32

Page 35: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

interpretation of data, modelling and expertise from otherinstitutions.

Partnership creationalongwithcollaborationswithindustryandotherrelevantacademicgroupsinUK,Europeandinternationallywillbekeytoscalingupresourcesandimpact.CollaborationonclimateandenvironmentalsciencewillbeanimportantcomponentoftheCentre’swork.Datasetscouldbedevelopedwithinputfrom:EnergyPerformanceCertificatesanddigitalpassportsforbuildings;theUKSpaceAgencyonremotesensingandsatelliteimagery;MetOfficeonclimatedata;andtheEnvironmentAgencyonfloodrisk.Successwillrequireoutreachtothesespecialistcentres,anduniversitieswithrelevantresearchcapacitysuch asBristol,Bath,Exeter,andCardiffUniversities. Thiswillrequirededicatedresources.

Early projects:TheCentrecouldundertakewouldbeevidence-based,risk-drivenanddelivertangibleapplicationsofclimaterelatedrisk- sharingmechanisms.

Sustainable infrastructure:WorkingwiththeNationalInfrastructureAssessmentsubworkinggroupdescribedinTheme 8, develop and socialise acleardefinitionandmeanstoevaluatetheclimateresilience of investments, including UK and overseas propertyandinfrastructure,byapplyinginsurancestyleclimateriskmetricsandmethodologies.ThisshouldbepromotedaspartoftheGreenFinanceInstitute’s diplomacy strategy, as set out in Theme 1.

The second is the creation of a Products and Services Company limited by guarantee. Locatedcloselytocoreusermarketstoservicebothdomestic and international clients, this company wouldfocusonturningresearchintoproducts,wherethecombinedeffortandtransparencyoftheircompositionwouldassistinconceptualrobustness,interoperabilityandwidespreadmarketacceptance.Corefunctionswouldinclude:

o The production and support of industry-standard models and datasets, including ones centred on TCFD implementation.Anearlytaskshouldbetodeveloppracticalmethods,standardsand

applicationsofphysicalclimateriskstress-testingtofulfiltherequirementsoftheTCFDforcorporatesandwiderfinancialandpublicsectororganisations to assess their current and future UKandoverseasexposures.Theyshouldbefreeandpubliclyavailable.WorkingthroughtheHub,theinsurancesectorshouldtakealeadin developing and implementing stress-tests forfutureclimateriskscenarios,lookingahead20,50and100yearsforunderwritingandinvestmentmanagementplanning.

o Developmentofnewinsuranceunderwriting products and innovations to de-risk green investmentsandtechnologiestoenablegreaterinvestmentinsustainabledevelopmentsuchas clean energy and or resilient infrastructure, loweringthecostofcapital forsuchinvestments.

Set up and implementation: The estimated costtosetuptheCentreisintheorderof£15-£20 millionperyearwithapproximatelyone third dedicated to the applied research centre and theresttotheProductsandServicesCompany.Fundingcouldbeinitiallyseededthroughanindustry-led application to the Industrial Strategy ChallengeFundinadditiontocorefundingprovidedbytheNaturalEnvironmentResearchCouncil.

Post-TCFD,thepotentialdemandforsuchservicesshouldbeincreasedtoanat-scale offer.Onthatbasisitissuggestedpublicfunding,withmatchfundingfromtheprivatesector,isusedduringthefirstfiveyearsofexistencetogetthe Centre up and running – amounting to total fundingof£75-£100million.Afterthat,giventheexpectedsignificantandgrowingdemandforsuchproducts and services, there is the potential for theProductsandServicesCompanytobecomeself-financing.Onceestablished,theappliedresearch arm could operate as a mainstream academic department funded via the usual channelsbutalsosetup–throughitspartnershiparm – to source funding from other domestic and internationalpublicandprivatesectorsources.

A report to Government by the Green Finance Taskforce

33

Page 36: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Achieving impact

SettinguptheCentrewouldenableinsurance-relatedapproachestobeemulatedinthewiderrealmsofpublicandprivatesectorfinancewiththe UK developing the leading metrics, standards andimplementationsystemsforusebydomesticandinternationalfacingfinancialinstitutions.Relatedinsuranceproductswouldbecreatedandsold,makingtheUKagloballeaderinthismarket.Prudentialregulatorsshouldthenconsideramendingframeworkstoallowprotectionstobeproportionatelyrecognisedonbalancesheetsasacontingentformofgreenfinance(regulatorycapital)againstthesecontingentclimateriskstoencourageprotectionandincreasedemand.

The establishment of the Centre would also helppromoteUKleadershipinclimateriskandinsurance to close the insurance protection gap, furtherboostingtradeopportunities.Climate-relatedre/insuranceprotectionunderpinsamajorproportiontheUKre/insurancepremiumincomeandyetglobalcoverageratesremainlow.Strategiestoincreasefinancialsecurityandresilienceandclosetheprotectiongap,willbecomeagrowingfocusofattentionanddemandand the UK should maintain and extend its role in thisgrowingglobalmarket.

BOX 2.

DEEP DIVE: HOW THE CENTRE COULD UNLOCK INNOVATION IN THE INSURANCE SECTOR IN MANAGING CLIMATE RISK AND BOOSTING GREEN UNDERWRITING

o Mainstreaming industry sector support and related public sector R&D and innovation alignment with the newly announced Centre for Global Disaster Protection to increase insurance for climate and natural disaster risk in developing and emerging countries.

o Establishing a research and innovation programme for Insurance Linked Securities and Capital Markets integrating industry, public sector and academic communities with a particular focus on application of recent UK legislation. This could include the development of climate resilience bonds for sovereign, public sector or corporate entities and expand the role of these instruments in development finance.

o Establishing a domestic and international research and innovation programme with industry, academic and public sector on Insurance Systems and Public Policy in UK and other Countries to support the application and integration of UK experience, expertise and industry capacity in the development of systems for climate and wider risk sharing and resilience in the UK and overseas markets. Part of this focus should be on driving innovation in the range and quality of green related insurance protections for UK consumers and public and private sector institutions.

o Embedding insurance and resilience related areas of science, industry and regulatory expertise as a sustained focus within diplomatic and trade development strategies including international processes.

Accelerating Green Finance

34

Page 37: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 3: Implement the recommendations of the Task Force on Climate Related Financial Disclosures (TCFD)

The size of the opportunity

Capitalmarketsrequirehighqualityandtimelydatatofunctionefficientlythroughtheclimate-relatedenergytransition.Companiesandinvestorswillneedbetterinformationtomakeinformeddecisionsabouttheimpactofclimaterisksontheirbusinessoperationsandfuturecapitalinvestments.Therecommendationsfromtheprivate-sectorledTaskForceonClimateRelatedFinancialDisclosures(TCFD)provides aninternationallyagreedframeworkthrough whichexposuretoclimateriskcanbeassessed,reducedandmanaged. The UK Government has already formally endorsed theworkoftheTCFD.58 This section presents proposalsforclarifyinghowtherecommendationsshouldbeimplementedintheUK.

Manybusinessesandinvestorsareincreasinglyvocalabouttheneedtourgentlytransitiontoalowcarboneconomytodeliversustainableeconomicgrowthandbusinesscompetitiveness.Several changes to the regulation, supervision andoversightoffinancialmarketsandfinancialmarketsandinstitutions,assuggestedinthischapter,wouldexpandtheUKgreenfinancesector,helpingpromotefinancialstability,marketefficiencyandconsumerprotection.

58 BEISandHMTreasury(2017)UKGovernmentlaunchesplantoaccelerategrowthofgreenfinancehttps://www.gov.uk/government/news/uk-government-launches-plan-to-accelerate-growth-of-green-finance

Building on UK strengths

TheUKisrenownedastheworld’slargestfinancialcentreandanattractiveplacetodobusinesswithatradesurplusofUS$77billion in2016,morethanthecombinedsurplusesofthenexttwoleadingcountries(USandSwitzerland).59Itisavaluableasset,contributing11%ofGovernmenttaxreceiptstoMarch2017.60 The depth of innovation, products andcapitalincludingongreenfinanceandinvestment,combinedwithlegalexpertiseandcapabilitiesinemergingmarketsareunmatched.EnsuringtheUKhasthebestandmostreliableinformationonclimate-relatedrisksandopportunitieswillbefundamentaltoitscontinuedsuccessanditsabilitytoactastheleading greenfinancialcentre.

Leadershipintheavailabilityofclimate-relatedandsustainability-relatedinformationforfinancialdecision-making,inlargepartenabledbyeffectivedisclosureandreportingframeworks,isacriticalcompetitiveadvantagefortheUK.Disclosureand transparency help to encourage trust in capitalmarkets.ThisisimportantforLondon’sinternational reputation and its attractiveness to issuersontheLondonStockExchange.TheBankofEnglandhasledthediscussiongloballyonfinancialstabilityrisksflowingfromclimatechangeand has a position of authority on development of thesustainabilityaspectsofthefinancialstabilityregimeglobally.TheUKhasabaseofexistingregulationsandguidanceonsustainabilityissuesthatcanbeclarifiedtoproperlyincludeclimaterelateddisclosureobligations.61

59 TheCityUK(2017)KeyfactsabouttheUKasanInternationalFinancialCentre2017https://www.thecityuk.com/assets/2017/Reports-PDF/Key-facts-about-the-UK-as-an-International-financial-centre-2017.pdf

60 CityofLondonCorporation(2017)TotaltaxcontributionofUKFinancialServices10theditionhttps://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/research-2017/total-tax-report-2017.pdf

61 PrinciplesforResponsibleInvestmentandBakerMcKenzie(2017)RelevanceofrecommendationsoftheTaskForceonClimate-relatedDisclosuresinparticularjurisdictionshttps://f.datasrvr.com/fr1/717/47909/TCFD_Baker_McKenzie_PRI_full_report_2017.pdf

A report to Government by the Green Finance Taskforce

35

Page 38: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

The time is right for the UK to move further on climate related disclosures and stay ahead of the curve.Thecompetitivelandscapeischangingrapidly.Asnotedearlieragrowingnumberoffinancialcentres,togetherwithproactivepolicymakers,havestartedtochallengeLondon.

Challenges to overcome

Existing UK legislation provides the foundation forimplementingtheTCFD.Yet,italsoincludesseveralgapssuchas:theabsenceofforwardlookinganalysis;inadequateconsiderationoftransitionrisks;62 and only partial enforcement ofexistingrequirements.63 Realising the opportunitiesthatglobalmarketleadershipongreenfinanceprovideswillrequirearesponse tothesegapsandthefollowingmarketbarriers.

62 TheFinancialConductAuthority’sriskoutlook,forexample,doesincludephysicalclimate-relatedriskbutnottransitionrisks.HouseofCommonsEnvironmentalAuditCommittee(2018)GreenFinanceInquiry,oralevidence,20Februaryhttp://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/environmental-audit-committee/green-finance/oral/78606.html

63 ClientEarthhasreportedseveralUKquotedcompaniestotheFinancialReportingCouncilthatarenotmeetingthedisclosurerequirementssetoutunderthe2006CompaniesAct.ClientEarth(2016)ClientEarthtriggersreviewofcompanies’climatedisclosureshttps://www.clientearth.org/clientearth-triggers-review-companies-climate-disclosures/

Information failures Despite wide acceptance in business and finance of the need to reduce emissions, information failures limit common understanding of the financial risks and opportunities and hamper decision making. For example, assumptions about the severity and implications of climate risk vary. There is also limited forward looking climate related financial information disclosed by companies. Unless there is a clear signal that widespread, high quality disclosure is required, the value of the reporting of a minority of companies and investors will be undermined, creating a disincentive for the market to develop.

Financial stability risks The Bank of England has argued that climate change and policies to mitigate it could affect the ability of central banks and regulators to meet monetary and financial stability objectives. The speed at which re-pricing occurs due to physical and transition risks of climate change is uncertain but could be important for financial stability as well as the soundness and safety of financial firms. Delayed implementation of widespread reporting requirements on material emerging issues allows financial system risk to build. A, B

Trust in capital marketsExpectations of capital markets on sustainability challenges are increasing. Disclosure and transparency helps to encourage trust in capital markets. In addition, companies (and directors) may face legal liability exposure by failing to assess and manage environmental risk in accordance with their duties or failing to report risks. Without credible comparability of climate related disclosures, which are most reliably based on a level playing field of disclosure requirements, it is difficult for financial system users and beneficiaries to trust the information they receive.

ProductivityBusinesses in the UK face risks to future productivity and efficiency gains, without better information. The implementation of climate and sustainability practices at the organisation-level can therefore help UK companies become more competitive. Without a clear signal from government that climate transition and disclosure of relevant information is a substantial issue for all emissions intensive, energy dependent and related service industries, there is a real risk of delayed consideration of the implications by industry.

A Financialregulatorsacknowledgethatclimatechangepresentsasystemicrisktothefinancialsystem.AnAviva-sponsoredEconomistIntelligenceUnitreportestimatedthatuptoUS$43trillionofassetscouldbelostby2100asaresultofsevereclimatechange.TheEconomistIntelligenceUnit(2015)TheCostofInaction:recognisingthevalueatriskfromclimatechangehttps://www.eiuperspectives.economist.com/sites/default/files/The%20cost%20of%20inaction_0.pdf

B BankofEngland(2017,Q2)QuarterlyBulletin:TheBankofEngland’sResponsetoClimateChangehttps://www.bankofengland.co.uk/quarterly-bulletin/2017/q2/the-banks-response-to-climate-change

Accelerating Green Finance

36

Page 39: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Recommendations

RECOMMENDATION5Companies and investors should use the TCFD framework to develop their financial, corporate governance and stewardship disclosures on a comply or explain basis. TheremustbeacomprehensiveeffortbytheGovernment and relevant regulators to support successful adoption, implementation, and enforcementoftheTCFDrecommendations,suchasthroughpublicrankings,off-the-shelftoolsandscenarios,andpubliclyavailabledatasets.TheGovernmentshouldconductareviewofdisclosurein2020tomonitorandencouragemarketadoptionamongstbothissuersandusers.Ifadoptionisdeemedinsufficient,Governmentshouldgiveconsiderationtowhatfurthermeasuresarerequiredtoencouragetakeup.

RECOMMENDATION6RelevantfinancialregulatorsshouldintegratetheTCFDrecommendations throughout the existing UK corporate governance and stewardship reporting framework.TheGovernmentandfinancialregulatorsshouldcreateandpublishguidelinesbySummer 2019andappropriatelyreferencetheseguidelines in the corpus of relevant UK rules, codesandguidanceby2020.64 The guidelines wouldclarifycertainTCFDrecommendationstomakethemmorereadilyimplementable,forexample in relation to physical climate scenario analysisandthedisclosureofassumptions.

64 Keytothisprocesswillbeforrelevantregulatorstoidentifythemosteffectivemode bywhichtheguidelinescanbeaccommodatedwithinits regulatoryremit.Intheeventthat aregulatordeterminestheguidelinescannotbeaccommodatedwithinitsremit,thenthemandateshould beamendedaccordingly.

ToensurethattheTCFDrecommendationsare properly integrated into the UK corporate governanceandreportingframework,theguidelineswouldneedtobeappropriatelyreferenced in the corpus of relevant rules, codesandguidancesuchastheFCAHandbook(including listing rules and prospectus rules), corporategovernancecodeandstewardshipcode.GuidelinesshouldincludeeachofthefourkeyareasoftheTCFDrecommendations:governance,strategy,riskmanagement,andmetricsandtargets.65

Theguidelinesshoulddefinewhichcorporatepreparersarecoveredbydisclosurerequirements.Thiswillbeinlargepartdeterminedbythescopeofexistingrulesandcodes.Thisshouldbebasedonexistingplansforupdatesandrevisionsbutexpeditedifandwherenecessary.Financialregulatorswouldneedtoassessthesuitabilityoftheexistingrules,codesandguidanceforthedisclosuresenvisagedbytheguidelines.Wheretheexistingrules,codesandguidancearenotsuitable,thenpublishingseparateornewguidancetoassimilatetheguidelinesshouldbeconsideredwhereitiswithinaregulator’spowerstodoso,andwhereanyproceduralformalitiesarecompliedwith.

TheGreenFinanceInitiativeshouldbeformallytaskedbytheGovernmentandfinancialregulators to implement an inclusive process involvingkeyprivatesectorstakeholderstohelpgeneratetheguidelines.ThiscouldsignificantlyreducetheburdenontheGovernmentandfinancialregulatorsassociatedwithpreparingnewguidanceinashortperiodoftime.

65 ThisistoensurethatguidanceisprovidedonaspectsoftheTCFDthatcansupportcleangrowth,forexample,thedisclosure of revenues from products and services that providegreensolutions.Companiesrequireclearguidanceonrevenuesub-segmentstoreportontheirdisclosures.ForexampleseeChapter7oftheLSEGESGReportingGuidancehttps://www.lseg.com/sites/default/files/content/images/Green_Finance/ESG/2018/February/LSEG_ESG_report_January_2018.pdf

A report to Government by the Green Finance Taskforce

37

Page 40: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theguidelinesshould:o Definewhichpreparersarecovered

bydisclosurerequirements;o ensure that information is disclosed on

aconsistentandtransparentbasis.Theguidelinesshouldmakeclearthatassumptionsusedforcalculations,estimatesorprojectionsshouldalsobedisclosedbypreparers;

o ensurethatpreparersprovidescenario-baseddisclosuresofhowtheirbusinessstrategiesandfinancialplanningmaybeaffectedbyclimate-relatedrisksandopportunitiesand theassociatedtimehorizonsconsidered;

o ensurethatpreparesareawareoftherequirementandaresupportedinthereportingofrevenuesfromgreenbusinessareas;and

o takeaccountofhowdifferentjurisdictions arerespondingtonewdisclosureneeds.

In addition to the need for companies and investors to prepare and use the climate related disclosures, there are several steps that the private sector cantake.Theseincludeprovidingknowledgedevelopment and training for preparers to ensure sufficientorganisationalcompetenceinrelationtoenvironmentalrisk,impactandopportunity.

To support adoption and implementation Government and regulators should leverage the GreenFinanceInitiativeandCentreforClimateAnalyticstomakeavailablematcheddatasets fromtheLandRegistry,EnvironmentAgency,MinistryofHousing,CommunitiesandLocalGovernment,BEISandotherrelevantpublicbodies,suchastheMetOffice,tosupportbanksaccurately measuring the exposure of loans, particularly mortgages, to changing physical climate-relatedrisks.Theassessmentthatcould becreatedwiththesedatasetsshouldthen informfuturesupervisorywork.Thiswork shouldhelpdevelopbenchmarks,publicrankingsandoff-the-shelftoolstoencouragepreparerstodisclose.AnindependentbodyshouldalsoconductregularreviewsofTCFDdisclosurepracticesin2019/20toinformfuturepolicymaking.

TheGreenFinanceInitiativeshouldalsoconvenesector-specificpreparerforumstosupportguidelineadoptionandimplementation.Theseforumswouldinvolvepractitioners,expertsandpolicymakersandwouldprovideimplementationsupporttopreparersacrossasector.

2018 2019 2020 2021 2022 2023 2024 2025

FIGURE 7. Proposed Task Force on Climate-related Financial Disclosures implementation timeline

Accelerating Green Finance

38

Page 41: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Recommendations

RECOMMENDATION7Government and relevant financial regulators must clarify in their guidelines that disclosing material environmental risks, including physical and transition climate-related risks, is already mandatory under existing law and practice.TheguidelinesshouldalsoclarifythattheTCFDrecommendations,giventhattheyreflectkeyinternationalnormsfordisclosingmaterialclimate-relatedrisks,enablepreparers tofulfiltheirlegalobligationsandduties.

TheserecommendationswouldembedtheTCFDrecommendations for disclosing climate-related riskinallrelevantUKcorporategovernanceandreportingframeworks.Withtherequisitesupportfromfinancialregulatorsthiscanbeachievedwithoutadditionallegislation.However,at an appropriate moment, revisions to relevant legislationshouldfurtherintegratetheTCFDrecommendations into the corporate governance andreportingframework.

Thiswouldalsoprovideanopportunityto:harmoniserequirementsacrossdifferententities(whereexistingrules,codesandguidancetakedifferentapproaches);andmakeprovisionsforfurtheraccountabilityinrelationtotheinformation(e.g.specifylocation,makeprovisionfor shareholder approval similar to the directors’ remunerationreport).

Legislationwouldhoweverbenecessaryiffinancialregulatorsdonotprovidetheirsupportwithinthetimeframesenvisagedinthisreport (see Figure 7 for implementation timeline).

Achieving impact

Asaresultofthemeasuresoutlinedabovebeingimplemented,theUKwouldbecomethefirstjurisdictiongloballytofullyimplementtheTCFD.ThiswouldinturnenableinvestorsintheUKtodifferentiatebetweencompaniesandassetsthatarealigned(ormisaligned)withtheimplementationoftheParisAgreementandtheUK’sCleanGrowthStrategy.Thiswouldhavetheeffectofensuringthatcompaniesthatimplementsustainabilitypracticeshavealowercostofcapital,higherproductivityandbetterstockmarketperformance.66 Organisational level improvements in performance and resilience duetotheadoptionofsustainabilitypractices bycorporateswillhavemacro-economicbenefits,includinghelpingtoimprovetheproductivityoftheUKeconomyaswholeandputting UK industries at the leading edge of aglobaleconomictransformation.

66 GLClarkFeiner,A.,Viehs,M.(2014)‘FromtheStockholdertotheStakeholder:HowSustainabilityCanDriveFinancialOutperformance’ (Smith School of Enterprise and the Environment, University of Oxford)

A report to Government by the Green Finance Taskforce

39

Page 42: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 4: Drive demand and supply for green lending products

The size of the opportunity

BuildingsareattheheartoftheUK’sdecarbonisationandclimateadaptationchallenge.TheUK’sresidential,commercialandpublicbuildingsaccountfor30%oftotalgreenhousegas(GHG)emissions,comprisingtwothirdsofpowersectoremissionsand19%ofdirectCO2emissions.67 In addition,thehousingstockissomeoftheoldestandleastenergyefficientinEurope68–whichiswhyboostingenergyefficientrenovationisapriorityfortheGovernment.AswellascontributingtomeetingtheUK’scarbontargets,energyefficiencyimprovementssavemoneyonenergybillsandhavewiderbenefitsforhealth,reducedsupplysideenergycosts,andimprovedproductivity.

Progresssofarhasfocusedondomesticproperties.TheCleanGrowthStrategysetoutseveralpoliciesaimedatimprovingtheirenergyefficiency,including:anextensionoftheEnergyCompanyObligationto2028;andacommitmenttolookatenergyperformance standards across the private rented sectorwiththeaimofallprivaterentedhomesbeingupgradedtoEnergyPerformanceCertificate(EPC)BandCby2030.Theambitionisforasmanyhomesaspossible,wherepractical,cost-effectiveandaffordable,toreachEPCbandCby2035.

TheCleanGrowthStrategyalsoincludedacommitmenttohelpbusinessimprovetheirproductivityandcompetitiveness.TheGovernment’sambitionistoenablebusinessandindustrytoimproveenergyefficiency,reducingenergyusebyatleast20%by2030.Thiswoulddeliver£6billionofbillsavings(approximately

67 CCC(2017)MeetingCarbonBudgets:Closingthepolicygaphttps://www.theccc.org.uk/wp-content/uploads/2017/06/2017-Report-to-Parliament-Meeting-Carbon-Budgets-Closing-the-policy-gap.pdf

68 ACE(2015)ColdManofEurope–2015http://www.ukace.org/wp-content/uploads/2015/10/ACE-and-EBR-briefing-2015-10-Cold-man-of-Europe-update.pdf

20%oftotalbusinessandindustrybill)69 through buildingregulations,rentedsectorregulation,voluntarystandardsandsimplificationofreportingrequirements andothernewpolicyoptions.

International competition

Unlockinginvestmenttoimproveenergyefficiencyinbuildingsisamajorchallengefacedbygovernmentsglobally70 – and therefore a significantopportunityfortheGovernmenttoshowgloballeadership.Significantadditionalinvestmentinenergyefficiencywillbeneededtodeliverthe20%ambitionforbusinessandindustry.Intheresidentialsector,itrequiresanaverage annual investment in energy performance upgradesof£5.2billionto2035.71

Manymodelsarebeingtestedgloballyalready.Forexample,Germany’sdevelopmentbankKfWBankengruppe(KfW)unlocks€7ofprivateinvestmentforeach€1theKfW’sprogrammecoststhepublicpursebycombiningsubsidisedloansandcapitalsubsidyforenergyefficientrenovation.72 However,Germanyisstillsomewayoffitsgoaltosee2%ofitshousingstock(800,000homes)peryearundergoingmajorrenovationfrom2020.73 In comparison, the UK Government is aiming for up to 1.1millionhomesrenovatedtoagoodstandardperyear74–around4%ofthetotalhousingstock.

69 BEIS(2017)CleanGrowthStrategyhttps://www.gov.uk/Government/uploads/system/uploads/attachment_data/file/651916/BEIS_The_Clean_Growth_online_12.10.17.pdf

70 E3G(2017)WhatisholdingbackenergyefficiencyfinancinginG20countries?https://www.e3g.org/library/what-is-holding-back-energy-efficiency-financing-in-g20-countries

71 FrontierEconomics(2017)AffordableWarmth,CleanGrowthhttp://www.frontier-economics.com/publication/affordable-warmth-clean-growth/

72 ClimatePolicyInitiative(2013)ThelandscapeofclimatefinanceinGermany:acasestudyontheresidentialsectorhttps://www.eceee.org/library/conference_proceedings/eceee_Summer_Studies/2013/5b-cutting-the-energy-use-of-buildings-policy-and-programmes/the-landscape-of-climate-finance-in-germany-a-case-study-on-the-residential-sector/2013/5B-393-13_Novikova

73 Currentlyat1.5%.SeeZEBRA2020(2018)Energyefficiencytrendsinbuildings:Equivalentmajorrenovationratehttp://www.zebra-monitoring.enerdata.eu/overall-building-activities/equivalent-major-renovation-rate.html#equivalent-major-renovation-rate.html

74 BEIS(2017)CleanGrowthStrategyhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/651916/BEIS_The_Clean_Growth_online_12.10.17.pdf

Accelerating Green Finance

40

Page 43: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Meetingthisopportunitywillrequiremobilisingdifferenttypesofinvestment.PromotingagreenmortgagesandloansmarketforrenovationisoneobviousmeanstoboostinvestmentinthisareaandhasbeendonesuccessfullyalreadyintheNetherlands,wheremortgagelendingrulesallowhouseholdstoborrowupto€25,000extratopurchaseorrefurbishtoanetzeroenergyhome.75IntheUSA,state-ownedmortgageprovidersFederalNationalMortgageAssociationandFederalHomeLoanMortgageCorporation(commonlyknownasFannieMaeandFreddieMac)offerlowerinterestmortgagesformoreenergyefficientpropertiesandlowinterestloanstohelpfundimprovements.74

Consumer savings and small-scale investments76 are also an important source of capital, although thesuiteofsavingsproductsavailabletotheaverageretailinvestorislimited.Financialadvisors–forthosewhocanaffordthem–arenotgenerallyfamiliarwiththeissues,norarespecialistproductsavailable.Despitegrowingevidencethatfundsgearedtowardssustainabilitycanactuallyperformbetter,77advisorscontinuetofocusonfinancialreturnsandconventionaldiversifiedportfolios(withoftenimportantexposurestofossilfuels),withoutaskingfortheirclients’preferences.

WiththeGovernmentandthefinancesectorworkingtogether, there is now a serious opportunity for the UK to become a global leader in the products, services and logistics required to modernise buildings at a national scale.

Building on UK strengths

TheUKhasseveralassetsitcanbuildontodevelopathrivingmarketforgreenmortgages

75 Energiespronghttp://energiesprong.eu/country/the-netherlands/

76 BetterBuildingsPartnership(2017)BeyondRiskManagement:Howsustainabilityisdrivinginnovationincommercialrealestatefinancehttp://www.betterbuildingspartnership.co.uk/sites/default/files/media/attachment/BBP_BeyondRiskManagement_Insight_Final.pdf

77 GlobalImpactInvestingNetwork(2017)EvidenceontheFinancialPerformanceofImpactInvestmentshttps://thegiin.org/assets/2017_GIIN_FinancialPerformanceImpactInvestments_Web.pdf

andloans.First,theUKhasa robust database to work with:EPCsarepubliclyavailableforall domesticandcommercialbuildingsavailabletobuyorrent.

The supply chain for energy efficiency products is well establishedwithintheUK,although highly dependent on policy to drive demandforproducts.Since2012,therateofhomeinsulationhasdecreasedby90%,78 in part asaconsequenceofchangestopoliciesandreductionsinpublicinvestment.Nonetheless, theenergyefficiencysectorasawholeisthelargestwithinthelow-carbonandrenewableeconomy,employingover141,500peopleand anannualturnoverofover£20.7billionin2016.79

Theinsulationandretrofitsubsectorisalsoone ofonlythreepartsofthelowcarboneconomywheretheUKisanetexporter.80

78 TheCommitteeonClimateChangeCCC(2017)AnindependentassessmentoftheUK’sCleanGrowthStrategy:Fromambitiontoactionhttps://www.theccc.org.uk/publication/independent-assessment-uks-clean-growth-strategy-ambition-action/

79 OfficeforNationalStatistics(2018)UKEnvironmentalAccounts:LowCarbonandRenewableEnergyEconomySurvey:2016finalestimateshttps://www.ons.gov.uk/economy/environmentalaccounts/bulletins/finalestimates/2016

80 Carvalho,M.,FankhauserS.(2017)UKExportOpportunitiesinthelow-carboneconomyhttp://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2017/04/Carvalho-and-Fankhauser-2017.pdf2017

A report to Government by the Green Finance Taskforce

41

Page 44: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Finally,thelonger-termtrackrecordhasshownstrongprogress.Gasandelectricitydemandinhomespeakedin2004,andhasfallensteadilyto2016–by21%and13%respectively–mostlyasaresultofenergyefficiencyimprovements.81 Overallenergydemandwas19%lowerthanin2004–despitetherebeingmorehomes,risingindoor temperatures, more appliances and more lightingperhome.82Forcommercialenergyusers,totalenergyusehasbeenbroadlyflatsince2000,83despitesignificanteconomicgrowthoverthattimeperiod.Itisclearthatenergyefficiencymeasures not only deliver enhanced productivity andaffordabilitybutalsosecurityofsupply,fallinggasimportsandimprovedbalanceoftrade.

Challenges to overcome

Existingpolicieswillnotbesufficienttounlockthe investment needed to deliver the goals set outintheCleanGrowthStrategy.Thescaleofthechallengecallsforinnovativewaystousethetaxsystemalongwithregulatorysignalstoscaleupmarketopportunitiesinacarrotandstickfashion.

Itiswellestablishedthatscalingupinvestmentinenergyefficiencyinthehouseholdand

81 BEIS(2017) EnergyConsumptionintheUKdatatables https://www.gov.uk/government/statistics/energy-consumption-in-the-uk

82 Ibid.

83 BEIS(2018)EnergyandEmissionProjections2017https://www.gov.uk/government/collections/energy-and-emissions-projections

commercialsectorsisasignificantchallengebecauseofarangeofinstitutional,market,economicandfinancialbarriers.84

AsnotedintheGovernment’sCall for Evidence on Building a Market for Energy Efficiency,85 “thereisnosingle‘silverbullet’policyforimprovingenergyefficiency.”Providingeasieraccesstofinanceisimportant,but–asthecallforevidenceacknowledged–willnotinitselfdrivedemandforinsulationandmoreefficientheatingsystems.

From1April2018theMinimumEnergyEfficiencyStandard(MEES)willmakeit–subjecttocertainexceptions–unlawfultoletbuildings,orrenewexistingleases,inEnglandandWalesthatdonotachieveaminimumEPCratingofE.Thismaycreatesomelatentdemandforenergyefficientmortgageswithinapoolof280,000affectedrentalhomesandover100,000businesspremises86 butisunlikelytobeenoughtogettothe scale and depth needed to meet Government policyobjectives.Moreactionsareneeded.

84 EnergyEfficiencyFinancialInstitutionsGroup(2015) Energyefficiency–thefirstfuelfortheEUeconomy:Howtodrivenewfinanceforenergyefficiencysystemshttps://ec.europa.eu/energy/sites/ener/files/documents/Final%20Report%20EEFIG%20v%209.1%2024022015%20clean %20FINAL%20sent.pdf

85 https://www.gov.uk/government/consultations/building-a-market-for-energy-efficiency-call-for-evidence

86 BEIS(2017)Domesticprivaterentedsectorminimumlevelofenergyefficiencyhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/669198/PRS_Minimum_Standards_Consultation_2017.pdf

FIGURE 8. Overcoming barriers to boost the green mortgages market

Focusedmessaging

Better quality

inforamtion

Access to capital

Trust Incentives for green mortgageBorrowers Lenders

Accelerating Green Finance

42

Page 45: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

In addition, the challenges related to resilience discussedinTheme10meanthattheUKcannotconsiderupgradingourbuildingsstocksimplyintermsofefficiency.Resiliencetomoreextremeweathermustalsobeconsidered.

Multipleinterventionstobothgenerate consumerdemandandincentiviseretailbanks to develop and promote green lending for energyefficienthomesandcommercialpropertiesareneededandsetouthere.They focus on messaging, better quality information, access to capital, trust that the work done will deliver the energy savings predicted and incentives for both borrowers and lenders to act (see Figure 8).

Recommendations

Implementingthefollowingpackageofproposalssetwillboost demand for energy efficiency measuresbutalsoproducenewbusinessopportunitiesforUKindustry.

RECOMMENDATION8Government should extend 2035 EPC targets from residential properties to commercial properties by the end of 2018 and introduce requirements for operational energy ratings from 2020.

TheCleanGrowthStrategysetsoutanambitionfor all homes to reach a minimum Energy PerformanceCertificateCby2035,whereastheambitionforbusinessandindustryistoimproveenergyefficiencyby20%by2030.Itisrecommendedthatatrajectoryandminimum energy standard for commercial properties of EPC B by 2035beadopted.ThehighertargetreflectstheproactiveresponsefromcommercialpropertyownerstotheEPCEMinimumEnergyEfficiencyStandardalreadyinplaceforrentedproperties.Thecertaintyprovidedbyadefinedlong-termEPCtargetshouldunderpinenergyimprovement plans and the supporting investment decisionsandencourageearlycompliance.

Tighter energy performance regulations for rented commercial properties should be introduced that build on the existing Minimum Energy Efficiency Standards (MEES) set to come into effect during 2018.

In addition, it is recommended that mandatory operational energy ratings and an appropriate public reporting mechanism are introduced to driveimprovedongoingenergyefficienciesincommercialbuildings.

Mandatory operational energy ratings can help ensure that future energy performance standards areinformedbyactualenergyperformanceandensurethatinvestmentsareunderpinnedbymeasurableenergysavings.Theintroductionofmandatoryoperationalratingswillinitiallyrequirethedevelopmentofanagreedmetric,possiblybuildingontheDisplayEnergyCertificatemethodologyandtheBigger,BetterDataproject,asproposedbytheUKGreenBuildingCouncil,toreducecomplianceburdens.Ensuringthatoperationalratingsbecomearequirementandaremadeavailablethroughacentralplatformwillhelpowners,banksandassetmanagersassesstheirrealestateportfolios’regulatoryriskbetterandenablebetterlendingandinvestmentdecisions.

RECOMMENDATION9Government should introduce Green Building Passports for residential and commercial properties by 2020.

Adigitalpassportprovidingdetailedguidanceontheactionsrequired–andalreadyundertaken–toimprovethebuilding,basedonbuildingfabricandoperationaldatahelpingbuildingownersandoccupiersmakedecisionstoimprovethebuildings.

Thepassportwouldbetransferableacrossbuildingownersandhelpmaintainsightofalong-termdecarbonisationgoalforthebuilding.ThesewouldnotreplaceEPCsbutratherenhancethem,creatinganopportunitytocaptureEPCdatadigitallyandaugmentitwithotherdataovertime.

A report to Government by the Green Finance Taskforce

43

Page 46: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Digitalpassportscanformabasisforcustomisedretrofitroadmapsthatprovideaguidetohomeownersandcertifiedinstallersonrenovationoptions.Theseroadmapscouldalsooutlinetherenovation standards, in terms of improved and assuredenergyperformance,tobeachieved(inlinewiththeEachHomeCountsreview)87, incentivesandfinanceofferingsaswellascostsandpaybackperiodsagainsteachpossibleenergyefficiencymeasure.Thisinformationpassportcouldalsobeusedtorecordprojectsandcaptureenergyefficiencydataofbuildings.

SimilartocurrentEPCdata,thepassportdatashouldbeopenlyavailableforbothcommercialand residential properties, although commercial datashouldbecuratedtomanagethedisclosureofinformationtospecificstakeholders.Thedigitalpassport provides a platform to incorporate other datainduecourse,suchasflood-resilienceorwell-being,asdemonstratedbytheInternationalWELLBuildingInstitutewhichlaunchedaWELLBuildingStandardin2014tosupporthealthandwellnessinbuildings.Thestandardincludeselementssuchasindoorairquality,waterfiltration,lightingqualityandcomfort.

Introductionofdigitalpassportscouldfollowthe example of the German State of Baden-Württemberg,whichlaunchedanEPC-compliantpassportthatisinitiallybeingbackedbystatesubsidies.88INGBankintheNetherlandsalsodeveloped an app as an engagement tool to help theirborrowersidentifyenergyimprovementmeasuresthatwillprovidebothafinancialreturnand improved environmental performance89 drivingdownenergyusageanddrivingupcashflowandassetvaluation.InSwitzerland,renovatedornewlyconstructedbuildingsthatachievethe

87 http://www.eachhomecounts.com/

88 MinisteriumfurUmwelt,KlimaundEnergiewirtschaftBaden-Wurttemberg(2018)Sanierungsfahrplan-BWhttps://um.baden-wuerttemberg.de/de/energie/informieren-beraten-foerdern/sanierungsfahrplan-bw/

89 BetterBuildingsPartnership(2017)BeyondRiskManagement:Howsustainabilityisdrivinginnovationincommercialrealestatefinancehttp://www.betterbuildingspartnership.co.uk/beyond-risk-management-how-sustainability-driving-innovation-commercial-real-estate-finance

‘Minergie’energyandcomforthighperformancelabelcanbenefitfrompreferentialmortgagetermsofferedby30Swissbanks.90Thismeansthatweknowwhatgoodlookslikeandourbankshaveaprototypetolearnfromandimproveupon.

RECOMMENDATION10Government should complete research in 2018 to understand the opportunities and costs of using a range of fiscal measures to boost demand for energy efficient retrofits in 2018, and pilot fiscal measures alongside mortgage products from 2019.

Researchshouldbeundertakentounderstandthecostandbenefitofusingasliding‘bonus-malus’StampDutyscale,designedtobefiscallyneutralandlinkedtoenergyperformance91 to drive demandforenergyefficientrenovation.Researchshouldalsodeterminehowapilotschemecouldbesetuptoassesstheefficacyandfiscalimpactofsuchanapproachindrivingdemand,whilecreatinganenvironmentinwhichgreenmortgageproductscanbetested.Thisshouldbeexploredforbothdomesticandcommercialproperties.

ThescopingworkforaStampDutyincentivepilotshouldtakeaccountofthefollowingandreportwithinthenextsixmonths:

o Focusonsimplestpossibledesignforpolicymakersandforpurchaserstounderstand;

o Differentiatebetweentheowner-occupierandbuy-to-letmarkets;

o Takeearlierresearchandmodellingintoaccount;

90 SeeMinergiecoverage(2017)Bauenundrenovierenmit einerÖko-Hypothekhttps://www.minergie.ch/media/170830_kgeld_print.pdf

91 Ashasbeenproposed,amongothers,byUKGreenBuildingCouncil(2013)RetrofitIncentivesTaskGroupReporthttps://www.ukgbc.org/wp-content/uploads/2017/09/13070520Retrofit20Incentives20Task20Group20-20Report20FINAL_1.pdf

Accelerating Green Finance

44

Page 47: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

o ReflectonthetwolimitedStampDutyincentiveexperiences(ZeroCarbonHomesexemptionandGreenDealHomeImprovementFund)intheUKtodate;

o Uncoverandtakeintoaccountthe(limited)experiences from property sales tax incentives availableinothercountries;

o Consider the presence of the signal on the purchasingchoiceasmuchasthesizeofthesignal(e.g.theeffectsofarelativelysmallStampDutyvariationlinkedtoenergyperformancethatislessthanthatneededtomaketherationaleconomicsofenergyefficientrenovationstackup);

o Consideritsinteractionswithexistingandproposed policy levers, such as ECO and Clean GrowthStrategyambitions;and

o Ensureweconsiderhowdesigncoulddriveretrofitbeyondtheminimum(e.g.C)aimedfor,toEPCBorbeyond.

RECOMMENDATION11Government should provide short-term incentives to pump prime the green consumer loans and green mortgage markets

TheGovernmentshouldseektosupportcompetitivelypricedconsumerloansandmortgagesbylenderstofinanceandrewardgreenretrofit.Thissupportisintendedtobeforashortperiodonlyasapump-prime mechanism to drive consumer demand and establishcompetitivemarkets.Itwouldallowawiderangeoflenderstopilotdifferentgreenmortgageandloanproductsanddevelopanevidencebaseonloanperformanceandestablishconsumerdemand,whichshouldmeanthatlenderscouldthencontinuetooffertheseproductswithoutGovernmentsupportinthemediumterm.

Thisapproachshouldacknowledgethefullretrofitpathway,withhomeimprovementsfinancedthroughsavingsorloansandagreenmortgagedefinedsuchthatitispositionedasanincentiveforhomeownerstoretrofittheirhomestoqualifyforbettermortgageterms(lowerinterestrateand/orhigherloantovalue)basedonEPCorequivalenttargets.

TheGovernmentshouldundertakeanalysistodecidehowbesttoofferthissupport.Twopossible(not mutually exclusive) solutions for doing so are setoutbelow:

Time-limited guaranteesTheGovernmentcouldofferpartialguaranteesto support the development of green mortgage productssuchaslowerinterestloansformoreefficienthomesoradditionalborrowingcapacityforhomeownersbuyingmoreefficienthomesbasedoncalculationsofgreateraffordabilityduetolowerenergycosts.Thisshouldbeatimelimitedprogramme, so as to maximise value for money for Governmentandadditionalityshouldbedesignedto support the development of a range of pilot products.Thiscouldbeforexampleagreen mortgage challenge fund.

Afundcouldbelaunchedthatwouldbeopentolenderslookingtodevelopgreenmortgageandloanproducts.Fundswouldbeawardedtolendersbasedontheanticipatedbenefitintermsofenergysavingsornumberofhomesimproved,whichshouldbesetoutinbids.Lenderscouldusethefundingtoofferarangeofincentivestohomeowners,suchascashbackinreturnformakingimprovementsor,alower-to-zerointerestloantohelpfinanceimprovements.Governmentandlendersshouldworktogethertoensurethataportfolioofdifferentincentivesisdeployedandlearnedfromthroughthefund.

RECOMMENDATION12UK lenders should work towards promoting awareness and mainstreaming a consideration of green factors into all their mortgage lending decisions.

Mortgage lenders should identify and include EPCratingsonmortgagestatementsaspartofavoluntaryinitiativetoraiseawarenessofEPCratings.Buildingonrecommendation 9, awarenesscouldalsoberaisedthrough disclosureofrelevantportfoliolevelEPCordigitalpassportdata.

A report to Government by the Green Finance Taskforce

45

Page 48: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Thiscouldhelpkickoffaprocessofgreentagging.Knowingwhetherandhowsecuritiesandloans,includingmortgages,arefinancing‘green’,‘brown’or‘neutral’activitiesintherealeconomyandtaggingthemaccordinglyisakeysteppingstonetoenablingbanksandinvestorstobetteridentify the extent of their exposure to green (butalsonon-green)investmentsandfacilitatetheprocessofshiftingcapitaltobealignedwithsustainablegrowth.Identificationandappropriatelabellingor‘tagging’ofgreensecuritiesandloansiskeytounderstandingprogressinmeetingnationalobligationsundertheParisAgreementtoalignfinancialflowswith1.5/2°C;thepotentialforsystemicriskstothefinancialsystemfromclimatechange;andmeasuringtheadvancementofgreeningtheUK’sfinancialsector.Suchanexercisewouldalsohelpinstitutionalinvestorsavoidsomeoftherisksassociatedwith‘brown’investments, including potential asset-stranding resultingfromtransitionrisk.

Taggingisalsoafundamentalpre-requisitetoenabletheGovernmenttoincentivisegreenactivities.Equally,givenitisasubstantialundertaking,financialinstitutionswillneedencouragementtotagallsecuritiesandloans.Doingsowillhelpnormaliseclimatechangeriskandopportunitybecomingakeypartofeverydaybusiness.Itwillalsounlockopportunitiestoaggregateandsecuritiseasset-backedgreenbonds,asBarclayshasdoneandhelpsecurelowercostfinancingformoreefficientproperties(dependingonhowthebondsprice).

Demandforgreenmortgagescanbefurtherdrivenbytrainingforsalesstafffollowingthelaunchofgreenmortgagestoencouragetheirtakeup.ThiswouldbuildontheexperienceofbankssuchasINGintheNetherlands,whichhavedrivenenergyefficiencyimprovementsamongtheircommercialrealestatecustomersthroughacombinationofvoluntary targets including a sectoral covenant withtheDutchGovernment.InreturntheDutchGovernmentpump-primedthemarketthroughsubsidisingloweredinterestrates92 – discounted interestratesformoreefficientbuildingsandinternal training and green mortgage sales targets forfrontlinemortgagesalespeople.

Achieving impact

DepartmentofEnergyandClimateChangeresearchin2013foundthatacrossEngland,higherEPCratingsintheresidentialsectorcorrelatedwithanaverageincreaseinpropertyvalueof14%.ThisresearchwasthefirstofitskindintheUK,andthereportacknowledgedthatthiscorrelationwasnotknowntoamounttocausality.However,alaterreviewofsimilarstudiesin15EUcountriesfoundthatallbutoneidentifiedapositivecorrelationbetweenhigherenergyperformanceratingsandhigherpropertyprices–overawiderangeofclimates and geographical scales (cities, regions andcountries).93Inthiscontext,itwillbeespeciallyimportant to include impacts on property value in evaluationsofpilotsoffiscalincentivesandnewwaysoffinancingenergyefficiencyasproposed.

Acausallinkbetweenhigher-performingbuildingsandtheirvalueisbetterestablished,forcommercial

92 TUDelft(2011)WakingaSleepingGiant:PolicyToolstoImprovetheEnergyPerformanceoftheExistingHousingStockintheNetherlandshttps://repository.tudelft.nl/islandora/object/uuid:c1f0c794-f094-4d4d-a2ed-29aa53e62718/datastream/OBJ

93 BallaratConsulting(2017)Whatwillyoupayforan“A”?–areviewoftheimpactofbuildingenergyefficiencylabellingonbuildingvaluehttps://www.eceee.org/library/conference_proceedings/eceee_Summer_Studies/2017/6-buildings-policies-directives-and-programmes/what-will-you-pay-for-an-8220a8221-8211-a-review-of-the-impact-of-building-energy-efficiency-labelling-on-building-value/2017/6-033-17_Brocklehurst.pdf/

Accelerating Green Finance

46

Page 49: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

buildings.94Forexample,INGconcludedthatovertheperiod2015-2016,greenbuildingsintheNetherlandscommanded9-11%highervaluethanbrownbuildings.95AcademicresearchintheUShasshownlowerdefaultratesfromcommercialpropertieswithEnergyStarratings.96

Asaresult,implementationoftheserecommendationislikelytoleadtobuildingvalueincreasinglylinkedtoenergyperformance,whichcreatesongoingincentivestoinvest. Thiswillboostthedemandforgreenloansin thehouseholdandcommercialsector,which inturnbooststhesupplyofassetbackedgreenbonds,loweringcostofcapitalforgreenloans,andloweringemissionsfromthebuildingstock.

94 HermesInvestmentManagementandBetterBuildingsPartnership(2017)HermesRollsoutProgrammethatImprovesEnergyEfficiencyandComfortLevelswww.betterbuildingspartnership.co.uk/hermes-rolls-out-programme-improves-efficiency-and-comfort-levels

95 ING(2018)Howtosavemoneyandenergyinbuildingshttps://www.ing.com/Newsroom/All-news/How-to-save-money-and-energy-in-buildings.htm

96 An,XandPivo,G(2015)DefaultRiskofSecuritizedCommercialMortgages:DoSustainabilityPropertyFeaturesMatter?www.reri.org/research/files/2014funded_An-and-Pivo.pdf

BOX 3.

UK GREEN START-UPCASE STUDY: YASA MOTORS

o SpunoutfromOxfordUniversityin2009

o Inventionofnovelaxial-fluxmotortechnology

o World-leadingpowerandtorquedensity

o Significantgrantsupport,including£1.5million fromtheRegionalGrowthFund

o Raised£35millionofequitycapitalfromthe private sector across six funding rounds

o Securedawideportfolioofworld-class electricandhybridautomotivecustomers includingNissan,JaguarLand-Rover,Williams

o New100,000-unitfactoryinOxfordopenedby BEISSecretaryofStateGregClarkinFebruary2018

A report to Government by the Green Finance Taskforce

47

Page 50: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 5. Boost investment into innovative clean technologies

The size of the opportunity

TechnologicalinnovationhasakeyroletoplayindeliveringtheUK’sCleanGrowthStrategyandtheIndustrialStrategy’sCleanGrowthGrandChallenge.Venturefundingisanimportantsourceoffinanceforcleantechnologycompanies.However,thelongerdevelopmenttimescalesneededforcleanenergyhardwarecommercialisationrequireapatientcapitalapproach.Thispresentsachallengeforprivatesectorinstitutions,whichtypicallyneedashorter-termreturnoncapital.Thedeploymentofpublicfinanceintheearlystagesofstart-upcompaniescancrowd-inventurecapitalbyreducingthequantityofexpensiveinitialfundingneededfromtheprivatesector.ThiswouldsupportbusinessinnovationtodelivertheCleanGrowthandIndustrialStrategies.

Inaddition,publicentities,workinginpartnershipwiththeprivatesector,canhelpscaleandacceleratethespeedatwhichenergyinnovationiscommercialised.Thissectionsetsoutdeliveryoptions to maximise the impact of funding that the Governmenthasalreadyannounced. Building on UK strengths

Highgrowth,innovativecompaniesaredisproportionatelyimportantforeconomicgrowthandimprovingproductivityintheUK.TheOECDrankstheUKasoneofthebestplacestostartandgrowbusinessesthankstoasupportivebusinessenvironment, competitive tax rates and innovative financesupportschemessuchastheEnterpriseInvestmentScheme.TheUKisalsoagloballeaderinscienceandhostsfourofthetop10universitiesintheworld,whichgenerateworld-classtalentandideasfornewtechnology. DemonstratingtheGovernment’sambitiontosupportcleangrowth,theCleanGrowthStrategy

setsouthowover£2.5billionwillbeinvestedbyGovernmenttosupportlowcarboninnovation.Thisincludesthe£246millionFaradayChallenge

that supports companies to rapidly commercialise newbatterytechnologies;aswellas£20milliontosupportanewcleantechnologyearlystageinvestmentfund.Ensuringthatthis£2.5billionspendingisdeployedefficientlyandleveragesmaximumprivatesectorinvestmentshouldbeahighpriority.

International competition

Globalinvestmentincleantechhasdoubledsince2013,whilecleantechinvestmentintheUKhasdeclined,97meaningthattheUKisfallingbehinditsinternationalcompetitors.ThePatientCapitalReviewhighlightedissueswiththedistributionofR&Dbusinessinvestment.Forexample,45%ofR&DinvestmentbybusinesswasbylessestablishedfirmsintheUS,comparedtoonly15%intheUK.98Inaddition,totalUKR&Dinvestmenthasplateauedat1.7%ofGDPcomparedto2.8%and2.9%inGermanyandtheUSArespectively.99 The Government’stargettoincreaseR&Dinvestmentto2.4%ofGDPby2027iswelcome.100 It is important to ensure that this investment is converted into businessvalueinanefficientmanner.

Publicprogrammessupportingearly-stagecleantech in other countries have proved successful in stimulating increased private sectorinvestment.AgoodexampleisARPA-E(“AdvancedResearchProjectsAgency-Energy”),aUSGovernmentagencytaskedwithpromotingand funding research and development of advancedenergytechnologies.TheagencyreceivesUS$200-300millionoffederalfundingannuallyfromtheUSDepartmentofEnergy.

97 CleantechGroupi3platformhttps://www.cleantech.com/i3/

98 HMTreasury(2017)FinancingGrowthininnovativetimes:consultationhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/642456/financing_growth_in_innovative_firms_consultation_web.pdf

99 Ibid.

100 HMGovernment(2017)RecordboosttoR&Dandnewtransportfundtohelpbuildeconomyfitforthefuturehttps://www.gov.uk/government/news/record-boost-to-rd-and-new-transport-fund-to-help-build-economy-fit-for-the-future

Accelerating Green Finance

48

Page 51: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Sinceitsinceptionin2009,ARPA-Eprojectshaveledto56newstart-ups,whichhaveraisedbetweenthemUS$1.8billionofprivatesectorventurefunding.ARPA-E’sfocusisonhigh-risk,high-rewardresearchthatmightnototherwisebepursuedbecauseofarelativelyhighriskoffailure.BackinggenuinelydisruptiveR&Dalignswellwiththetypeofhighly-scalabletechnologiesthatgreenventurecapitalistsarelookingtoback.

Challenges to overcome

Despitetheoverallgrowthofthegreen financesectorgloballyandincreasingdeploymentoflowcarbontechnologies, equityfinancetransactionsforcleantechcompanieshavebeenfallingintheUK.

Chart 3 showsannualdealtotalsforcleantechintheUK:thetotalvalueandnumberofdealshashalvedoverthelastfouryears.Thiscontrastswiththeoverallventureindustrytrend,whereinvestmentincreasedbymorethan50%intheUK

between2014and2016.101 Apaucityoffunderswillingtotakeearlystageriskincleantechmeansmanypioneeringlow-carbontechnology start-ups struggle to attract the capital requiredtoscaletocommercialisation.

Thereareseveralfactorsweighingonthesectorandholdingbackitsabilitytogrow.

Amajorconcernisthatthereislessappetitetoinvestinstart-upswithlongertimescalestocommercialdevelopment.Inmanyinstancesthisisunavoidablebecausecleantechstart-upsrequirelongertimescales,andinmanycasesmorecapital, to scale to commercialisation than digital technologycompanies.Thefirst-investment-to-exitjourneyforahardwarestart-upcanbemorethan10years.Thislongtimescalemeansthattheearlyequityinvestmentroundsareunsuitableforclosed-endfinanciallymotivatedfundsofatypically10-yeardurationthatarecommonintheUK.Bycontrast,thegrowthingreenventurecapital(VC)

101 BritishPrivateEquityandVentureCapitalAssociation(2016)BVCAPrivateEquityandVentureCapitalReportonInvestmentActivity2016https://www.bvca.co.uk/Portals/0/Documents/Research/Industry%20Activity/BVCA-RIA-2016.pdf?ver=2017-07-13-111054-127&timestamp=1499940663502

800

700

600

500

400

300

200

100

02010 2011 2012 2013 2014 2015 2016 2017

VALU

E O

F DE

ALS

£ M

ILIO

NS

NUM

BER

OF

DEAL

S

Value of dealsNumber of deals

180

160

140

120

100

80

60

40

20

0

Value of deals

Number of deals

CHART 3. Decline in cleantech investment to 2017

A report to Government by the Green Finance Taskforce

49

Page 52: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

seen in Europe has primarily come from corporate venturecapital(CVC),whichisdrivenbythelonger-termstrategicmotivationsofitsbackers.

Theknowledgespill-overmarketfailurecanalsoreducecommercialcompetitiveness.102 Start-upswithnewskills,knowledgeandtechnologythat can deliver the returns necessary to justifyventureequityinvestmentsufferfromcompetitionfromfastfollowerswhobenefitfromspill-overknowledgegeneratedbythepioneers.Duetothelongertimeframesforcleantechdevelopment,thevulnerabilitytoknowledgespill-overisgreater,therebyincreasingriskandreducingappetiteforinvestment.

The start-stop nature of Government grant fundingforearlystageR&Dcanincreasetheriskofthetechnologyincubationstageandlengthentheprototypedevelopmentprocess.

Evenwhencompaniesmature,theabsenceofaliquidsecondarymarketdisincentivisesVCslookingtomovetheircapitalintothenextopportunity.Privateequityorinstitutionalinvestorshavedifferenttimehorizonstoventurecapital,andthismakesitmoredifficultforVCstoexittheirinvestments.Thisiscompoundedbytheneedforpatient capital in physical technology investments, whichinturnlengthensandcomplicatesthebuy-outduediligenceprocess.

Lookingtothefuture,oncetheUKleavestheEU and no longer has access to the European InvestmentFund(EIF),theremaybeasubstantialgapinlimitedpartner(LP)funding.Historically,theEIFhasbeenacornerstoneinvestorinUKVCfunds,investing£500macrosstheUKofwhich£100mhasbeenincleantech.EnsuringsufficientsourcesoffundingtoreplacethatavailableviatheEIFisofparamounttothehealthoftheventureecosystemintheUK.

102 AsdefinedinEuropeanCommission(2014)Frameworkfor State aid for research and development and innovation https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.2014.198.01.0001.01.ENG

WhilethereisastrongcaseforGovernmentfundingsupport,itmustbedeliveredinawaythatoffersclarityandreassurancethroughouttheprocess.

Recommendations

Giventheheadwindsdetailedabove,theprivatesectorresponsealoneisunlikelytobesufficientfortheUKtoachieve‘world-class’statusasacentreforcleantechventurecapital.Alackoffunderswillingtotakeearlystageriskhasknock-oneffectsforlater-stageVCandgrowthcapitalinvestors.ThelackofseedandSeriesAfunding leads to high failure rates for early stage businessesandthereforeasmallerpipelineoflaterstagedeals.

TheGovernmentshouldactthroughthreelinkedrecommendationsfocusedondifferentstagesofthevaluechain.

RECOMMENDATION13Government should set up a Green Investment Accelerator (GIA) for early stage technology grant funding.

Building on the success of the Innovate UK InvestmentAcceleratorpilotinhealth,lifesciencesand infrastructure systems,103 the Government shouldfundacomparablemechanismtofocusonearlystagecleantech.TheGIAwouldbeamulti-year,multi-callschemetoprovidefasttrackgrantsofupto£150,000104 for early-stage companies receivingatleast£100,000ofnewVCfundingfrompre-qualifiedinstitutionswithagreenVCtrackrecord.

BEISshouldselectanumberofexperiencedprivatesectorinvestorstobeinvestorpartnersin

103 InnovateUK(2017)Fundingcompetition:investmentacceleratorpilothttps://www.gov.uk/government/publications/funding-competition-investment-accelerator-pilot

104 ThisisbelowtheStateaiddeminimusandwhichcanbereviewedoncetherelationshipbetweentheUKandtheEUisfinalisedpost-Brexit

Accelerating Green Finance

50

Page 53: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

theGreenInvestmentAccelerator.Inordertobemost impactful and develop a thriving ecosystem withcoordinatingGovernmentandinvestorsupport,theGIAschemeneedsamulti-yearcommitment,withregularcallsforapplicationsannouncedwellinadvance.ThiswouldbeawelcomechangefromthecurrentsituationwhereEnergyEntrepreneursFundsupport—welcomeasitis—isannouncedatshortnotice.ThiscouldbecomplementedbypublicfundingbodiessuchasResearchCouncilsUKincludingcleangrowthobjectivesintheirprogrammecriteria.

RECOMMENDATION14Government should establish a dedicated public-private green venture capital fund.

Government should set up a VC fund to leverage the£20millionannouncedintheCleanGrowthStrategy to raise capital from the private sector anddeployupto£100millionofnewcapital.ThegreenVCfundwillfocusonbackingearly-stageSMEsunderfiveyearsoldwithrevenueslessthan£1million(includingpre-revenuecompanies).Itwillencouragemorecapitalintotheearly-stagemarketandsupportmoreandlargerdeals.Governmentactionshouldbe byoneoftwo alternative delivery options fortheFund.

Co-Investment Fund (CIF):Anequity fundmatchingupto50%ofdeal-by-deal investmentsinstart-upsbytheprivatesector onaco-investmentbasis.TheCIFwouldselect anumberofexperiencedprivatesectorinstitutionstobeaccreditedpartners,who wouldbringco-investmentopportunitiestotheCIFtoassess.ManagementoftheCIFcouldeitherbeperformedwithinBEIS’EnergyInnovation team or out-sourced to, for example, theBritishBusinessBank(BBB).105 Keeping the transaction and portfolio management function

105 TheBBBprovidesfinancetoUKsmallbusinessesatallstages of their development has developed regional, venture capitalandgrowthloanprogrammes.

forthepublicfundsin-houseavoidstheneedfortheFundtopaymanagementfeestoitsprivate-sectorpartners.

General Partner/Limited Partner Partnership Fund: DeliveryofthefundwouldbethroughoneorseveralGeneralPartner(GP)fundmanagersselectedthroughcompetitivepublicprocurement.Selectionwouldconsidertheinvestmenttrackrecordanddomainknowledgeofthemanageraswellasitsabilitytoattractadditional private sector capital to leverage the publicfunds.Onceselected,thestatefundswouldbecommittedtotheGPasaLimitedPartner(LP)positiononaconditionalbasis. TheGPwouldthenneedtosecurematchingprivate sector funding of at least the same amounttocompletethefundanddrawdown thepubliccapital.TheGPwouldtakeonorigination, diligence, transaction and portfolio management authority, and charge the fund a managementfee(typically2%offundcapital)fortheseservices.TheGovernmentandotherLPswouldreceiveregularupdatesoninvestmentsandfundperformancebutaretypicallynotabletoinfluenceinvestmentdecisions.

LookingmorewidelytheBBBissector-agnosticbuthashadacapitalinjectionof£2.5billionfollowingthePatientCapitalReviewin2017.ConsiderationshouldbegiventohowtheycanplayabiggerroleinsupportingdeliveryoftheCleanGrowthStrategy.

RECOMMENDATION15Increase commercial opportunities for UK businesses throughtheuseofpublicprocurementprocesses.

In addition to supporting early stage technology investing, the Government shouldconsiderhowothersourcesofpublicfinancefrompublicentitiesandGovernmentprocurement could help support delivery of the CleanGrowthandIndustrialStrategiesthroughinvestment in products or services from British-ownedbusinesses.Theinvestmentprospects

A report to Government by the Green Finance Taskforce

51

Page 54: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

of early stage companies are hugely enhanced wheretheyhavecredibleleadcustomersor evenbetterasoundorderbook.Thisshouldincludepublicprocurement.

Annually,Governmentagenciesspendtensofbillionsofpoundsonprivatesectorgoodsandservices.Thispresentsasignificantopportunityfor innovative private sector companies to scale up through supplying services to the publicsector.Thepublicsectorisuniqueinitsnumberoflargeenergy-usingsitesclosetooneanotherand,throughtheCabinetOffice,hasaccesstocentralpurchasingsupport.Thepublicsectorcoulduseitsownsitesasapathfindertodemonstratebenefits,developmethodsand disseminate them to the private sector to buildinnovativecleanproductsandservices.TheGreenFinanceTaskforcerecommendsencouragingpublicsectorprocurementtoleadthemarketincleanalternativesusingmechanisms such as the Small Business Research Initiative (SBRI) and using climate impactasafactorinprocurementdecisions.Thepublicsectorshouldalsotakeastrategicapproachtopublicsectorenergypurchasingbyconsideringtheopportunitypresentedbysiteclusterstodemonstratelower-cost,cleanenergyservicesthatcanultimatelybescaledtoprovidebusinessmodelstodeliverservicestothewidereconomy.Finally,theGreenFinanceTaskforcerecommendsestablishingagreen procurement credit facilityforlocalauthorities.Thiswouldaimtoincreasethepercentageofrenewableenergy and other green goods and services that localGovernment,theNHSorotherGovernmentagenciespurchase.

Achieving impact

AdoptingtheserecommendationsisexpectedtomakeamaterialandmeasurableimpactongreenVCfinanceintheUK.TheGreen Investment Accelerator and public-private fundwillhaveadirectimpactonthequantityoffundinggoingintoearly-stagedeals,leveragingatleast100%ofthepublicfundswithprivatecapital.Theindirecteffectwillbetoincreasethequantity

andqualityoflaterstagedeal-flow,leadingtoadditional private-sector investment in these stagesbycorporatesandconventionalVCfunds.Inadditiontoincreasingthesupplyofcapital,therecommendationswillalsosupportventure-backedbusinessesinsecuringlead customers for their products from the public-sectorestate.Commercialadoptionofdisruptivetechnologyisofteninitiallyslow,butbyencouragingUKpublicentitiestoaligntheiractivitieswiththeGovernment’sCleanGrowthStrategy,publicprocurementcanbeusedtoaddvaluetocleantechstart-upsbyacceleratingtheircommercialdevelopment.These increases to funding and customer pullwillhelpgrowathrivinglow-carboninnovationecosystemintheUK.Thereisgreatdemandfornovelcleantechnologyglobally,and successful entrepreneurial companies willpresentasignificantexportopportunity.Technology start-ups typically create high valuejobsandifabletogrowattherateexpectedbyventurebackers,willdeliverstrongproductivitygrowntotheeconomy.Suchanintegratedpackageofsupport,workinginpartnershipwiththeprivate-sectorventurecapitalcommunity,wouldpresenttheUKasaworldleaderinefficientandeffectiveinnovativecleantechnologypolicy.

Accelerating Green Finance

52

Page 55: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 6. Clarify investor roles and responsibilities

The size of the opportunity

Clarificationoffiduciaryduties,investorcompetence, good fund governance on environmental, social and governance (ESG) issuesandprocessesthattakeproperaccountofthefinancialrisksandopportunitiesthattheypose,areessentialtoenabletheUKfinancialsystemtorespondinatimelywaytoclimateriskandcleangrowthopportunities.FiduciarydutiesarefoundationalfortheUKinvestmentindustry.Thewaytheyareframed,viewedandunderstoodhelps set the assumptions for appropriate investmentbehaviour.106

The Government has a clear opportunity to buildonrecentdevelopmentsalignedwiththisaim.Forexample,inalettertotheParliamentaryEnvironmentalAuditCommittee,107 the Minister forPensionsandFinancialInclusionattheDepartmentforWorkandPensions(DWP)hasconfirmedhiscurrentintentiontolaunchaconsultationinJune2018tobringforwardlegislationtoclarifytrustees’fiduciarydutiesinrelation to their consideration of ESG factors, includingclimatechange.Inaddition,recentmandatesawardedbyUKLocalGovernmentpension funds have targeted clean investment strategies, demonstrating that informed investors arewillingtoactoncleaninvestments,

106 PRIandUNEPFinanceInitiative(2015)Fiduciarydutyinthe21stcenturyhttp://www.unepfi.org/fileadmin/documents/fiduciary_duty_21st_century.pdf

107 MinisterforPensions,GuyOppermanMP(15February2018)LettertoMaryCreaghMP,Chair,HouseofCommonsEnvironmentalAuditCommittee:“Giventhatthereisabroadscientificandpublicpolicyconsensusthatclimatechangeis[afinanciallymaterial]risk,thentrusteesalreadyhaveadutytotakeaccountofit”http://www.parliament.uk/documents/commons-committees/environmental-audit/180215-Guy-Opperman-to-Chair-Green-Finance.pdf

especiallywhenschemesarerequiredtospecifyapolicyinrelationtoESGrisks.108

Addressingtherecommendationsbelowwillfosterthe investor competence and fund governance requiredtopromoteUKgreenfinance.

Building on UK strengths

ProgressiveUKinvestorshaveforyearsledthedebateontheneedtofactorESGissuesintofiduciaryobligationsandhavetakenstepstodoso.

TheLawCommissionhasstatedunambiguously:“Thereisnoimpedimenttotrusteestakingaccount of environmental, social or governance factorswheretheyare,ormaybe,financiallymaterial”109 that sought to address past misperceptionsthatfiduciarydutymayactasabarriertotheintegrationofESGissuesincludingclimate change adaptation and mitigation in the UKandabroad.Furtherclarificationthroughtherecommendationsbelowwouldservetoaddressthisneed.

ItisforthisreasontheUKdebateiswelldeveloped,andtheopportunitynotedabove,toclarifytrustees’fiduciarydutiesinrelationtoESGissuesincludingclimatechange,isamajorUKstrength.110

International competition

The European Commission has set a clear directionforrequiringconsiderationofESGissues

108 Including:BrunelPensionPartnership(2018)Anoverviewforfundmanagershttps://www.brunelpensionpartnership.org/news/2017/12/brunels-engagement-presentation-to-fund-managers;andLGPSCentralLimitedasfeaturedinEUCommissionTendersElectronicDailyhttp://ted.europa.eu/TED/notice/udl?uri=TED:NOTICE:94012-2018:TEXT:EN:HTML&src=0notingtherelevantregulation:LocalGovernmentPensionScheme(ManagementandInvestmentofFunds)Regulations2016–SI2016/946

109 LawCommission(2014)FiduciaryDutyofInvestmentIntermediarieshttps://www.lawcom.gov.uk/project/fiduciary-duties-of-investment-intermediaries/

110 DepartmentforDigital,Culture,MediaandSport(2017)Pensionfundandsocialinvestment:interimresponsehttps://www.gov.uk/government/publications/pension-funds-and-social-investment-interim-response

A report to Government by the Green Finance Taskforce

53

Page 56: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

aspartofaninvestor’sfiduciaryduty111 as an actionareawithintheEuropeanCommission’sSustainableFinanceActionPlan.TomaintaintheUK’sleadershipongreenfinance,theUKshouldaddressfiduciarydutiesandthecapacitiesofinvestorsasamatterofprioritytodrivebehaviourintheinvestmentchaintowardsUKgreenfinance.

Challenges to overcome

TheDepartmentforWorkandPensionshasnoted that some pension fund trustees have misconceptionsabouttheirfiduciarydutyasregards the consideration and incorporation of ESG issues including climate change, and payinsufficientattentiontotheseissues.112 Industryresearchshowsthat,similarly,thereare misconceptions among investment professionalsabouttherelevanceofESGissuesto investment decisions, and that they are often notconsideredinasystematicwayaspartoftheirfiduciaryduties.113

Aclearandcommonunderstandingoffiduciary duties is foundational for the UK investment industry.Thecoreaspectsoffiduciarydutyarethedutiesofprudenceandloyalty,whichrequirefiduciariestoactinthebestinterestsofbeneficiaries.Fiduciarydutyrelatestoduties:o owedtobeneficiaries,forexample,apension

fundtrusteetoitsschememembers;ando thatinvestmentmanagersowethroughoutthe

investmentchainandtotheendinvestor.

111 Incivillaw,referredtoas“investorduties”

112 MinisterforPensions,GuyOppermanMP(15February2018)LettertoMaryCreaghMP,Chair,HouseofCommonsEnvironmentalAuditCommittee:“Giventhatthereisabroadscientificandpublicpolicyconsensusthatclimatechangeis[afinanciallymaterial]risk,thentrusteesalreadyhaveadutytotakeaccountofit”http://www.parliament.uk/documents/commons-committees/environmental-audit/180215-Guy-Opperman-to-Chair-Green-Finance.pdf

113 FinancialConductAuthority(2016)AssetManagementMarketStudy:InterimReport:“Inarecentsampleof34InvestmentAssociationmembers,halfreportedthattheymanaged at least some proportion of assets according toESGconsiderationsand,wheretheydid,approximatelyonefifthoftotalassetsweresubjecttoESGrequirements.”https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf

AdditionalbarrierstoinvestorcompetenceandgoodgovernanceonESGissuesinclude:

o Gaps in the expertise of trustees on ESG issues,makesitmoredifficulttoclearlyincludethese factors in investment principles and strategies;

o investment consultants that do not fully incorporate ESG issues into the servicesprovidedtoinvestors.GiventheirdisproportionateinfluenceintheUKpensionmarket,thisactsasabarriertopensionfundsincorporating ESG issues into investment strategy;114 and

o shortterminvestmenthorizons,investmentmandateswhichdonotincludeESGissuesandperformancemanagementbenchmarkswhichdonotincludeESGissues.115

Recommendations

To improve capacity and performance in the investment sector on ESG issues including climate change, the Government should clarify fiduciarydutiesandimplementseveralsupportingrecommendations on investment processes and disclosures, in particular in revising investment regulations.

RECOMMENDATION16Regulationsonfiduciarydutyshouldclearlyincorporate ESG issues.

TheInvestmentRegulationsshouldberevisedtoclarifythatESGissuesshouldbetakenintoaccount116wheretheyarefinanciallymaterial

114 PrinciplesforResponsibleInvestment(2017)Workingtowardsasustainablefinancialsystem:InvestmentConsultantsReviewhttps://www.unpri.org/download_report/45165

115 PrinciplesforResponsibleInvestment(2016)SustainableFinancialSystem:Ninekeyprioritiestoaddresshttps://www.unpri.org/download_report/23144

116 TakingESGissuesintoaccountincludestheirintegrationintoinvestmentdecisionmakingandincludingESGrequirementsinmandatestoserviceproviders.GoodpracticeincludesESGintegration,engagementwithinvesteecompanies,considereduseofshareholderrightsandpublic-policyengagementinbeneficiaries’bestinterests.

Accelerating Green Finance

54

Page 57: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

overthetimehorizonthatisconsistentwithfiduciarydutiesthatareowedtothebeneficiary.117

RECOMMENDATION17Government should require that the Statement of Investment Principles118 include statements on the extent to which social, ethical and environmental issues (including climate change) are considered,orwhythetrusteeshave determined that such considerations are not materialorrelevantfactorstoconsider.119AssetownersshouldberequiredtoreportonhowtheytakeintoaccountESGissuesintheirStatementofInvestmentPrinciplesandinvestmentstrategy.120 Implementation of the revised Investment Regulations and Statement of Investment Principlesbypensionfunds(recommendations16and17)shouldbeoverseenbyThe PensionsRegulator.

RECOMMENDATION18The FCA should require that corresponding requirements are put in place for contract-based schemes,121notingthat:contract-basedpensionprovidersalsohaveafiduciarydutytotheirmembers;theDWPandFCAshouldseektoaligntopreventregulatoryarbitrage;andgiven that under automatic enrolment, pension schememembershavenochoiceastowhethertheyareenrolledintoatrustorcontractbasedscheme.TheFCAshouldexploreoptionstobetter

117 Particularlyforpensionbeneficiariesandinsurancepolicyholders

118 Inordertostrengthentrusteeboardcompetenceonclimate

119 TheOccupationalPensionScheme(Investment)Regulations2005sections2(3)(a)(vi)currentlystatesthatSIPsmustcover“theextent(ifatall)towhichsocial,environmentalorethicalconsiderationsaretakenintoaccountintheselection,retentionandrealisationofinvestments.”SuchanupdatetotheSIPswillrequirestrengtheningtrusteeboardcompetenceonclimateissuesfortrusteestocomplywithtrusteeknowledgeandunderstandingrequirementsinsections247-249ofthePensionsAct2004,particularlywithregardstheStatementofInvestmentPrinciples.

120 Alsoreferredtoaspoliciesandbeliefs

121 Includingforexample,termsofreferencesforIndependentGovernanceCommittees(IGCs).SeeUKroadmap:PRIandUNEPFinanceInitiative(2015)Fiduciarydutyinthe21stcenturyhttp://www.unepfi.org/fileadmin/documents/fiduciary_duty_21st_century.pdf

clarify the need for asset managers to have a soundunderstandingoftheinterestsandbroadrange of preferences of their clients, including those relating to ESG factors, and that they provideclearinformationtotheirclientsaboutthepotentialbenefitsandrisksofincorporatingsuchpreferences,includingtheeffectontheprospectivereturnoftheinvestmentstrategy.122

RECOMMENDATION19Government should clarify that trustees should engage with their beneficiaries to understand their beneficiaries’ preferences and can make investment decisions that are based on these preferences123, provided thereisnoriskofsignificantfinancialdetrimenttothefund.TheGovernmentshouldprovideguidancetodefine‘significantfinancialdetriment’anddemonstratehowtheyestablishtheirunderstandingofbeneficiarypreferences.

RECOMMENDATION20Government should clarify that investment consultants should have sufficient expertise and competency on ESG issues.

Recognising the critical role of investment consultants in advising pension trustees, including theregulatedobligationforschemetrusteestoseekinvestmentadvice,theGovernmentshould124 clarify that investment consultants should have sufficientexpertiseandcompetencyonESGissues, including climate change, and should includeESGissuesasastandingissuewhenadvice is given, including advice on portfolio strategy,assetallocationandmanagerselection.

122 Institutionalclientsofassetmanagersshouldconsidertheirmembersandbeneficiaries’preferencesintheirdiscussions,toensurethatinformationflowsthroughouttheinvestmentchain.

123 Beneficiarypreferencesmayormaynotbedistinctfromtheirfinancialinterests.

124 Inlieuofregulatoryoversightofconsultants,thisisarecommendationthatthegovernmentwouldberequiredtoimplement.

A report to Government by the Green Finance Taskforce

55

Page 58: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

RECOMMENDATION21Investment advisors should ask clients about their sustainability preferences, and investment funds marketed directly to individuals should clearly state the ESG impacts of the fund

Marketsurveysregularlyreportthatsocialandenvironmentalobjectivesareanimportantfactorforamajorityofretailinvestors125 and the EUMarketsinFinancialInstrumentsDirective(MiFIDII)requiresadvisorstoofferproductsthataresuitabletomeettheircustomers’needs.However,advisorsrarelyasktheirclientsabouttheirinvestmentpreferences.Correctingthisfailurewouldconnectindividualcitizensmorecloselywiththesustainabilityagenda,aswellashelpstimulatetheflowofcapitaltowardsgreenprojects.InvestmentadvicemorebroadlyiscurrentlythesubjectofanongoingreviewbytheFCA,buttheGreenFinanceTaskforceunderstandsthatissuessurroundingsustainabilityhavenotyetbeenconsidered.

ThisGreenFinanceTaskforcenotesthattheEUhighlevelexpertgrouponsustainablefinancerecommended that the European Securities and MarketsAuthority(ESMA)‘requireinvestmentadvisorstoaskabout,andthenrespondto,retail investors’ preferences regarding the sustainableimpactoftheirinvestments,asaroutinecomponentoffinancialadvice’.126 This Green Finance Taskforce further notes that the European Commission Action Plan on Sustainable Finance proposes that subjectto the outcome of its impact assessment, the CommissionwillamendtheMiFIDIIandInsuranceDistributionDirectivedelegatedactsinthesecondquarterof2018toensure:thatsustainability

125 NatixisGlobalAssetManagement(2017)2017ESGReport;Asurveyof7100respondentsin22countriesfoundthatsocialandenvironmentalobjectivesareanimportantfactorforaround70%ofretailinvestors.https://www.im.natixis.com/us/press-release/esg-may-be-catalyst-to-solving-the-savings-crisis-

126 EUHigh-LevelExpertGrouponSustainableFinance(2018)Finalreportofthehigh-levelexpertgrouponsustainablefinance,page28https://ec.europa.eu/info/sites/info/files/180131-sustainable-finance-final-report_en.pdf

preferencesaretakenintoaccountinsuitabilityassessments;andthatitwillinviteESMAtoincludeprovisionsonsustainabilitypreferencesinitsguidelinesonthesuitabilityassessmenttobeupdatedbytheendof2018.Technical guidance would be needed on the nature of the questions asked, but these should be kept simple. Importantly, the questions should not be framed in terms of a financial trade-off, particularly where there is evidence from multiple studies to indicate that sustainable investments can achieve higher returns than approaches that do not incorporate sustainability criteria.127

The FCA should issue similar clarifying guidance for the UK directly.ItisanopportunityfortheFCAtomovequicklyandassume a leadership role internationally on sustainabilityissues.

Furthermore,allinvestmentfundsmarketeddirectlyto individuals should have clear and simple disclosures about the environmental and social impacts of those funds.IntheUK,manyretailinvestorsarelikelytoinvestmoneyinproductsboughtdirectly,withoutprivatefinancialadvice.Suchretailinvestorswillhavelimitedappetitetowadethroughpagesofdisclosuredocuments,muchlesstheabilitytoanalysethem.128

TheFCAshouldconsiderworkingwithindustrytodevelopsimplelabellingschemesthatwouldbothinformandbetterprotectretailinvestorsbyproviding clear, simple indicators for the non-financialimpactofinvestmentfunds.Thiswouldfacilitatebetter-informeddecision-makingby

127 GlobalImpactInvestingNetwork(2017)EvidenceontheFinancialPerformanceofImpactInvestmentshttps://thegiin.org/assets/2017_GIIN_FinancialPerformanceImpactInvestments_Web.pdf;‘TheValueofResponsibleInvestment–InvestmentLeadersGroup’,UniversityofCambridgeInstituteforSustainabilityLeadership,2014’;G.Friede,T.BuschandA.Bassenet al(2015)ESGandFinancialPerformance:AggregatedEvidencefromMorethan2000EmpiricalStudies, JournalofSustainableFinanceandInvestment

128 SeeactiononimplementingClimateRelatedFinancialDisclosure(TCFD)recommendations.

Accelerating Green Finance

56

Page 59: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

investorswhohaveapreferencetoimprovetheenvironmentalandsocialimpactoftheircapital.Existing Government-agreed targets such as the SustainableDevelopmentGoals,andtheCleanGrowthStrategyataUKlevel,shouldprovidethebenchmarkagainstwhichimpactsareassessed.Practicalapproachesthatrecognisecurrentdata limitations are already under development byindustryandacademicleaders,129butanyapproachwouldneedFCAendorsementtoencouragetake-upatscale.Ifmarket-driven, suchaschemecouldbevoluntary.”

RECOMMENDATION22Governmentandprofessionalbodiesshoulddevelop competencies across a wider group of societal stakeholders through education tools.

Education for investors and professional training

Shiftingfinanceontoasustainablefootingtoboostgreenfinanceopportunitieswillrequireallactors in the system to improve their engagement, understandingandcompetencyintheissues.Forexample,pensionfundsandassetmanagers,includinginsurancecompanies,shouldbeexpectedtoapplytheclarifieddutiesintheirinvestmentpractices.Additionaleducationandtrainingisrequiredtosupporttheirimplementation.Professionalandindustrybodies,includingtheCharteredFinancialAnalysts(CFA)andtheInstituteandFacultyofActuaries(IFoA)shouldbeengagedbyinvestorstodevelophowESGissuesareincorporatedwithintheirprofessionaldesignations.

Similarly, educational programmes for issuers butalsoimportantlyindividualsaversshouldbedevelopedtoraiseawarenessofgreencapitalmarketsandtocreategreaterdemandforsustainablefinancialservices,respectively.

129 Example:InvestmentLeadersGroup,CambridgeInstituteforSustainabilityLeadership(2016)InSearchofImpact:MeasuringtheFullValueofCapitalhttps://www.cisl.cam.ac.uk/publications/publication-pdfs/impact-report.pdf

Education for issuers and banks

Aneducationandcapacitybuildingprogrammedforissuersandbanksshouldcoverthedevelopmentofskillsaround:o Identificationofgreenprojectsandassets

alreadypresentinacompanycapexplans;o keyareasforgreendatacollectionsand

reportingandtheproject/assetlevel;o ESGdisclosurecapabilitiesattheentitylevelo impactreporting;o understandingofESGcreditandsustainability

equityratings;ando developmentoftheabilitytotapintoallthe

availableinsuranceandcreditenhancementfacilitiesalreadyprovidedbytheGovernment.

ThiscapacitybuildingeffortshouldbeconvenedbytheGovernmentwithdeliverycontributionsmadebyleadingindustryplayers.

Education for individual savers

The Government should also deliver rapid improvementsinliteracyinsustainablefinanceandeducatecitizensabouthowtheirinvestmentsshapetheworldtheyliveintodayandretireinto.TheGovernmentshouldworkwithindustry,educational and consumer groups, via the GreenFinanceInstitute,todesignanddeliveranambitiousfinancialliteracyprogrammedeliveredinsecondary,tertiaryandcontinuingeducation.Financialcapabilityqualificationsarecurrentlyavailablefor14-19yearoldsandareofferedinapproximately700schoolsnationally.130

Government should encourage more schools to adoptthesequalifications,encourageeducationatayoungerage,andensurethatsufficientemphasisisplacedonsustainabilityissues.Thesemeasureswillhelpboostboththesupplyof,anddemandforgreenfinance.Aschemethatfocusesonfinancialliteracycouldbefundedthroughreleasing a portion of the UK’s dormant assets accruingfromtheinstitutionalinvestorsector.

130 TheLondonInstituteofBankingandFinance(2018)FinancialCapabilityQualificationshttps://www.libf.ac.uk/study/financial-capability/qualifications

A report to Government by the Green Finance Taskforce

57

Page 60: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Thisdemandcanbefurtherenhanced throughtheworkoftheWorldBenchmarkingAlliancetocreateleaguetablesrankingcompaniesontheirsustainabilityperformance.Theleaguetableswillbemadefreelyavailable,asapublicgood.Theywillincentivisecorporatestoimprovetheirsustainabilityperformanceandhelpeducatepeopleabouthowtheirmoneyisinvested,andhowtheycanexerttheirinfluenceto stimulate demand through the investment chain.TheGovernment(DfID)hasfundedtheestablishmentoftheWBAandalong-termcommitmentisnowrequired.

Achieving impact

Thisprocesswilldriveimpactby:incentivisingcorporatestoimprovetheirsustainabilityperformance;creatingaracetothetop;educatingpeopleabouthowtheirmoneyisinvested;howthisimpactstheworldaroundthem;andhowtheycanusetheirinvestmentstoexertinfluenceoncompaniestostimulatedemandthroughtheinvestmentchain.

AcceleratingGreen financeIn the uk

Accelerating Green Finance

58

Page 61: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 7. Issue a Sovereign Green Bond

The size of the opportunity

Thedevelopmentofaworld-classUKSovereignGreenBondFrameworkunderwhichasinglesovereigngreenbond(structuredintranches,oneofwhichfortheretailmarkets)orarollingprogrammeofsovereigngreenbondscouldbeissued to help secure the investment needed to achievetheUK’scleangrowthandinnovationgoalswhilealsosignallingaconsolidationofUKleadershipingreenfinance.

The strongest argument posed to date for UK Sovereign Green Bond issuance or programmatic issuances is that it sends a signal that the Governmentisseriousaboutgreenfinance. Tobackupthatsignal,thefundssecuredmustthemselvesbeusedforseriousintent.Withoutsuch additionality, there is a danger that a SovereignbondsimplysubstitutesforpotentiallycheaperGiltissuance,makingitpoorvaluefor money after green accreditation costs and simultaneouslyvulnerabletoaccusationsof‘greenwashing’.

Thekeytoachievingameaningfulimpactrelativetosovereigngreenbondsalreadyissuedelsewhere,istomakeitclearthattheproceedsamount to additional sources of capital, invested innewgreenprojectsthatmightotherwisenothavebeenfunded.Indeed,onepossibleusewouldbetoraisesufficientfundingtosupportthe full gamut of activities set out in this report, andwhichwouldotherwiserequireexistingpublicresourcesforimplementation.

TheUKSovereignGreenBondFramework shouldbedesignedtoreflectthetargetsandprioritiessetbytheCleanGrowthStrategy andthe25-YearEnvironmentPlanandchannellow-cost,patientcapitaltowardsselectedqualifyinggreenprojectsthatwillbeidentifiedoverthecourseofthebondframework’slife. Thegreenassetsaccumulatedwouldalso

createopportunitiesforthemtobesecuritisedandsoldontoinvestors–enablingproceedstoberecycledintoothergreenassets.

IssuingaseriesofUKSovereignGreenbondscouldthereforebeacornerstoneactivitytodelivertheGreenResilientInfrastructurePipelineproposed in Theme 8,withpublicfundsusedtocrowdinprivatecapitalwhereriskistoohighorfundingstreamstorepayhighpublicvalueinvestmentarelacking.

Building on UK strengths

TheUK’sCleanGrowthStrategyandthe25YearEnvironmentalPlansetacleardirectionoftravelforhowtheeconomyneedstoreduceGHGsandadapttoachangingclimate.ItisproposedthataUKSovereignGreenBondFrameworkbuildonthis.AssuchtheFrameworkneedtoreflectthetargetsandprioritiessetbytheCleanGrowthStrategyandthe25YearEnvironmentPlanandfocus on raising and channelling attractively priced,patientcapitaltowardsselectedqualifyinggreenprojects.Throughtheuseandmanagementofproceeds,theprojectselectionprocessandthequalityoftheassociatedimpactreporting131,theUKwillhavetheopportunitytodemonstrate excellence and transparency in applying standards and tools so far tested on amorelimitedscaledomestically.

International competition

International competition in sovereign green bondissuanceissignificant–morespecificallyfinancialcentres’abilitytousebondissuancetopositionthemselvesasgreencapitalmarketshubs.Therecentlypublished,inaugural GlobalGreenFinancialCentresIndexfrom

131 ThesearethefourcomponentsoftheInternationalCapitalMarketAssociation(2017)GreenBondPrinciples(2017)https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/GreenBondsBrochure-JUNE2017.pdf

A report to Government by the Green Finance Taskforce

59

Page 62: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Z/Yen,132ranksLondonasnumberonebut citesLuxembourg,currentlyrankedsecond,ashometohalfoftheworld’sgreenbondlistingsandParis,currentlyrankedfive,asasignificantlikelymoverinfuturerankings.

Francehasissuedasovereigngreenbondprogramme,raising€9.697billion,whichwenttofundavarietyofeligibleactivitiesandprojects,includingenergyefficientbuildings,transport,smart grids, farming, adaption and the circular economyalthoughthereweredisagreementsaboutwhetheranyofthis activitywasadditional.WithintheEU,Belgium andPolandhavebothissuedsovereigngreenbonds.Globally,NigeriahasissuedinAfrica,IndonesiaissuedthefirstGreenSovereignSukukinFebruary2018andFijihasindicateditsintentiontolistitssovereigngreenbondinLondon,highlightingtheclimateissuesfaced byislandstates. UKSovereigngreenissuancewillbe agamechangerinthislandscapeby:

o Directlyraisinganddeploying additionalcapitaltosupportnewkey climateprojectsandensuringthecapital isdeployedtofundareaswhereitwill create significant additionality in terms ofimpact;

o sendingapowerfulsignallingeffect to investors and issuers that positions Londonasgreenfinancehub;

o stimulating further development of the sterlinggreenbondmarket,whichlagsbehindthegreenmarketsinRMB,€andUS$

o energisingwiderpopularparticipationin thegreenfinanceagenda(ifaretailbond ischosen);

132 ChinaDevelopmentInstituteandZ/Yen(2017)GlobalFinancialCentresIndex22http://www.longfinance.net/images/GFCI22_Report.pdf

o hardwiringclimatechangemitigationandadaptation into the national assets and liabilitiesimprovingtheUKlong-termcreditworthinessprofile133;and

o signallingthattheUKwillremain,post-Brexit, ahighenvironmentalstandardseconomy.

Impacts of the UK Sovereign Green Bonds in the public sector

Throughthedevelopmentofpublicsectorskillsand procedures in the design and management ofaGreenBondFramework,theUKSovereignGreenBondcould:

o StimulatemunicipalandmorebroadlylocalGovernmentgreenbondissuance(includingpublicutilities),especiallyinthefaceofreducedborrowingavailablefromtheEIB,whichhasbeenanimportantsourceofmunicipalgreenfunding to date134;

o revitalise the role of the UK Municipal Bonds Agency,withafocusongreenbondissuances;and

o pavethewayforretailgreenbondissuancefromtheNationalSavingsandInvestments,whichwouldfurtherpopularisetheretailgreensavings.

Impacts on the private sector

TheUKcorporatemarketingreenbondissuanceisalsomarkedlysmallerthaninothercountries. OftheoverUS$20billionequivalentraisedthroughgreenbondsonLondonStockExchange[since2012],onlyUS$3.4billionfundedUKbusinesses135.AUKSovereignGreenBondwouldhelpcatalysethismarket,openingupmoreinvestmentopportunitiesforUKinvestors.Intheprivatesector,aUKSovereignGreenBondwould:

133 AscreditratingagenciesincreasinglyincorporateESGconsiderationsintotheirratingmethodologies,thiswill stand the UK in good stead

134 Seealso:InvestmentAssociation(2016)InvestorsEncouragetheDevelopmentofUKMunicipalBondMarkethttps://www.theinvestmentassociation.org/assets/components/ima_filesecurity/secure.php?f=Investors_Support_the_Development_of_Municipal_Bonds_Market.pdf

135 LondonStockExchange,datafromMarch2018

Accelerating Green Finance

60

Page 63: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

o Catalyse further issuance of corporate green bonds,drawingontheestablishedcredentialsofUKunderwriters,morepricinginformationforinvestorsandaburgeoningnarrativethatLondonhasthecapabilities,marketinfrastructureandinvestorbasetoissuegreenbonds;

o mobilisetheretailmarket,throughtheexposuretotheretailtrancheofthebond.Retailinvolvement could also lead to greater demand for pension scheme solutions that incorporate ESGconsiderations.Buildingongrowingprivateinvestor demand, the Government might later considerremovinganyfiscalasymmetries,forexamplethroughtheintroductionofgreenISAs(IndividualSavingsAccounts)andgreenSEIS(SeedEnterpriseInvestmentScheme);

o buildoninitiativesaimedatdevelopingtaxonomies (such as the forthcoming Green LendingPrinciplesoftheLoanMarketAssociation(LMA)andtheEUsustainabletaxonomyannouncedaspartoftheEUActionPlanonSustainableFinance),greentaggingandwarehousingofloanportfolioscouldleadtothestructuringofgreencoveredbondsandgreenassetbackedsecurities;and

o promotetheuptakeofgreenbondwrappersforSMEsortoaggregategreenprojectsinsectorswherethereisashortageofgreenprojectatscale,toallowsmallercorporateissuersorsectors that are not typically green to access the capitalmarkets.

In summary, a UK Sovereign Green Bond would directly drive investment into clean growth,consolidateUKleadershipbyaddingmajorissuancetoourexistingunderwritingstrengthsandmaximiseopportunitiesforUKbusinessesbycreatingopportunitiesforcorporateissuance.Inaddition, the green assets developed under this frameworkcouldlater besecuritisedandsoldontoinvestors– enablingproceedstoberecycledintofurthernewgreenassets.

Challenges to overcome

Theprincipalbarrierstoimplementingthisrecommendationidentifiedsofararearoundtheuse and management of proceeds and the cost of fundingandreporting.

SuitablemechanismsmustbedesignedtotracktheuseofproceedsofsovereigngreenbondsandmanagethefundsinalignmentwiththeGreenBondsPrincipleswithinthecontextoftheNationalLoansAct1968.

Theotherkeyaspectinissuingsuchabondisthecostoffunding.However,itisworthnotingthatinthecasesofFrance,BelgiumandPoland,theirsovereigngreenbonds,pricedclosetoorinsidetheirconventionalbondcurves,andonthesecondarymarket,thebondstradedclosertoorinsidethecurve,havingbeenheavilyoversubscribed.CorporategreenbondissuancesinLondonandelsewherehaveexperiencedsimilarpricing.Itisfurther evidence that the pool of specialist investors lookingforgreenopportunitiesisgrowing.

WherepricedifferencesdoexistitisalsoworthnotingthefindingsofSweden’sInquirytoPromotetheMarketforGreenBonds,whichsuggestedthatthecostsassociatedwithagreenbondissuancewereaworthwhile‘tuitionfee’giventhat“Inthelongrun,greenbondswillaccountforasignificantshareofthebondmarket”,aswellasthefactthat“theissueofagreenbondwouldwidenthebaseoffutureinvestorsinSwedishGovernmentbonds.”

WhiletheDebtManagementOfficeisamarketexpertonraisingmoney,thoughtshouldbegiventothe governance of the use of proceeds from funds raised.ASteeringCommitteeofexpertsshouldbeestablishedconsistingoftheCommitteeonClimateChange,BEIS,Defra,HMTreasuryalongwithcivilsocietyandtheprivatesectorrepresentedbyGreenFinanceInitiative.

A report to Government by the Green Finance Taskforce

61

Page 64: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Reporting on the impact of funds raised through the UK Sovereign Green Bond programme could buildontheworkalreadycarriedoutbytheGreenInvestmentBank(nowGIG),andtheissuancecouldprovidethetestbedfortheworkongreenstandardsnowbeingcarriedoutbytheBritishStandardsInstitution(BSI)andbesupportedbytheexpertiseoftherecommendedCentreforClimateAnalyticsandoftheGreenFinanceInitiativemorebroadly.

Recommendations

RECOMMENDATION23Government to issue a Sovereign Green Bond. This should be of the order of the French sovereign green bond programme, which has raised EUR9.697 billion and be considered as one of the measures of a comprehensive UK Green Capital Raising Plan.

Itshouldbemadeclearthatthemoneyisadditional,tofinancenewgreeninvestmentthatwouldnototherwisehavehappened.

HMTreasurywoulddeterminetheoverallpolicyframeworkwithinwhichdebtissuancetakesplace,includingtheleveloffinancingtoberaisedeachyearandthetypeoffinancialinstrumentsforthistoberaisedthrough.TheDMOwouldbethesolebodychargedwithissuingsovereignbondsandwouldalsobeexpectedtobeinvolvedinanygreensovereignbondissuance.However,thisissuancewouldneedtoconnectdirectlywiththeCleanGrowthStrategyand25YearEnvironmentPlan,whendrawingupeligibleprojectsanddefiningtheuseofproceedsandshouldrequirecoordinationwithanumberofGovernmentdepartmentsandagenciesaspartoftheUKGreenNationalCapitalRaisingPlan.

Implementationstepsinclude:

o HM Treasury to design a mechanism for the managementofproceedsinlinewiththeGreenBondPrincipleswithintheframeworkoftheNationalLoansAct1968;

o BEIStoappointaGreenBondFrameworkSteeringCommitteedrawingontheskillsofexpertbodiesassetoutabove;

o AconsortiumofgreenbondexternalreviewerstobeconvenedbytheGovernmenttoassistwiththecertificationoftheGreenBondFramework;and

o DMOtoworkwithGilt-EdgedMarketMakers toensurebuyinandthebestpricingconditionsfortheissuancearesecured.

Achieving impact

Theshort-termimpactwouldbering-fencedfinancetodeploytoclimatechangemitigationandadaption-relatedinvestments.Ultimately,successwouldbejudgedagainsthowmuchthisgiveswaytoabroaderprogrammeofissuanceandunderwritingofgreenbondsinLondonandhowswiftlyandcost-effectivelypublicpolicygoalsaremet.

Atsub-sovereignmunicipal,corporateandsmall- and medium-enterprise level, the UK lags in termsofissuanceevenifLondonisacompetitivejurisdictionforunderwriting.Butifasovereignissuanceweretotakeplace,itwouldlikelyenhanceLondon’scompetitiveposition,allowittoremainontopofgreenfinancialsectorglobally,andallowittogrowmarketshareingreenbondlistings.

Accelerating Green Finance

62

Page 65: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 8: Build a green and resilient infrastructure pipeline

The size of the opportunity

Attheendof2017,theGovernmentcommittedto upgrading the UK’s digital, energy, transport, housing,waterandflooddefenceinfrastructure,includingthroughinvestmentintheNationalProductivityInvestmentFund,withannualcentralGovernment infrastructure investment rising each yearfromaround£2billionin2016/17toover £5billionin2020/21.136

This represents a step change in the amount of capitalbeingdeployedtoinfrastructureoverall.Lookingmorespecificallyatgreeninfrastructure,the Committee on Climate Change has estimated theannualcostofmeetingthefifthcarbonbudgetin2030atlessthan1%ofGDP,137equivalenttoaround£22billionannually.138ItwillrequiretheUKsecuringmajorinvestmentnotjusttorenewanddecarboniseitsinfrastructure(whichincludesbuildingsaswellasmoretraditionalinfrastructuresuchasrailandICT),whichisdiscussedindetailearlierinthereport,butalsoensureitisresilienttotheimpactsofachangingclimate.

Againstthisbackdrop,theUKisdeliveringlessthanahalfofthegreeninfrastructureprojectsrequired

136 HMTreasury(2016)AutumnStatement2016https://www.gov.uk/government/topical-events/autumn-statement-2016

137 CommitteeonClimateChange(2015)TheFifthCarbonBudget:Thenextsteptowardsalow-carboneconomyhttps://www.theccc.org.uk/wp-content/uploads/2015/11/Committee-on-Climate-Change-Fifth-Carbon-Budget-Report.pdf

138 AldersgateGroup(March2018)TowardstheNewNormal:IncreasingInvestmentintheUK’sGreenInfrastructurehttp://www.aldersgategroup.org.uk/events/towards-the-new-normal-how-to-increase-investment-in-the-uk-s-green-infrastructure;andWorldBanknationalaccountsdata(accessedMarch2018)UKGrossDomesticProduct2015https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2016&locations=GB&start=2008&view=chart

tomeetitsenvironmentaltargets.139 ,140Meanwhile,investor demand for investment opportunities linkedtothesetargetsissubstantialandcurrentlyunmatchedbythesupplyofviableprojects.

Institutional investors, especially those with long-term liabilities, like insurers and pension funds, would like to increase allocations to infrastructure assets since they offer inflation-linked long-term returns. Fordefinedbenefitpensionfunds,increasinginvestmentininfrastructureassetscanhelpreducedeficits.AnalysisbyMacquariesuggeststhatforevery£1billionUKdefinedbenefitpensionfundsallocatefromcorporatebondstoinfrastructuredebt,areductioninpensionfunddeficitsof£270millioncouldbeachieved.141However,therearecurrentlysofewinvestableopportunitiesthatany reallocation of institutional investor funds to greeninfrastructureisunlikelytoreducedeficitsuntilmoreopportunitiesaremadeavailable.142 The availabilityofbankableopportunitiescanbeduetoacombinationoffactorsincludingthecomplexityoftechnologyorinfrastructure,lackoflong-termuncertainty around policy and the dual challenge (particularlyinthecaseofsmall-scale,distributedandenergyefficiencyprojectswheretransaction

139 By2020:15%ofUK’senergyneedsand10%ofitstransportenergyconsumptionhastocomefromrenewableenergysources;reducetheamountofbiodegradablemunicipalwastesenttolandfillto35%of1995levels;reducecarbonintensityofnewcarsandvansto95gramsofcarbondioxideperkilometre(g/km)and147g/kmrespectively;by2050,returnaviationemissionsto2005levels;andreducewaterconsumptiontoanaverageof130l/person/dayby2030from2008thelevelof150l/person/day.Vivideconomics(2011)TheEconomicsoftheGreenInvestmentBankhttp://www.vivideconomics.com/publications/the-economics-of-the-green-investment-bank

140 IntermsofreducingGHGemissionstheUKisontracktooutperformonthesecond(2013to2017)andthird(2018-2022)carbonbudget,however,"gaps to meeting the fourth and fifth carbon budgets remain".CommitteeonClimateChange(2018)AnindependentassessmentoftheUK’sCleanGrowthStrategy:Fromambitiontoactionhttps://www.theccc.org.uk/publication/independent-assessment-uks-clean-growth-strategy-ambition-action/

141 Macquarie(2016)Appraisalofprivatedebtopportunities:AholisticapproachforUKpensionfundshttp://static.macquarie.com/dafiles/Internet/mgl/global/shared/sf/pdf/MIDIS_White_Paper_Appraisal_of_Private_Debt_Opportunities.pdf?v=2

142 IntelligenceonEuropeanPensionsandInstitutionalInvestment(2016)InfrastructureDebt:anichestrategyhttps://www.ipe.com/reports/special-reports/liability-driven-investment/infrastructure-debt-a-niche-strategy/10013539.fullarticle

A report to Government by the Green Finance Taskforce

63

Page 66: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

costarehighasaproportionofoveralldealsizeandcomplextechnology).

WhileinvestmentinUKcleanenergyinfrastructurehasgrowninrecentyearstowardsthelevelsrequiredtomeetpolicytargets(Chart 4), UK investors consistently cite a lack of UK-based green infrastructure investment opportunities as a major barrier to deploying more capital to these assets.

TodeliveronthecleandevelopmentobjectivesintheCleanGrowthStrategy,IndustrialStrategyand25-YearEnvironmentPlanandenhancetheUK’sreputationasamarketwithreliablecleanandgreen infrastructure investment opportunities, the Governmentshoulddevelopdetailedforwardplansfordevelopingcleaninfrastructure,contributetoabetter-informedmarketaboutavailableinvestmentopportunities,andhelpmaketherisk/rewardprofilesofcleaninvestmentopportunitiesmorefinanciallyattractivetoprivateinvestors.Indoingso,theGovernmentcantapintogrowinginvestorappetite and increase private investment in clean growthopportunitiesacrosstheUK.

Building on UK strengths

TheUKbenefitsfromalargelystableregulatorypolicyframeworkandimpressivegrowthpotentialingreeninfrastructure.143

AcrosstheUKsub-nationalinfrastructureinitiativesareemerging.Forexample,anumberofUKcityauthoritieshaveplanssuchastheLeedsHydrogenCityGateproject.RunbyNorthernGasNetworkswiththesupportofLeedsCityCouncil,theprojectispilotingconvertingthegasgridfromnaturalgas(methane)tozero-carbonhydrogen.144 Lookingataregionallevel,theNorthEnergyTaskforcesetoutavisionforthenorthofEnglandasaleadinglowcarbonenergyregionintheUKworth£15billionperannumandemployingover100,000peopleby2050.145

143 CMS(2016)InfrastructureIndex:Bridgingthegaphttps://cms.law/en/GBR/Publication/Infrastructure-index-bridging-the-gap

144 H21LeedsCityGate(2016)https://www.northerngasnetworks.co.uk/wp-content/uploads/2017/04/H21-Executive-Summary-Interactive-PDF-July-2016-V2.pdf

145 IPPR(2017)ANorthernEnergyStrategyhttps://www.ippr.org/publications/northern-energy-strategy

0

10

20

30

40

50

60

70

80

90

100

Chart6:Growthinglobalrenewablesinvestment2004-2017(US$bn)

APAC

EMEA

AMER

Total

Linear(Total)

CHART 4. Growth in global renewables investment 2004-2017 (US$bn)Source:BloombergNewEnergyFinance

Accelerating Green Finance

64

Page 67: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theseplanscanbothleadtoincreasedsupplyofclean infrastructure assets for investment146 and provideexamplesthatcanbeusedinotherlocalauthorityandregionalareas.

AtaninstitutionalleveltheUKbenefitsfromwell-developedcapacitytosupportinfrastructureplanninganddelivery.TheNational Infrastructure Commission provides independent strategy thinking, analysis and advice to address the UK’s long-term infrastructure needs. The Infrastructure Projects Authority (IPA) is the Government’s centre of expertise on infrastructure and major projects.Itworkstocreatetherightenvironmentforsuccessfuldeliverythrough:supportingandde-riskingthemostcomplexandhigh-riskprojects;developingtheskillsandcapabilityofthepeoplewhodeliverprojects;andoverseeingtheprojectlife-cyclefrompolicy,initiationandfinancingtoindependentassurance.Ithasavailabletoittoolsthatcanenableandcrowdinprivateinvestmentopportunitiesintheformofits£40billionUKGuaranteeSchemeandtheNationalProductivityInvestmentFund.147TheIPAalsohasexperienceinestablishingco-investmentvehiclesincleaneconomyandrelatedenablingsectorssuchasICTsectors, for example through the DigitalInfrastructureInvestmentFund.148

Challenges to overcome

DespitetheUKstrengths,theproportionofgreeninfrastructureprojectsemergingfromtheIPAisonlyonesixthofthewholepipeline,andonlyone eighth of the total spend on infrastructure

146 H21LeedsCityGate(2016)https://www.northerngasnetworks.co.uk/wp-content/uploads/2017/04/H21-Executive-Summary-Interactive-PDF-July-2016-V2.pdf

147 Example:DepartmentforEnergyandClimateChange(2013)DraxandWhiteRoseCCSProject:projectwasfacilitatedbyUKguaranteeonpartofthedebthttps://www.gov.uk/government/news/drax

148 HMTreasuryandInfrastructureProjectsAuthority(2017)Billionpoundconnectivityboosttomakebufferingathinkofthepasthttps://www.gov.uk/government/news/billion-pound-connectivity-boost-to-make-buffering-a-thing-of-the-past

at£85billion149.Asignificantbarrierisaroundinfrastructuredevelopmentchoices.Infrastructurecan last many decades and the UK has a GHG reduction target ofatleast80%by2050.Thus,climatescreensurgentlyneedtobeappliedtotheemergentprojectpipelinetoensureassetsdonotbecomestrandedinthecomingdecadesbytighteningclimatepoliciesandthattheyarebuiltandsitedtoberesilienttoachangingclimate.

Lookingmorespecifically,investorsandprojectdevelopershavecited:

o InsufficientpolicydetailintheCleanGrowthStrategyand25YearPlanincludingalackofclear economic incentives for infrastructure operators to develop a pipeline of clean assets forprivateinvestment;

o fearsofpolicyuncertaintyaffectingreturns duetothechillingeffectof2015solar feed-intariffadjustments,scrappageof thezerocarbonhomestargets;

o insufficientlyattractiverisk-returnprofiles on some next generation clean infrastructure investments;

o dual challenge of high transactions costs and complexityoftechnologyorinfrastructure;and

o alackofclarityonwhatassetsandactivitiesshouldbeconsideredgreen.

Inadditiontothis,UK-basedpensionfundallocations to the green infrastructure opportunities thatdoexist–notablyrenewablesinfrastructure-iscurrentlywellbelowthoseoffromothercountries,notablyAustraliaandCanada.150 Similarly, investmentbyinsurersremainsbelowpar.

149 Greeninfrastructureprojectsincluderenewableenergy,electricityinfrastructure,floodmitigationmeasures:InfrastructureProjectsAuthority(2017)NationalInfrastructureandConstructionPipeline2017https://www.gov.uk/government/publications/national-infrastructure-and-construction-pipeline-2017

150 CityofLondonGreenFinanceInitiative(2017)Therenewableenergy infrastructure investment opportunity for UK pensionfundshttp://greenfinanceinitiative.org/wp-content/uploads/2017/11/Final-Report-14.11.2017.pdf

A report to Government by the Green Finance Taskforce

65

Page 68: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

International context

The challenge of connecting sufficient capital to sustainable infrastructure projects is one faced by Governments across the globe.Inrecognition of this, the European Commission alongwiththeEuropeanInvestmentBank(EIB)hasundertakenamoreactivistapproachtopromotingsuchinvestmentthroughtheestablishmentoftheEuropeanFundforStrategicInvestmentandtheEuropeanInvestmentAdvisoryHub,whichprovides targeted support to identify, prepare anddevelopinvestmentprojectsacrosstheEU.MorerecentlytheEUhasboostedthiscapacity,addinganewhub–URBIS–topromotecitylevelinvestmentandtheHighLevelExpertGrouponSustainableFinancehascalledfortheestablishmentofanewdedicatedinstitution(SustainableInfrastructureEurope)toacceleratetheestablishmentofhighqualityinfrastructureprojectsthatdelivertheEU’sobjectivesincludingundertheParisAgreement.151

AstheUKpreparestowithdrawfromtheEU,theUKwillconsideritsaccesstotheEIB–amajorinvestorinUKinfrastructureandworldleaderonsustainabilitystandardsinparticular-andthelargestpublicinfrastructurelenderglobally.Currently90%ofEIBinvestmentisdirectedtoEUMemberStatesandtherehavebeenreportstheEIBhasbegunscalingbackinvestmentintheUKaheadofitsexitfromtheEU.152 The EIB Group invested€31billionintheUKfrom2012-2016,ofwhich30%wasintheenergysector.153Activesolutionsmustnowbesoughttomanagethepotential impact on infrastructure development as theUKconsidersitsfuturerelationshipwiththeEU.

151 EUHigh-LevelExpertGrouponSustainableFinance(2018)FinancingasustainableEuropeaneconomyhttps://ec.europa.eu/info/sites/info/files/180131-sustainable-finance-final-report_en.pdf

152 TheArchitects’Journal(2017)EuropeanInvestmentBankfreezespublicbuildingloansduetoBrexithttps://www.architectsjournal.co.uk/news/european-investment-bank-freezes-public-building-loans-due-to-brexit/10022730.article

153 EuropeanInvestmentBank(2017)TheEuropeanInvestmentBankintheUnitedKingdom:whatwedohttp://www.eib.org/projects/regions/european-union/united-kingdom/index.htm

Recommendations

RECOMMENDATION24Government should publish a National Capital Raising Plan explicitly designed to align UK infrastructure planning with the delivery of the Clean Growth Strategy and the 25 Year Environment Plan.

Aspartofits2018NationalInfrastructureAssessment,theNationalInfrastructureCommissionshouldsetupanexpertisehubwithsubgroupsfocusedonprovidingadvicetotheCommissiononwhatinfrastructureincludingmappingrequiredrangeofassetsingeographicalregionsandhowmuchcapitalisneededtodeliveranationalcapitalraisingplanalignedwithdeliveryoftheCleanGrowthStrategyandthe25YearEnvironmentPlan.ThishubshouldreporttotheCommissionbytheendof2018anditsrecommendationsincludedinthefinalNationalInfrastructureAssessmentReport.

Five subgroups could be set up with the following focuses.

o Establishing more granular pipeline over the next five, 10 and 15 years.Thiswouldsetoutclean infrastructure and regional development priorities, including details on the priority locations and types of green infrastructure required.Thereshouldbeafocusonlargeandsmall-scaledistributedenergy/energyefficiencyprojects.Forlargeprojectsadviceshouldbeprovided on splitting the value chain for complex projectssuchascarboncaptureandstorageandhydrogenandheatnetworkstoprovideforinterventionsappropriatetodistinctrisksandinvestmentrequirementsateachstageofthevaluechain.ForsmallerprojectsadviceshouldbeprovidedontheaggregationofsmallerprojectsthroughadedicatedGovernment-ledprogramme.Wherepossibleclearguidanceoninvestmentneedsshouldbegivenincludingthetype(debt/equity)andlevel(quantity)ofprivatecapitalneededtocomplementpublicfinanceandallowinfrastructuredevelopmentstoproceedalongwithguidanceonthelikely

Accelerating Green Finance

66

Page 69: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

characteristicsoftherequiredcapital(intermsoftenorandriskreturnprofiles).

o Increasing a regional role for green infrastructure development.Inconcert withtherecommendationssetoutintheTheme 9onbolsteringprosperitythatisgreenandinclusive,thisshouldlinklocalauthorityenvironmental improvement plans to national andlocalinfrastructurerequirements.Providingpartieswithvisibilityofcomplementaryinvestmentrequirementsandtimelineswillenhancecoordinationandpoolingofresources, realising economies through efficiencyandsynergy.

o Advising on the role of standards in delivering low carbon and resilient green infrastructure.DeliveringaresilientUKeconomywillrelyonhigherbuildingandinfrastructurestandardstoreducecarbonemissionsandpromoteresiliencetofloodrisk.Aprogressiveandpredictableregulatoryframeworkwillofferbuildingownersandinvestorsthenecessaryvisibilitytoplan foramajor,multi-decadeinvestmentprogramme.Thisworkshouldbelinkedto the recommendations in Theme 2 on managingclimateriskanalytics,Theme 4 on green mortgages and lending and Theme 10 onresilience.

o Setting out the role Government and other public bodies can play in supporting low carbon and energy efficiency investment through procurement policy andpurchasingpowertofavourbusinessesandpremisesthatareresource-efficientandcreate a platform for encouraging investment intoinnovativeprojectssuchasvehicleelectrification.Thisshouldbeundertaken inconcertwiththerecommendationsset out in Theme 5 expanding investment in innovativecleantechnologies.

o Identifying opportunities for regulated authorities to allow service charges reviews onthebasisofcapitalexpendituredesignedtoincreasetheresourceandenergyefficiency,reduce the emissions footprint or increase the resilienceofinfrastructureassets.

Membershipoftheexpertisehubshouldincludeprivate sector representatives spanning the breadthofinfrastructureinvestmentactivityandencompassingequityinvestorsfromacrosstheprojectlifecycle,bankandnon-bankfinance,non-traditionalfinance,projectdevelopersandsponsors.Publicsectorinterestsshouldberepresentedby:IPA;keyGovernmentdepartmentsincludingBEIS,DEFRA,MHCLG;statutorynationalenvironmentalregulators;localauthoritiesincludingcityregionswithrelevantexperienceandinterests;andothercivilsocietyandacademicexperts.ThisactivityshouldbeconvenedandcoordinatedbytheGreenFinanceInstitute.

Achieving impact

Amoreactivepartnershipbetweenthepublicandprivatesectorisneededtoturnpublicpolicyaspirationintoinvestmentoutcomes.mirroringwhatishappeningacrossEurope,ChinaandLatinAmerica.ThroughtheapproachesoutlinedaboveaseriesofhighimpactopportunitiescouldemergetounlockprivatesectorinvestmentintotheUKeconomyincluding:

o Mobilisingawiderrangeofprivatesectorinvestorstoinvestingreeninfrastructure.Inparticular this may assist smaller institutional investors such as smaller pension funds to investinnewassetclasses;

o increasinginvestorconfidenceandspurringprivate long-term investment, including enteringintolong-termPowerPurchaseAgreements(PPAs).Thiswillprovideprojectdeveloperswithrevenuecertaintyrequiredtoconstructandoperaterenewablesinfrastructure,forexample,atscale;

o through the standardisation of documents for certain types of small-scale or distributedenergyprojectsscalingup

A report to Government by the Green Finance Taskforce

67

Page 70: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

levelsofinvestmentbytheprivatesector.Standardisationofdocumentationcouldbeparticularly useful on aggregated small-scale projectssuchaselectricvehiclechargingstationprojects;

o stimulating private investment in innovative technologiesthatcanbeusedtomeetGovernment strategies through a commitment byGovernmenttouseprocurementpoliciesfocussingonlowcarbonandenergyefficientinvestment;

o forbuildings,aclearstimulusforprivatedevelopers and landlords to enter sustained programmes of investment in the energy performanceoftheirstockofproperty.Leadershipthroughpublicprocurement wouldprovideademonstrationeffect,helptoupskillthesupplychainandcouldactas a precursor to a further tightening of MinimumEnergyEfficiencyStandard(MEES)Regulationsinthefuture;and

o enablingtheUKtobecomeagloballeaderin the deployment of high value innovative technologiessuchascarboncaptureandstorage and could export this expertise elsewhere.

Accelerating Green Finance

68

Page 71: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 9: Foster inclusive prosperity by supporting local actors

The size of the opportunity

Localauthoritiesarewellplacedtodriveemissionreductionsthroughtheiruniquepositionofmanagingpolicyonland,buildings,water,wasteandtransport.154Theycanembedlowcarbonmeasures in strategic plans across areas such ashealthandsocialcare,transport,andhousing.Partnershipsacrosspublic,privateandcommunitysectororganisationscanunlockpowerfulintegratedlocalenergysolutions.LocalleadershipisthereforecriticalinrisingtothecleangrowthGrandChallengeacrosstheUK.

TheUK’sIndustrialStrategyforeseesakeyroleforlocalactorsindelivery.ItsetsoutanationalframeworkwhichisdrivenbyLocalIndustrialStrategies,strengtheningtheleadershipofLocalEnterprisePartnershipsandMayoralCombinedAuthorities.BoththeIndustrialStrategyandCleanGrowthStrategystresstheimportanceofcleangrowthascentralplankinthedevelopmentoftheseLocalIndustrialStrategies.Futureinvestmentinlocalcleangrowthwill:reducecarbonandbringhighvaluelocaljobs;improveproductivityandairquality;driveUKinnovation;anddeliverwiderwellbeing.

Building on UK strengths

Localleadersalreadyrecognisetheimportanceandtheopportunityincleangrowthandareputtinglocalcarbontargetsandstrategiesinplace.Localleadersarealsoattheforefrontofmanagingchallengesrelatingtoresilience,notablyfloodrisk.Localinitiativesandactionabound:35

154 CommitteeonClimateChange(2012)HowLocalAuthoritiesCanReduceEmissionsandManageClimateRiskhttps://www.theccc.org.uk/publication/how-local-authorities-can-reduce-emissions-and-manage-climate-risks/InternationalEnergyAgency(2009)Cities,Towns&RenewableEnergyhttp://www.iea.org/publications/freepublications/publication/cities2009.pdf

UKcitiesaresigneduptotheGlobalCovenantofMayors,whichcommitscitiestodevelopingclimate resilient initiatives and independently assessedstrategiesandcarbontargetsfor2020,2030and2050155;80UKplaceshavealsosigneduptotheUK100commitmenttobeing100%cleanenergyby2050.Othercity-ledexamples are set out in Box 4.

International competition

Greater action is needed to unlock the full potential of place-led investment across UK regions and cities. This is especially the case as the UK prepares to exit the European Union and lose access to technical assistance facilities providedbytheEIB.Thisincludes:theELENAscheme, 156whichprovidesgrantsfortechnicalassistance focused on the implementation of energyefficiency,distributedrenewableenergyandurbantransportprojectsandprogrammes;andtheURBISfacility-anewdedicatedurbaninvestment advisory platform set up to provide advisorysupporttourbanauthorities to facilitate, accelerateandunlockurbaninvestmentprojects,programmesandplatforms.

Challenges to overcome

Currentlytheambitiontohaveallcitiesandregioncontributingtothelowcarbontransitionisstymiedbyalackofcapacityandcapabilitytoturnpublicpolicyambitionintoinvestment.AsnotedintheUK100report:“Accesstodevelopmentfinanceforlocalprojectsisanissue,andthedisparitybetweenprivatefinanceandlocalauthoritiesintheirattitudestowardsriskcontinuestobeabarrier.However,thedevelopmentoftheglobalinfrastructurefinancemarkethascreatedalarge

155 GlobalCovenantofMayors(2017)TheGlobalCovenantofMayorsannounces3newinitiativesandpartnershipstosupportlocalclimateactionatOnePlanetsummithttps://www.oneplanetsummit.fr/IMG/pdf/4-global_covenant_of_mayors-press_release-en.pdfandhttp://www.iclei.org/fileadmin/user_upload/ICLEI_WS/Documents/Press_release/One_Planet_Charter_Press_Release.pdf

156 EuropeanInvestmentBank(2018)ELENA–supportinginvestmentsinenergyefficiencyandsustainabletransporthttp://www.eib.org/products/advising/elena/index.htm

A report to Government by the Green Finance Taskforce

69

Page 72: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

plant,oraninvestmentprogrammetoretrofithundreds or thousands of homes amounting from £100,000to£5million.Deliveringsuchprojectsrequiresspecialisttechnical,commercial,legal,procurementandotherskills.Thesewillnotbeavailablein-houseineverylocalauthority–andnorshouldtheybe.Butthereisaneedtodevelopandshareexpertisethroughbuildingupasupplychain across to support local authorities and developinhousecapacity.

Someofthisworkhasalreadystarted-throughtheGovernment’s£7millionLocalEnergyProgrammeinEngland.Theprogrammehassupported the development of local strategies, toolsandguidanceandcapacitysupportviafiveregionalenergyhubs.However,giventhescaleofthe opportunity, there is scope for further action to expandcapabilityatalocallevel.

Commercialisation:Asdiscussedabove,manylocalactorsareunder-resourced.Manycanaccessfundingforfeasibilitystudies,butthenlackthedevelopmentcapitalneededtoturntheseintoinvestibleproposals.Whereproposalsdocomeforward,theyoftenlackconsistencyinspecifications.Thisnon-comparabilitypushesuptransactioncosts.Thislackofestablishedandagreedprotocolandpractise,whichwouldenablequickandlowcostduediligence,meanslong development time lines and high costs for investors.Thisisakeybarriertoaddress.

Therecanalsobecomplexandlengthyprocurements,evenforsmallvalueschemes.Anarduousbiddingprocessagainstfixedcriteriameanshightransactioncostsforbiddersandofcourse,thereisnoguaranteeofsuccess.Frameworks,intowhichmultiplebidderscangainaccesstodeliverarangeofprojects,reducecostsandopenopportunity.Therearealsomoreflexibleframeworkapproachesavailable, for example dynamicpurchasingsystems,whichallowdeliverybodiestoregisterwithminimalcostsupfrontandthenbidagainstarangeofprojects,astheycomeforward.Theseapproachesareinevidence,butmoretypicallyarenotseenatlocallevels.

RecommendationsThefollowingrecommendationsaredesigned asapackagetoopenopportunitiestoboostplace-basedgreenfinance.

RECOMMENDATION25Government should set up a Local Development Finance fundThisshouldbeafundof£100millionthatwouldawardcapitalgrantstoapplicantsseekingtocreatenewformsofpublic-privateconsortiaandorganisationstobridgethe“developmentgap”andunlocktheestimated£30billion158 of potential cleangrowthinfrastructureprojectsestimatedbytheUK100initiative.Theseprojectshavebeenidentifiedbylocalauthorities,buttheylackthedevelopmentcapitalandcapacitytofinance andbuild.

ThiscapitalwoulddifferfromthatavailablethePublicWorksLoanBoard(PWLB)becausethemoneyisfullyatriskandnotinvestedagainstanasset.Anymoneyrepaidwouldcomefromtherealisation of value from a successful move to the next stage of the development cycle (at an indeterminatepointinthefuture).Suchevent-drivenrepaymenttermsarebeyondthenormalscopeofPWLBterms.

Thecapitalwouldbeawardedtothoseorganisations that can demonstrate potential tocreatescalableapproaches,allowingthedevelopmentcapitaltoberecycledasmuchaspossible.Thiswouldavoiddevelopmentgrantsbeingtreatedasa‘sunkcost’,andinstead,leveragethevaluecreatedbysuchinterventionstofundfuturedevelopmentcapital.

Organisationswouldalsoneedtodemonstratepotentialforbringingprojectstocompletionwithinanacceleratedtimeframerelative.Thiswould

158 GreenInvestmentBank(2015)Smarter,greenercities:TenWaystomoderniseandimproveUKurbaninfrastructurehttp://greeninvestmentgroup.com/media/44748/gib-smarter-greener-cities-report-final.pdf

Accelerating Green Finance

70

Page 73: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

poolofinvestorswithastrongdesiretoinvestincleanenergyprojectswhichcangenerateanappropriatereturnfortherisksinvolved.Withoutclear direction in terms of policy and regulation, themarketonitsownwon’tdeliver.Businessneeds strong signals and active leadership from Government,locallyandnationally.”157

Thekeyissuestoaddressarethereforecapacity,capabilityandcommercialisation.

Capacity:Therearenostatutoryobligationsonlocalauthoritiestodeliveronenergy,lowcarbonorresilience,thoughDefra’s25YearEnvironmentPlanhasprovidednewimpetustoact.Thismeansthatformanycouncils,forwhomresourcestofulfilexistingstatutorydutiesaretight,makingstaffandfundingavailabletopromotecleanenergyorresilienceinvestmentisdifficult,evenifthereisastrongbusinesscasetoact.

Wherecleanenergyinvestmentschemesaretakenforward,theyareusuallysmall,adhocprojectsbasedonresourcesavailableinasingleyear.Theseprojectstendnottobeembeddedinoreffectivelylinkedintowiderlocalstrategies,ofthesorttheLocalIndustrialStrategiesenvisage,meaningopportunitiestodevelopintegratedlowcarbonsolutions,withhighervaluefinancialandsocialreturns,aremissed.

Wherefundingisavailable(forexamplefromEUprogrammes, national Government or commercial investors)tosupportintegratedprojectdevelopment over a longer time it is often not allocatedbecausethereisnoonetobidforthemoneyortodeveloptheschemes.So,projectsareneverbroughtforwardforinvestment.

Capability: Energyandlowcarbonprojectscoveraverybroadrangeofpotentialschemes.Theycanbeofsignificantsize,upwardsof£250-300milliontobuildanefficientscaleenergyfromwaste

157 UK100(2017)Financingthetransition:harnessingUKcities’ambitionforcleanenergyhttp://www.uk100.org/wp-content/uploads/2017/09/UK100_Report_SEP04_Final.pdf

BOX 4.

CITIES IN ACTION

o Towns such as Grimsby are committed to meeting UK Carbon Budget levels locally while bigger cities are looking to go further faster with Liverpool City region aiming for a 2040 target for example.

o Bristol, London and Manchester are among UK cities which have successfully applied for ELENA funding from the European Investment Bank. This funding for resources has a minimum 20:1 investment ratio. Bristol secured over £50 million investment in low carbon energy for a £2.5 million grant.

o Greater Manchester has a publicly agreed low carbon strategy with a steering group mixing local authority, other public sector, private sector and third sector organisations. This integrates buildings, transport, waste, energy and some elements of health in a broad place-based approach to decarbonisation.

o Bristol and Nottingham have supported local supply companies, with many others looking to white label supply companies to develop local tariffs and savings. Gateshead and many others have developed a commercial energy opportunity through a Combined Heat and Power development.

o Cambridgeshire Council and Nottingham City Council have developed energy teams from the incomes generated through energy projects developed and funded by the local authority. These both provide funds for key frontline services as well.

A report to Government by the Green Finance Taskforce

71

Page 74: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

buildontheopportunitiesbeingunlockedviaIndustrialStrategyChallengeFundsandunlockmatch funding for the forthcoming UK Shared ProsperityFund,todrivethecleangrowthagenda.The development capital needed is not huge, so individualawardsof£250,000-£500,000wouldallowameaningfultrialofcompetingmodelsofdevelopment.Theleverageandrepaymentaspectofthefundmeanthiswouldoperateasarollingpot,continuingtosupportprojectsovertimewithoutongoingnewmonies.However,anyunsuccessfulinvestmentsriskreducingthecoretotalfundvalueovertime.Thismuchneededlearningwouldcreateefficienciesofscaleandacceleratedroll-outofthesuccessfulmodels.

Theprivatesector,workingincollaborationwithcommunityandpublic-sectorbodieshasthecapitalandcapacitytodevelopthe£30billionofprojectscurrentlystuckinthe‘valleyofdeath’betweeninitialfeasibilityandbecominginvestment ready, successfully developed projects.

GovernmentwouldenablethecreationofnewformsofpublicprivatepartnershipwhichwouldensurethebenefitsofcleangrowthinfrastructureinvestmentarefeltbylocalcommunitiesandeconomiesacrosstheUK.Thesemodelscouldincludecharitabletrusts,CommunityInterestCompanies,andlocalauthorityownedcompanies(suchasSwindon&PublicPowerSolutions).Thisfundwouldcomplementthededicatedpublic-privategreenventurecapitalfund’proposed in recommended in Theme 5 Expanding investmentininnovativecleantechnologies.

RECOMMENDATION26Boost demand from public bodies and their pension providers for diverse place-based low carbon investments.

Localauthoritiescontrolsignificantinvestmentcapital in pension funds and treasury reserves thatarenotcurrentlyinvestedinlinewithlongtermenvironmentalorsocialbenefitsofmembersorlocalcitizens.Narrowinterpretations

offiduciarydutyareoftencitedasthereasonformakinginvestmentsthatproduceunintendedconsequencesofincreasedclimateriskandthereforereducedrealbenefitsformembersandlocalcitizens.Inaddition,trusteesandmanagerslackconfidenceandexpertiseinlowcarboninvestmentstrategies.

LocalGovernmentpensionschemesshouldbuildongrowingcollaborationundertheLocalGovernmentPensionScheme(LGPS)pooling,forexamplebetweentheLocalPensionsPartnershipandNorthernPoolintheGLILinfrastructurefund.Thiswillhelpshareknowledgeandexperience,supporting the achievement of infrastructure allocationtargets,currentlyupto10%ofassets,whichpresentlyfarexceedactualinvestment.

Demandformorediverseplace-basedlowcarboninvestmentopportunitiescouldbefurtherboostedifLGPSistoimplementtherecommendationsoftheTCFDtodisclosetheirclimate-relatedrisksandopportunities,onacomplyorexplainbasis.Thiswillcreateaspacefortrusteesandmanagerstoexaminetheirdecision-makingcriteriaforinvestments and ensure they have the right level of trainingandcapacitytounderstandandtakeintoaccount the climate impacts and opportunities of thosedecisions.This,inturncreatesopportunitiesforanalternative‘activist’approachtosecuringlowcarboninvestmentopportunitiestoemerge.159

Induecourse,requiringpublicsectorinvestmentstobeheldtotheTCFDrecommendationswouldprotectpublicinvestmentagainstclimateimpactsandfurtherbuildonUKexpertiseinlowcarbonfinancing.Suchamovewouldrequireinvestmentin education and training of local authority pension fundtrustees,managerandtreasuryofficialsontherisksandopportunitiesofinvestmentsinalowcarbonfuture.

159 CityofLondonGreenFinanceInitiative(2017)Therenewableenergy infrastructure investment opportunity for UK pensionfundshttp://greenfinanceinitiative.org/wp-content/uploads/2017/11/Final-Report-14.11.2017.pdf

Accelerating Green Finance

72

Page 75: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

RECOMMENDATION27Government should set up Clean Growth Regeneration Zones

GovernmentshouldworkwithindustryandfinancialinstitutionstoidentifycleangrowthregenerationzonesacrosstheUKthatcanbetransformedbyanchorinvestmentsindirectgenerationofgreenpowertonewindustrialassets.Thiswould:buildontheLocalEnergyProgrammealreadyinplace;encouragefurtherclusteringofcriticalexpertiseandresource;provide the long-term investment strategy neededtocreatestablesignalstothemarket;and support integrated investment portfolios to maximiselocalvalue.

ItwouldbuildonthemodelofdevelopmentbeingpioneeredbycompaniessuchasGFGAllianceinScotlandandtheNorth-westofEnglandtorebuildlocalindustrialcapacitybasedaroundanchorinvestmentsinlocalcleangrowthinfrastructuresuchaslocalenergygeneration.Suchprojectscouldrequireinnovationinthescopeandtermsofcorporatepowerpurchaseagreementsbutcan potentially deliver a model of clean energy developmentthatdoesnotrequireGovernmentsubsidytorealise.

Theaimwouldbetoengagelocalcommunities,legacylocalskills,localeducationalinstitutionsandlocal investors to support such redevelopment and focusontheregenerationofqualityonthebackofleadershipincleangrowthtransition.

Localauthoritieswithinandadjacenttothezonewouldbeencouragedtobringforwardinvestments in infrastructure to support the regenerationandextendthebenefitsintothelocalsupplychainaswellasmobilisinglocalpension fund investments alongside individual and corporateinvestments.

BeyondtheworkcarriedoutundertheAdaptationReportingPower(ARP),theGovernmentshouldalsorequirepublicagenciesandregulatorstofindwaystodeliverandincentiviseinvestmentsinclimateresilienceandmitigationinthelocalregion.

RECOMMENDATION28Awareness raising of green finance opportunities among Local Authorities

ManyLocalAuthoritiesremainunawareoftherangeoffinanceavailabletosupportlowcarbonenergyprogrammes.Toovercomethisbarrier,aseriesofregionalworkshopscouldberunforseniordecisionmakerson‘Financingthetransition’bringingtogetherlocalandnationalfundersandspecialistlowcarbonenergyinvestors.ThiscouldberunbytheGreen FinanceInitiativeinconjunctionwiththeLocalGovernmentAssociation.

Awarenessshouldalsoberaisedofthefactthatrenewablesarefallingincostandbecomingcost-competitivewithtraditionalformsofgeneration.LocalGovernmenthasthepotentialtoaccessthesecostbenefitsbybecomingbuyersofelectricityfromprivatelyfundedrenewableprojectsusingpowerpurchaseagreements(PPAs)andsosupportinginvestmentbyprovidingpricestabilityforcontractedoutput.Thiscanbedoneinamannertoensurelowcoststothepublicsectorbyholdingcompetitiveauctionstosupplyrenewableelectricitytothepublicestate,includinglocalGovernmentoffices,universities,schoolsandhospitals.

TheseeventscouldberunoverthesummerwithanationalconferenceheldinOctober2018tocoincidewithGreenGreatBritainWeek.

Achieving impact

The shift to more, decentralised, local clean and resilient infrastructure in the UK presents large investmentopportunities.Takingactivistmeasurestounlockinvestmentatthe locallevelwillhelpboostopportunitiesforplace-basedinvestmentbutalsocreateleadershipopportunitiesfortheUKgloballyascitiesandregionseverywhereseeksolutions to play a more active role in delivering thetransitiontosustainableeconomies.

A report to Government by the Green Finance Taskforce

73

Page 76: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Theme 10. Integrate resilience into the green finance agenda

The size of the opportunity

Infrastructure assets and services are already vulnerabletoarangeofweather-relatedhazardssuchasflooding,drought,heatwavesandsnowandice.

EnsuringtheUKisresilienttotheeffectsofachangingclimatewouldcreatesignificantnewgreenfinanceopportunitiesthatwouldenabletheUKtoleadtheworldinhowtoemployinnovativemeansofdirectpublicinstitutionalandregulatorycapacityandpublicandprivateandfinancialresourcestobuildresilientinfrastructure,supplychainsandeconomies.

There is a significant opportunity now for the UK to amend how it plans, delivers and manages its infrastructure to be resilient to a changing climate and avoid economic losses later down the line.

Onanationalscale,thecostsoffloodingcanbesignificantandtheresilienceofbuildings–andhousingespecially–hasbeenahigh-profileeconomicandsocialconcern.Improvingtheresilienceofinfrastructureandbuildingsisthereforea‘noregretsoption’—schemesthatgeneratedirectorindirectbenefitsthatarelargeenoughtooffsetthecostsofimplementingtheoptions.Thisisessentialtopreservingaproductiveandsociallyfunctionaleconomy. Doingsowouldpromote the UK as a global leader on how the deliver a resilient economy while boosting green finance opportunities.

RecentweathereventsintheUKillustratethescaleoftherisksandcostsiffurtheractionisnottaken.Thesummer2007floodsalonewereassociatedwith43,000flood-relatedresidential

insuranceclaims.160Overthelast10years,anaverageof19,000homeshavemadeflood-relatedinsuranceclaimseachyear.161Twomillionpeoplelostpowerinthe2013/14floods,andpoweroutagesdisruptedtradethroughGatwickairportandthreemajorports.FloodsinDecember2015directlyaffected17,000properties,leadingto£1.3billionofdamage.162Thenumberofassetsinhighfloodriskareaswillincreasebyatleast50%in2050.163

Solving the resilience challenge requires the public and private sectors to share the risk, as well as a step change in the amount of capital being deployed to infrastructure.

WhiletheresponsetoclimatechangehastraditionallybeenseenastheresponsibilityofGovernmentpolicy,thereisgrowingrecognitionoftheroleofthefinancialsystem.Therearehugeopportunitiesforgrowthanddevelopmentassocietyandtheeconomymovetobeingbothlowcarbonandmoreresilienttoachangingclimate.TheTCFDhasprovidedarefreshedimpetusinthisarea,withitsdualfocuson‘transitionrisks’and‘physicalrisks’.

Asnotedearlier,theGovernmenthasalreadycommitted to upgrading the UK’s digital, energy, transport,housing,waterandflooddefenceinfrastructure, including through investment in the NationalProductivityInvestmentFund,withannualcentral Government infrastructure investment risingeachyearfromaround£2billionin2016/17tomorethan£5billionin2020/21.164

160 FloodRe(2016)ThefirstFloodRetransitionplan:Transitioningtoanaffordablemarketforhouseholdfloodinsurancehttp://www.floodre.co.uk/wp-content/uploads/Flood-Re-Transition-Plan-Feb-2016-FINAL..pdf

161 Ibid.

162 Defra,(2016)ThePropertyFloodResilienceActionPlan:anactionplantoenablebetteruptakeofresiliencemeasuresforpropertiesathighriskoffloodinghttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/551615/flood-resilience-bonfield-action-plan-2016.pdf

163 Ibid.

164 HMTreasury(2016)AutumnStatement2016https://www.gov.uk/government/topical-events/autumn-statement-2016

Accelerating Green Finance

74

Page 77: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Building on UK strengths

TheUKhasagreattrackrecordonmitigationandaleadershiproleglobally.Astrongeralignmentbetweenmitigationandresiliencewouldunlockfurtheropportunitiesforgreeninvestment.

TheUKinsurancesectorisagreatasset,beingthelargestinEuropeandfourthlargestintheworld.FloodReisa‘world-first’floodre-insuranceschemethatenablesinsurerstoofferaffordablepremiumsandlowerexcessestohomesatriskoffloodingacrosstheUK.SinceitslaunchinApril2016FloodRehassignificantlyimprovedtheavailabilityandaffordabilityoffloodinsurance,withmorethan142,000policiescededtoitwithinthefirst18months.165FloodReisplannedtoceaseby2039andenableatransitionbythentoanaffordableriskreflectivemarketforhouseholdfloodinsurance.Toenablethistransitiontheschemeisinvestigatinghowitcouldincentivisetheuptakeofresilienceimprovementsforpropertiesathighfloodrisk.

Asnotedearlierinthereport,theUKisalsoregardedasagloballeaderindrivinggreaterpublicunderstandingoftherisksandimpactsofclimatechange.ThisleadershipisbuiltofftheexpertiseinclimatescienceheldintheMetOfficeandotheracademiccentresaroundtheUK.

Otherpublicinstitutionalcapacitycreatedoverthe past decades has also had an important roletoplay.TheCommitteeonClimateChange,whichwasestablishedbytheClimateChangeAct(2008)–thefirstintheworld-isexplicitlytaskedwithadvisingtheGovernmentanddevolved administrations on emissions targets andreportingtoParliamentonprogressmadeinreducing greenhouse gas emissions and preparing forclimatechange.ThelattertakestheformsofaNationalAdaptationProgrammethatmustbepublishedeveryfiveyearstoaddressclimateimpactsidentifiedintheprecedingnational

165 FloodRe(2017)AnnualReportandFinancialStatements(2017)http://www.floodre.co.uk/wp-content/uploads/FloodRe-Annual-Report-AW-WEBSITE.pdf

ClimateChangeRiskAssessment.ThenextNationalAdaptationProgrammeisexpectedtobepublishedlaterin2018.TheClimateChangeActalsoincludesprovisionforadaptationreporting,whichisaimedatinfrastructureoperatorsandpublicbodies,askingthemtoreporttoGovernmentonhowcurrentandlong-termclimaterisksarebeingaddressed.TheEnvironmentAgency,anon-departmentalpublicbody,isattheforefrontofmitigatingandrespondingtosomeofthemostsignificantimpacts,withaleadroleonfloodandcoastalriskmanagementandonwaterresources.Thisexperience,coupledwithitsroleasacategoryone responder under the Civil Contingencies Act(atthecoreoftheresponsetomostemergencies),meansitisleadingthewayonembeddingthinkingaboutclimateimpactsintoitsdecisionmakingandinvestmentplanning,incollaborationwithotherpartnersathomeandoverseas.TheEnvironmentAgency’sfuturefloodandcoastalerosionstrategyduein2019willseektoattractmorenon-publicsectorinvestmenttosupportcommunitiesifandwhenfloodingdoesoccur(see Figure 9 for current arrangements regarding investment).

ThisfocusnowneedstobeexpandedtosupportbroaderresilienceinlinewithrecentcommitmentsmadeintheGovernment’s25YearEnvironmentPlantoensure“allpolicies,programmesandinvestmentdecisionstakeintoaccountthepossibleextentofclimatechangethiscentury”.Attentiontodrought,floodandcoastalrisktendstobefocusedintheimmediateaftermathofmajoreventsandreducesignificantlythereafter.ThisGreenFinanceTaskforceisaskingGovernmentandindustrytolead a paradigm shift so that resilience is central tonewinfrastructureprojectsandbuildingsareconsistently“builtbackbetter”.

Lookingahead,in2019,Defrawillupdatethenationalfloodandcoastalerosionriskmanagementstrategy,lookingtostrengthenjointdeliveryacrossorganisations.Itwilllookatcurrent partnership arrangements ahead of a reviewoffundingneedsbeyond2021,seeking

A report to Government by the Green Finance Taskforce

75

Page 78: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

toattractmorenon-publicsectorinvestment,andmakesureallrelevantagenciesareabletorespondquicklyandeffectivelytosupportcommunitiesifandwhenfloodingdoesoccur.

International competition

The UK can learn from other countries facing similarclimaterisks.TheNetherlandsisaworldleaderindevelopingflood-resiliencestrategies.ItsDeltaProgramme166 lays out the strategytomanagethecountry’svulnerabilitytowater.Thisstrategysupportsadaptationandmitigationbybringingtogethermunicipalities,NGOs,businessesandexperts,whilethenationalGovernmentisresponsibleforthesystemwithrespecttoclimateadaptationandresilience.167 This type of devolved approach canenablethedeliveryofmodernandresilientinfrastructuresystemsbytakingadvantageof

166 DutchGovernment(2018)DeltaProgrammehttps://www.government.nl/topics/delta-programme

167 PBLNetherlandsEnvironmentalAssessmentAgency(2015)AdaptationtoclimatechangeintheNetherlandswww.pbl.nl/sites/default/files/cms/publicaties/PBL-2015-Adaptation-to-climage-change-1632.pdf

the opportunities for convergence and careful integration of infrastructure systems at the local levelofconsumermarkets,supplychains,physicalsystemsandplanningchoices.168

Challenges to overcome

Althoughtheimportanceofresilienceisclear,thereareoftenmarketfailuresormissingmarketsforresiliencemeasureswhichcanmakethemhardertofund.

Forexample,resilienceinfrastructuresuchasfloodriskmanagementisapublicgoodandsuffersfroma‘free-rider’problemwherepeoplehavecometorelyontax-fundedfloodriskmanagementbyGovernment.Thisrelationship,coupledwithlowpublicawareness,hasnegativelyimpactedthe

168 NickMabeyandTaylorDimsdale,E3G(2016)Faster,Smarter,Safer,Cleaner:MakingBritain’sInfrastructureSystemsfitforthefuturehttps://www.e3g.org/library/making-britains-infrastructure-systems-fit-for-the-future

Government and Environment Agency Investment in flood defences

2015-20212010-2015

£2.6billion

Homes 250,000 300,000

28,000Commercial Properties

800,000

1,500 further flood

defence projects

£1.7billion

Acres of agricultural landICON

FIGURE 9. Governance arrangements for flood and coastal risk management in EnglandSource: EnvironmentAgency

Accelerating Green Finance

76

Page 79: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

demandforresiliencemeasures.169 This is an issue forhouseholdsbutalsoforbusinesses.

Recommendations

RECOMMENDATION29Government should establish a national resilience unit to coordinate and champion climate resilience and ensure Government investment is ‘future proofed’ to climate change

There is a need for greater coordination among publicagencies–andarealopportunityforgreater leadership from the heart of Government to deliver investment that supports resilience andboostingtheUK’sresilience.Currentlyresponsibilityforclimateresilienceisspreadacross multiple Government departments and agencies,withaccountabilityrestingwithdifferentpolicyowners.TheseincludeDefra,BEIS,theEnvironmentAgency,theNationalInfrastructureCommission,theAdaptationSubCommitteeandtheCabinetOfficethroughthesectorresilienceplansandthenationalriskregister.

Bettercoordinationandcollaborationwillensurethat decisions are consistent and proportionate tothelikelylevelofclimateriskandthatinterdependenciesbetweenriskownersareunderstoodandactedupon.Toachievethisanewnationalresilienceunitcouldbeestablished,andcoordinatewithCabinetOfficetoprovidestrongercross-GovernmentalleadershipandbuildingthelinksmorecloselywiththeCivilContingenciesSecretariat. This in turn would provide clarity to the private sector of responsibilities and market opportunities for innovation around resilience. In delivering this recommendation,

169 Theneedtoincentiviseadoptionoffloodresiliencemeasuresisnotnew.Anumberofschemeshaveattemptedtoinfluencehouseholddecisionsinthisarea,suchastheHouseholdFloodResilienceGrantSchemeandtheCommunitiesandBusinessRecoveryScheme.However,despitesignificantrecentandhistoricactioninthisarea,householdshavenotalwaysshownwillingnesstotakeupmeasurestoprotecttheirhomes.

Government should decide where such a unit would best sit in Government so that it has maximum leverage across Departments, delivery agencies, and private and public sector investments.’

Thenationalresilienceunitshould:

o Coordinateandalignexistingpublicbodiestoensureproperownershipandcoverageofclimaterisk;

o commissionworktoinformwhatlevelofpossibleclimatechangeshouldbeassumedfordifferentplanningpurposes;

o requiredepartmentsandtheiragenciestointegrate resilience planning into all their policies, programmes and investment decisions;

o provideguidancetoenablebusinessestomakeresilientinvestmentdecisions

o workwiththefinanceandinvestmentcommunity to promote greater understanding, integration and disclosure of climateriskandresilience;and

o assess the overall resilience performance of UK infrastructure, ensuring resilience isbuiltinfromthedesignandinvestmentphase.

Itshouldalsolookbeyondfloodriskandinfrastructuretoconsiderthewiderrangeofissuesidentifiedbythe2017statutoryreportbytheCommitteeonClimateChangetoParliamentincludingriskstothenaturalenvironment,includingtosoilsandbiodiversity,andriskstohumanhealthandwellbeingfromhighertemperatures.

The national resilience unit willhelpdeliveron theaspirationsofthe25YearEnvironmentPlan tosetstandardsfornewbuildhomesthatwillreducedemandsforwater,energyandmaterialresources,whileimprovingfloodresilience.Resilientbuildingsandinfrastructurewillmorereadily adapt to a changing climate and reduce theriskofharmtopeople,theenvironmentandtheeconomyfromnaturalhazardsincludingflooding,droughtandcoastalerosion.The

A report to Government by the Green Finance Taskforce

77

Page 80: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

nationalresilienceunitshouldalsoembedconsideration of the use of natural processes to boostresilienceandachievemultiplebenefits.170

RECOMMENDATION30Government should publish an action plan to develop the resilience market

Themarketforresilienceproductsandservicesisunder-developed,withfewincentivesforendusers,betheybusinesses,publicbodiesorhomeowners.AsnotedinTheme 8onbuildinga green and resilient infrastructure pipeline, a dedicatedNationalInfrastructureAssessmentworkingsubgroupcouldfocusspecificallyon the role of standards in incentivising greater up-takeofproductsandservicesrelatingto‘greenretrofitting’ofhomesandcommercialproperties.Thiswouldbeakeymeanstoimprovingresilience.

TheGovernment’smovetosponsorthePropertyFloodResilienceActionPlan,theoutputsoftheBonfieldreportonbuildingresilience,isastepforwardinencouragingpropertyownerstobecomemoreresilient.Thisbringstogetherthepublicandprivatesectortoaddresssomeofthekeyissuesandencourageinnovationthroughcollaboration.

Partoftheworkofthegroupandkeyoutputfor2018willbethedevelopmentofaCodeofPractice.Thiswillbeasetofstandardsforthepreparation,responseandrecoveryoffloodedproperties.Byadoptingthiscode,andthereforeaconsistentsetofstandardswewillstarttoseeresiliencebeingconsiderednormalpracticeacrossretrofitandnewbuild.

170 EnvironmentAgency(2017)Naturalfloodmanagement–partofthenation’sfloodresiliencehttps://www.gov.uk/government/news/natural-flood-management-part-of-the-nations-flood-resilience

Thiswillbeachievedthrough:o Promotingresearchanddevelopment

–andworkingwiththenewCentrefor ClimateRiskAnalytics;

o attracting innovation and start-ups in the fieldofresilienceproductsandservices;and

o developingresiliencestandardsfornewhomes,andcoordinatingwiththeNationalInfrastructureAssessmentworkingsub- grouponstandards.

Theactionplanshouldincludeafocusonhowgeneratenewresearch,developmentanddeploymentopportunitiesforbusinesses,inlinewiththeaimssetoutintheCleanGrowthandIndustrialStrategy commitment to aiming for resilience as a general principle of the UK’s infrastructure systems andthewiderenvironmentswithinwhichtheyoperate.

ThisinturnwouldreinforcetheUK’scommitmenttomovingtowardsamorecirculareconomyaswellasraisingproductivitybyusingresourcesmoreefficiently,increasingresiliencebycontributingtoa healthier environment, and supporting long-term growthbyregeneratingournaturalcapital.

Increased private sector investment into protecting andenhancingnaturalcapitalwillalsobecrucialtoimprovingourresilience.Furtherconsiderationshouldbegiventohowpublic-privateinvestmentsinnaturalassetscanenhancetheabilityofthenaturalenvironmenttocontributetoUKresilience.Tothisend,the25YearEnvironmentPlancommitstoexploringthepotentialforablendednaturalenvironmentimpactfund.

Accelerating Green Finance

78

Page 81: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Achieving impact

Climatechangeisexpectedtoincreasetherisksfromextremeweathersuchasflooding,heatanddroughtintheUK.171AccordingtotheCommitteeonClimateChange,10-35%ofinfrastructuredisruptionsintheUKarealreadycausedbyextremeweatherevents.172 Under current climate trendsthe“500year”heatwavein2003,whichbuckledrailwaytracksandcauseddroughtrestrictions,willlikelyhappeneveryotheryearby2050.173Resilienceisanimperativenota‘nicetohave’benefit.Overall,thepackagewouldboosthelpboostthepipelineofresilienceandgreeninfrastructureopportunitiespromoteamarketforresilience products and services and deliver clear economicbenefitintheformofavoidedlosses.

171 MetOffice,commissionedbyOfwat(2010)ChangesintheFrequencyofExtremeRainfallEventsforSelectedTownsandCitieshttps://www.ofwat.gov.uk/wp-content/uploads/2015/11/rpt_com_met_rainfall.pdf

172 CommitteeonClimateChange(2015)Reducingemissionsandpreparingforclimatechange:2015progressreporttoParliamenthttps://www.theccc.org.uk/publication/reducing-emissions-and-preparing-for-climate-change-2015-progress-report-to-parliament/

173 MetOffice(2015)TheHeatwaveof2003https://www.metoffice.gov.uk/learning/learn-about-the-weather/weather-phenomena/case-studies/heatwave

A report to Government by the Green Finance Taskforce

79

Page 82: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

3.More ambitious reforms for the future

Accelerating Green Finance

80

Page 83: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

TheGreenFinanceTaskforceincludedseniorleadersfromthefinancesectorwhoworkedtodesignhighimpactreformsongreenfinance.ManyofthereformsrecommendedbytheGreenFinanceTaskforceinvolvedclearactionsforGovernment,regulatorsandindustrythatcouldbeimplementedinatimelyandrelevantway.Theserecommendations constitute the earlier part of thisreport.

Inaddition,theGreenFinanceTaskforceidentifiedpotentialreformsthatrequirefurtherdevelopmentorforwhichtheexactnatureofimplementationwillinpartbedeterminedbyongoingnegotiationsoverthetradingrelationshipbetweentheUKandEUafterBrexit.Taskforcemembersdonotbelievethattherecommendationsthatfollowinthissection are less important than those that precede it,butrecognisethateitheradditionalworkorgreaterclarityontheUK’sfuturerelationshipwiththeEUareneededbeforetheycanberesolved.

1. Provide further incentives for sterling issuers of green securities

2. Go beyond TCFD with Sustainability-related Disclosures

3. Increase allocations into illiquid asset classes to facilitate long term investments

4. Addressing barriers to sustainable investment

5. Consider how the prudential regime for banks and insurers might better reflect the different financial risks associated with ‘green’ and ‘brown’ assets

A report to Government by the Green Finance Taskforce

81

Page 84: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

1. Provide further incentives for sterling issuers of green securities

CurrentlyStateAidrulesprecludetheGovernment’sabilitytoprovidesuchincentives.However,BrexitpotentiallyopensupnewopportunitieswhichcouldbeexploreddependingonthenatureofthefinaldealbetweentheUKandtheEU.

Whiletherehasbeenhealthygrowthofthegreenbondmarketinthelastfewyears,the level of sterlingissuanceremainsverylow.Nogreenbondswereissuedinsterlingin2016.Besidesissuingasovereigngreenbondorbonds,theGreenFinanceTaskforcerecommendsthattheGovernmenttakesfurtherstepstoencourageUKissuers.Severaloptionsaresetouthere.

Option one - remove tax barriers

IssuersshouldbeincentivisedtoissueingreenformatbytheremovalofanytaxorotherbarriersOtherincentivessuchasfast-tracklistingshouldbeactivelyconsidered,especiallyformaidenissuances.

There are several types of tax incentives policy makerscanputinplacetosupportgreenbondissuance.Theincentivescanbeprovidedeither totheinvestorortotheissuer:

o Taxcreditbonds:bondinvestorsreceivetaxcredits instead of interest payments, so issuers donothavetopayinterestontheirgreenbondissuances.Anexampleofthisintheareaofclean energy is the US federal Government’s CleanRenewableEnergyBonds(CREBs)andQualifiedEnergyConservationBonds(QECBs)programme.Theprogrammeallowsfortheissuanceoftaxablebondsbymunicipalitiesfor the purposes of clean energy and energy conservation,where70%ofthecouponfromthemunicipalisprovidedbyataxcreditorsubsidytothebondholderfromthefederalGovernment;

o directsubsidybonds:bondissuersreceivecashrebatesfromtheGovernmenttosubsidizetheirnetinterestpayments. ThisstructureisalsousedbytheUS federalGovernmentCleanRenewableEnergyBonds(CREBs)andQualifiedEnergyConservationBonds(QECBs)programme;and

o tax-exemptbonds:bondinvestorsdonot have to pay income tax on interest from the greenbondstheyhold(soissuercanget lowerinterestrate).Thistypeoftaxincentive istypicallyappliedtomunicipalbondsinthe USmarket.Inthegreenbondspacespecifically,anexampletohighlightistax-exemptbondissuanceforfinancingofwindprojectsinBrazil.

Option two - grants for first time issuers

Grantsfortheverificationprocessofgreenbonds,whicharealreadybeingofferedinotherfixedincomemarketssuchasSingaporeshouldbeintroducedforsmallerissuers.In2017,theMonetaryAuthorityofSingaporeannouncedanewgrantscheme,allowingqualifyingissuerstooffset100%oftheexpensesattributabletogettinganexternalreviewforgreenbonds,withacapofUS$100,000pertransaction.

SomeofthesesuggestionswillbesubjecttoStateAidrulescurrently.DependingonthenatureoftheUK’sfuturetradingrelationshipwiththeEU,thesebarrierscouldberemovedenablingtheirimplementation.

Accelerating Green Finance

82

Page 85: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

2. Go beyond TCFD with Sustainability-related Disclosures

Asalong-termtarget,andbasedonsuitableinternalcapacitybeingmadeavailable,theUKcouldconsiderestablishinga new and voluntary UK Sustainability-related Disclosures framework, introducing additional elements that werebeyondthescopeofTCFDprocess.ThiscouldbuildontheworkoftheGreenFinanceInitiative’sWorkingGrouponData,Disclosure,andRisk.TheSustainability-relatedDisclosuresframeworkcouldinclude:anewframeworkformeasuring and reporting on impacts related to climate change, the environment and the SustainableDevelopmentGoals(SDGs);clarifyingreporting processes and standards for disclosing green revenues, asset-level data and committed emissions;andsettingoutrequirementsforknowledgeandtraining,amongotherthings.

Withtherequisitesupportfromfinancialregulators,thiscanbeachievedwithoutadditionallegislation.TheGFI,togetherwithrelevantregulators and Government departments, can beginaninclusiveprocessinvolvingkeyprivatesectorstakeholders,togenerateguidelinesonsustainabledisclosure.ThiscouldsignificantlyreducetheburdenonfinancialregulatorsandtheUKGovernmentassociatedwithpreparingnewguidanceinashortperiodoftime.SimilartoguidelinesonTCFD,theseshouldalsobereviewedaftertwoyears.OncetheTCFDframeworkiswellestablished,Sustainability-relatedDisclosuresrecommendationsshouldalsobeproperlyintegrated into the UK corporate governance andreportingframework.

Sustainability-relatedDisclosuresshouldincludedisclosure of green revenues.Thereareinformationasymmetriesinthemarketongreencorporateactivitiesandinvestmentopportunities.Increasing allocations of corporate capital to green assetswillbeencouragedbyclearerinformationinthemarketongreenrevenues.

GreenrevenuestreamscouldbeeasilyidentifiediftheUKandtheEUdevelopgreentaxonomies.Buildingonthis,companiesshouldbeencouragedtoconsiderwhichcommercialservicesorproductstheyofferprovideenvironmentalsolutions,intheirdisclosures.Theyshouldsetouttherationaleandevidenceofwhyspecificproductshaveanenvironmentalutility.Thiskindofdisclosurecouldclarifyforinvestorswhetherthereisafinancialadvantageofinvestingin‘green’ratherthan‘business-as-usual’streams.

174

175

176

174 Anexampleofthismaybedirectlyheldrealestateorinfrastructureassetswhichrequirelock-inperiods.Theseareprojectswithlongtimehorizons,varyingmarketvalueandanyinvestmentsthatcannotbeboughtorsoldasquicklyoreasilybetweeninvestors,orpricedasaccuratelyatanygiventime,asliquidassets.

175 Forexample,theLawCommissionstudyonsocialimpactinvesting,Treasurypatientcapitalreview,socialimpactinvestingtaskforce.

176 ThePensionsRegulatorGuidance:“Mostmemberswillnothaveaneedforimmediateliquidityoftheirinvestments,anditmaynotalwaysbebeneficialfordealingtobecarriedoutdaily.Youshouldthinkaboutthelevelofliquiditythatyourmembersneed,e.g.inrelationtolikelytransfersfromthefund,andinthatcontext,considertheliquidityconstraintsoncertainfundstructures.Youshouldseektobalancetheliquidityofassetsagainsttheinvestmentobjectives.Holdingtoohighaproportionofliquidassetsmayimpactthelevelofinvestment return, and limit opportunity for diversifying your portfolioofassets.”http://www.thepensionsregulator.gov.uk/trustees/investment-management-in-your-dc-scheme.aspx

A report to Government by the Green Finance Taskforce

83

Page 86: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

3. Increase allocations into illiquid asset classes to facilitate long term investments

Theperceivednormfordefinedcontributionfundsistoinvestinassetswhichcanbeliquidateddaily.ThispresentsabarriertoinvestmentinilliquidassetclassesthatmayotherwisecontributetotheobjectivesofUKgreenfinanceandtheCleanGrowthStrategy. Dailypricingisusedtoallowinvestors to transfer in and out of funds at any time,usingup-to-datevaluationsforthoseassets.Becauseilliquidassetscannotalwaysbeaccuratelyvaluedatanygiventime,definedcontributionschemesintheUK(andtheirmembers)aregenerallynotabletoinvestinilliquidassets.171

ThisissuehasbeennotedbyvariousindustryandGovernmentreviews172andinNovember2017,theGovernmentestablishedaninvestorworkinggrouptoinvestigatebarriers,includingliquidityconstraints,whichpreventdefinedcontributionschemesinvestinginpatientcapital.

ToaddressthisbarrierTPRandtheFCAshouldclarifyandbetterpromoteexistingguidancefordefinedcontributionpensionassetswhichstatesthatdailydealingisnotrequiredunderregulation,andwhichencouragesbetterbalancingofliquidityandmemberinvestmentobjectives.173Thiswouldhelptoremoveperceivedbarrierstomakingallocationstoilliquidinvestmentsinthedefaultoptionthatlimitspensionfundinvestmentpractice.

Further,theFCAshouldissueguidanceonthenecessary minimum standards of practice in relation to pricing fund assets to fairly value investmentpotsonentrytoandexitfromafund.Theguidanceshouldclarifyareasofreasonableflexibilitythatpensionfundscanapplytoenablethemtoinvestinilliquidassets,butstillhavefairassetpricesreflectedinfundvaluation.Thismayincludeguidanceonhowandwhenfundsshouldbepricedi.e.offeringanexactversusestimatedfundpriceandidentifyingcriticaltimeswhenanexactfundpriceisneeded(onentryandexit).

Accelerating Green Finance

84

Page 87: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

4. Addressing barriers to sustainable investment

Industry, Government, and the UK prudential regulators,thePRAandwhereappropriatetheFCA,shouldworktoidentifyanyunnecessaryregulatoryandpracticalbarriersthatpreventordelaysustainableinvestmentswithaviewtoremovingthemtoeffectivelymanagethetransitiontoamoresustainablefinancialsystemwithreducedlong-termrisk.

WherethisisconsistentwiththeRegulators’statutoryobjectivesandwithintheirpowerunderregulatory regimes including Solvency II, the Regulators’approachshouldcombine:

o Applyingdiscretiontoreviewcapital treatmentofsustainableinfrastructureinvestmentand,wherenecessary,to facilitatefasterinvestmentdecisions;and

o Whereexistingsupervisorypracticeorregulationprevents,delaysormakessuchinvestmentsinaccessibletoUKinstitutions,workingwiththoseinstitutionsandGovernmenttoamendthesupervisorypracticeorregulation.

5. Consider how the prudential regime for banks and insurers might better reflect the different financial risks associated with ‘green’ and ‘brown’ assets

InlinewiththerecommendationsoftheEU’sHighLevelExpertGrouponSustainableFinance,theGreenFinanceInitiativeshouldbetaskedbyGovernmenttoconveneacross-sectorworkinggroupmadeupofrepresentativesoffinancialinstitutions, regulators and civil society and academic experts to investigate the extent to whichthereisevidencethatsupportsafinancialriskdifferentialbetween‘green’and‘brown’assets.Inthelightofthatevidence,thePRAshouldconsiderhowthismightbereflectedintheprudentialframework.Giventheneedforsuchassetstobecorrectlyandconsistentlyidentified,thisworkshouldalsoincludestayingclosetointernational initiatives relating to the development ofagreentaxonomyandconsideringhowthiscouldbebestappliedinaUKcontext.

A report to Government by the Green Finance Taskforce

85

Page 88: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

4. Next steps

Accelerating Green Finance

86

Page 89: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

InSeptember2017,theGreenFinanceTaskforcewasgivensixmonthstocomeupwithasetof proposals to inform and advance policy developmentongreenfinanceintheUK.

TheTaskforcewasaskedtoaddressthefollowingaims:tohelpdelivertheinvestmentneededto meet the UK’s Industrial Strategy and Clean GrowthStrategy;tofurtherconsolidatetheUK’sleadershipinfinancinginternationalcleaninvestment;andtomaximisetheopportunitiesforUKbusinessesinthisrapidlygrowingarea.TheGreenFinanceTaskforcealsoexpandeditsfocusto examine opportunities to support investment towardstheGovernment’s25-YearEnvironmentPlan,followingitspublicationinJanuary2018.

Upto10ambitiousandpracticalpolicyrecommendationswererequested.Asthisreportsetsout,rapidlyexpandinggreenfinanceintheUKwillrequiremultiplemarket,economicandinstitutionalreforms.Therecommendationshavebeencapturedunder10themes,withfurtherstretchrecommendationstobeconsidered.TheGreenFinanceTaskforcehasalsosuggestedasetofresearchtaskstostrengthentheanalyticalunderpinning to the recommendations made, set outinAnnex2.

Mostoftherecommendationsputforwardprovideactionsthatcanbedeliveredinarelativelyshorttimescaleofonetotwoyears.Theyhavebeenagreed as part of an ongoing iterative process betweenGreenFinanceTaskforceMembers.EmergingfindingswerepresentedinmeetingswithMinisterstoincorporateearlyfeedbackpriortodraftingthefinalreport.

Assuchthisreportrepresentsthefirststageofanongoingcooperationbetweentheprivatesector, the UK Government and academia that couldusefullybeextendedtoincludeothercivilsocietyexperts.TheGreenFinanceTaskforcelooksforwardtofurtherdiscussionontheimplementationoftheserecommendations.

87

A report to Government by the Green Finance Taskforce

Page 90: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Annex

Accelerating Green Finance

88

Page 91: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Annex 1. Members of the Green Finance Taskforce

Sir Roger Gifford (Chair), Representing the GreenFinanceInitiative

Dr Ben Caldecott,FoundingDirector,OxfordSustainableFinanceProgramme,Universityof Oxford Smith School of Enterprise and the Environment

Bruce Davis,Co-Founder,Abundance

Rowan Douglas, Chair and CEO of Capital Science&PolicyPractice,WillisTowersWatson

Dr Paul Fisher,SeniorAssociate,UniversityofCambridgeInstituteforSustainabilityLeadership

Emma Howard Boyd,Chair,EnvironmentAgency

Dr Daniel Klier, Group Head of Strategy and GlobalHeadofSustainableFinance,HSBC

Nick Molho,ExecutiveDirector,AldersgateGroup

Charlotte Morgan,Partner,GlobalEnergyandInfrastructureGroup,Linklaters

Edward Northam, Head of Green Investment Group, Europe

Nikhil Rathi,CEO,LondonStockExchange

Fiona Reynolds,ManagingDirector,PrinciplesforResponsibleInvestment

Dr Rhian-Mari Thomas,ManagingDirector,Barclays

Robert Trezona,Head,Cleantech,IPGroup

Dr Steve Waygood,ChiefResponsibleInvestmentOfficer,AvivaInvestors

Mark Zinkula,CEO,withMeryamOmi,HeadofSustainabilityandResponsibleInvestmentStrategy,LegalandGeneralInvestmentManagement

Observers

Bank of England

SecretariatTheSecretariatresponsibilitiesfortheGreenFinanceTaskforcewereundertakenbythreeorganisations:E3G,PRI&CityofLondon.

Ingrid Holmes,Director,E3G

Nathan Fabian,Director,UNPRI

Simon Horner,CityofLondon

Edward Baker,SeniorPolicyAdvisor,PRI

Jon Dennis,Researcher,E3G

Alyssa Heath,SeniorPolicyManager,PRI

Olivia Mooney,SeniorPolicyAnalyst,PRI

Dileimy Orozco,SeniorResearcher,E3G

George Triggs,PolicyAdvisor,E3G

Heather Wilson, Innovation Coordinator, CityofLondon

Carina Wu,PolicyAdvisor,CityofLondon

A report to Government by the Green Finance Taskforce

89

Page 92: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Acknowledgements

WegreatlyappreciateinputfromexpertmembersofalltheTaskforceworkinggroupsandthosethathavecontributedtothedraftingofthisreport,withparticularthanksto:

Jennifer Anderson,TPTandInstitutional Investors Group on Climate ChangePatrick Arber,AvivaSarah Barber, BarclaysTatiana Bosteels, Hermes Investment Management Zelda Bentham,AvivaMurray Birt,DeutscheAssetManagementAndy Bord,FloodReChris Botten,BetterBuildingsPartnershipLeanne Bouvet,CDPAidan Brady,UKMunicipalBondsAgencyplcPatrick Brown,BritishPropertyFederationBen Carr,AvivaDan Carson,FTSERussellEmanuela Cernoia Russo,TransportforLondonVictoria Clarke, HSBCTom Coleman,CDPDavid Cooke, ClientEarth Peter Cosmetatos,CREFCEuropeMatt Cullen,AssociationofBritishInsurersKajetan Czyz,CambridgeInstitutefor SustainabilityLeadershipOlivia Darby,WillisTowersWatsonJennie Donovan,EnvironmentAgencyMark Ellis-Jones,EnvironmentAgencyTony Fullbrook, BarclaysLaurence Fumagalli, Greencoat CapitalChristine Galeon, BarclaysMartina Garcia,LondonStockExchangeGroupAlice Garton, ClientEarthJonathan Gascoigne,WillisTowersWatsonChris Goode,LondonStockExchangeGroupPedro Guertler,E3GKirsty Hamilton, Chatham House David Harris,LondonStockExchangeGroupUrsula Hartenberger, RICSEmma Harvey, BarclaysTom Herbstein,CambridgeInstituteof SustainabilityLeadershipAndy Hodson,AnglianWater

Stephen Huller,BNPParibasDerek Ip,CityofLondonCorporationChristopher Kaminker, SEB Dermot Kehoe,FloodReJohn Kraus, RICSJustine Leigh-Bell, Climate Bonds InitiativeKate Levick,CDPSara Lovisolo,LondonStockExchangeGroupGreg Lowe,AonStephanie Maier,HSBCGlobalAssetManagementRichard Mattison, Trucost Graham Meeks, Green Investment GroupMaximilian Meyer, BarclaysJason Mitchell, Man Group Tom Murley,TwoLightsEnergyAdvisorsBen Murphy, IPGroupPauliina Murphy,AvivaMike Oliver, HSBCSimon Oswald,AvivaEce Ozdemiroglu, Committee on Climate Change,AdaptationSub-CommitteeElena Panomarenko,InternationalFinance Corporation Andrew Parry, Hermes Investment ManagementNicholas Pfaff, International Capital MarketAssociationBen Powell, SEB Matthew Pringle, SSEJuliàn Romero,BBVACarlos Sanchez,WillisTowersWatsonJohn Scott,ZurichMelanie Shanker, LinklatersLLPIan Simm,ImpaxAssetManagementAndrew Sissons,EnvironmentAgencyJonathan Sorrell, Man Group Daniel Stander, RMSJane Stevensen,CDPThomas Tayler,AvivaReza Taylor,LinklatersMark Thompson,HSBCUKPensionFundJessica Thorne,LondonStockExchangeGroupSerena Vento, Climate Bonds InitiativeThomas Verhagen,CambridgeInstitutefor SustainabilityLeadershipAndrew Voysey,CambridgeInstitutefor SustainabilityLeadership Faith Ward,BrunelPensionPartnershipEd Wells, HSBC

Accelerating Green Finance

90

Page 93: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Alex White,AldersgateGroupMichael Wilkins,Standard&Poor’sJeremy Wilson,Chair,BankingEnvironmentJon Wood, Guy CarpenterInitiative Working Group,CambridgeInstitute forSustainabilityLeadershipBenjamin Z Y Lu, HSBC

WethankRegulatorsandGovernmentofficialsthatprovidedimportantinsight,inparticular:

Kate Barbier, BEISDaniel Barwick,DEFRARuth Binny, BEISCatherine Bremner, BEIS Henry Carr, BEISAlex Craig, HMT Edward Denbee,BankofEnglandRhys Gordon-Jones, HMTDavid Farrar, DWPJosephine Ives,FinancialConductAuthorityCarsten Jung,BankofEnglandSamantha Kennedy, BEIS Sofie Kinsey,FCOAmanda Latham,ThePensionsRegulatorLucy Moran, BEIS Tom Mutton,BankofEnglandKathryn Newell, BEISIoannis Orfanos, BEISIan Paine, BEISLiz Parkes,EnvironmentAgencyGervase Poulden, BEISLeila Pourarkin, BEISLaura Royle,FinancialConductAuthorityMatthew Scott,BankofEnglandNathaniel Smith, BEISRaphaelle Vallet, BEIS Will Walker, BEISKaren Wood, BEIS

Wewouldalsoliketothankparticipantswhohavecontributedtheirtimeandviews,includingbutnotlimitedtothefollowingorganisations:AnglianWater,AllianzGlobalInvestors,BBCPensionTrustLtd,BBVA,Blackrock,ClimateBondsInitiative,GreencoatCapital,HSBCPensionScheme,InternationalCapitalMarketsAssociation(ICMA),InternationalFinanceCorporation(IFC),InstitutionalInvestorsGrouponClimateChange(IIGCC),ImpaxAssetManagement,JPMorganAssetManagement,RPMIRailpenLtd,SchrodersPlc,ShareAction,SSE,StateStreetGlobalAdvisorsLtd,StandardLifeAberdeen,ShellContributoryPensionFund,ThePensionsTrust(TPT),TransportforLondon,TwoLightsEnergyAdvisors,UKMunicipalBondsAgencyplc,VanguardEurope.

A report to Government by the Green Finance Taskforce

91

Page 94: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Disclaimer

1:Theroleofobservershasbeentoprovidetechnical assistance and support for the membersanddoesnotnecessarilyconstituteanendorsementfortherecommendations.

2:TheTaskforcereportincludesrecommendationsfromactorsworkingindifferentpartsofthefinancialsystemandwhilsteveryattempthasbeenmadetodevelopworkablerecommendationsusingdifferentperspectives,furtherworktoresolve the practical implementation of the recommendationswillbeneededinthe nextphase.

Green Finance Taskforce terms of reference

ObjectivesTheintentionwastoinformandadvancepolicydevelopmentongreenfinance,contributingtosetting direction of travel for long-term policy development.

Asaresult,theGovernmentestablishedtheGreenFinanceTaskforceinSeptember2017to:helpdelivertheinvestmentneededtomeettheUK’sIndustrialStrategyandCleanGrowthStrategy;furtherconsolidatetheUK’sleadershipinfinancinginternationalcleaninvestment;andmaximisetheopportunitiestobehadforUKbusinessesinthisrapidlygrowingarea.

The Taskforce was asked to present Government with a report that includes up to 10 ambitious and practical policy recommendations within six months on how Government can best support the finance sector in achieving the above objectives.

ThekeyunderlyingquestionsfortheTaskforcewereaskedtoconsiderwereasfollows:1. Whatistheinvestmentthatwillberequiredin

eachsector?2. Whatarethebarrierspreventingthis

investment?3. Whatistheroleofprivatefinancialmarketsin

acceleratingthisinvestment?4. HowcanGovernmentsupporttheacceleration

ofthisinvestment?5. HowcanGovernmentenablebetterrisk

management?6. HowcanGovernmentsupportthe

development of particular products, for examplegreenmortgagesforowneroccupiersandthebuy-to-letmarket?

7. WhatisneededtostrengthentheUK’sinternational leadership position and ensure it capturesgreatestshareofglobalopportunitytofinanceCleanGrowth?

Accelerating Green Finance

92

Page 95: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

TASKFORCE WORKSTREAMS

VentureCapital

Retail Finance

Project & Commercial

FinanceCapital

MarketsInstitutional Investment Insurance

CROSS- CUTTING ISSUES - Taskforce on Climate-related Financial Disclosures’ implementation:

enablingfinancialflowsthroughdataanddisclosure- Place agenda:connectingsmall-scale,localprojectstosourcesoffinance- International agenda:cementingtheUK’sgloballeadershipingreenfinance- Resilience:ensuringUKisresilienttotheeffectsofachangingclimate*

*thisthemewasintroducedpartwaythroughtheprocesstoconnectthediscussions relatingtoresiliencethatwereoccurringacrossmultiplesubworkstreams.

HandlingAnyrecommendationfromthisGreenFinanceTaskforcearetobeconsideredandimplementedattheGovernment’sdiscretion.

ProcessTheGreenFinanceTaskforcewassetupthroughsubworkstreamsencompassingthefullsuiteoffinancingoptionsassetoutinthetablebelow.TheTaskforcewereinitiallyaskedtorefineandagreedraft recommendations, and then gathered input fromawiderangeofindustrypeersinsupportoftheseobjectives.

TheGreenFinanceTaskforcemetwithMinisterspriortofinaldraftingtopresentearlyfindingsandincorporateearlyfeedbackwhererelevant.

TheGreenFinanceTaskforcewasworkingtoveryshorttimelines.However,consultationswereheldacrossworkstreamastheydeveloped,withdifferentapproachesusedbydifferentworkstreamsrangingfromquestionnairestoroundtablesandbilateralmeetings.Inallmorethan300stakeholderswereconsultedduringthistimeperiod ranging from asset managers, consultants andinvestmentbanks,tocivilsocietyorganisations,tradeassociationsandlocalcouncils.

A report to Government by the Green Finance Taskforce

93

Page 96: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Annex 2Research proposals

Duringthedevelopmentofthisreport,severalareasofhighvalueresearchwereidentifiedbymembers.Thesearesetoutbelow.Inallcases,thedriverwasasensethatbenefitwouldbederived,intermsofbuildthecaseaswellasestablishingthecostandbenefitofpolicyaction.

Theadditionalresearchareasinclude:afocusonprovidingcertaintyaroundfunding,optionsandcostsoffiscalincentivestobothsupplyanddemandofgreeninfrastructure;howdatacanbemoreinformativeandbeusedtodrivethechange;andusinglimitedpublicresourcestocrowdinprivatefinance.Eachoftheseareasareassociatedwithachapterwithinthereport.

CHAPTER SECTION RESEARCH PROJECT FOCUS

CHAPTER 2 Theme 1: Relaunch UK green finance activities under a new unified brand

GreenFintechHub i. TheGFIWorkingGrouponData,DisclosureandRiskbeingchargedwithformulatingthefollowingfortheGreenFinanceHub:1)abusinessplan,2)adetailedbusinesscaseforHMGtoprovideco-funding,and3)findingsomeco-fundingfromfinancialinstitutionsandothers.Thequestionsthatwouldbebottomedoutinprocesswouldinclude: Whatexactlydoesitdoandhow?Wheredoesthefundingcomefrom?Whatdoesitsgovernancelooklike,andwhereisitbestpositionedinstitutionallytodeliver(isitCityofLondonCorporation,anewnon-profit,orbasedelsewhereinthelongerterm)?

CHAPTER 2 Theme 4: Drive demand and supply for green lending products

Literaturereviewofdigital passport and utilisingnewandexistingdata

i. Aliteraturereviewshouldbecommissionedconcerning:theestablishmentofaDigitalPassportforbuildings;datacollectionrelatedtoenergyefficiencyandconsumption;andpotentialforadigitalpassporttoassistindecarbonisingtheUK’scommercialandresidentialbuildingstock.Thiswouldprovideguidanceonhowtoutilisethedatathatisalreadyavailable. There are practical elements to this recommendations that needtobeexplored,including:mappingoutexistingdataresources/stakeholder,understandinglegalconstraintsof sharing collected data and technology needs for data collection(e.g.sensors,satellites),thelattershouldbeconstructedtobeflexibleandexpandable.

ii. Whatwouldthecostofatimeorvolume-limitedhelptobuy,100%grantorpartialguaranteeschemebetosupportthepumpprimingofthegreenmortgagemarkettohelphomesandbusinessestomeettheC-ratingEPCsetoutbytheCleanGrowthStrategyby2035?

iii. Howwouldabonus-malusstampdutyrating(higherenergyefficiencyperformanceattractslowerstampduty)affectdemandforretrofitimprovements?WhatwouldthecostbetoHMTreasuryandcoulditbedesignedtobefiscallyneutral?Howcouldatrialbedesignedtoassessefficacyandcostofsuchascheme?

Accelerating Green Finance

94

Page 97: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

CHAPTER 2 Theme 7: Issue a sovereign green bond

Incentives needed to scale up the green capitalmarket

iv. WhatarethebestformsofincentivesthatGovernmentshouldintroducetothecapitalmarket?Whataretheidealamountstobeofferedfromgovernmentandissuerperspective?Howwouldtheincentiveseffectbehavioursofissuerandinvestorbehaviour?Whatbetherisksofofferingincentives?

CHAPTER 2 Theme 8: Build a green and resilient infrastructure pipeline

AND

Theme 9: Foster inclusive prosperity by supporting local actors

Publicbankingcapacity TheUKisconsideringitsaccesstotheEIBwhich isamajorinvestorinUKinfrastructureinparticularandthelargestpublicinfrastructurelenderglobally.Therefore,animpactassessmentofthepossibleremovalofEIBfunding isnecessary.

CHAPTER 2 Theme 9: Foster inclusive prosperity by supporting local actors

ReformofthePublicWorksLoansBoard

i. ThePWLB–astatutorybodyoperatingwithintheUKDMO–hasbeenasourceofborrowingforlocalauthoritieswhichisoftenusedtofinancelocalinfrastructureprojects.ThroughthePWLB,localauthoritieshaveaccesstoverylow-costdebt(60basispointsabovegilts,whichareathistoricallylowlevels).Mostlocalinfrastructureprioritiesarefinancedthisway.However,thescaleoftheUK’sgreeninfrastructurerequirementsmeansprivatefinancewillhavetobethemain source of investment and opening local authorities to privatefinanceshouldbeaddressedasapriority.Therefore,thegovernmentshouldresearchhowtoreformPWLBsoitbecomesaresourceofhighvaluepublicriskcapitalandnotcheappublicdebt.Identifyingtheagenciesanddepartmentsthatneedtobeinvolvedwouldbeagoodstart.

ii. TheGovernmentshouldassesswhatimprovementscouldbemadetotheUKplanningprocess,inordertomakeiteasiertobuildcommunityenergyprojects.

iii. ResearchdynamicsofequitycrowdfundingmarketintheUK:dealstage,typesofcompany,quantaofinvestment;consultthecrowdfundingplatformsonhowtheymightrespondtotheproposedchange;evaluatetheimpactoftheproposedSEISboundarychangeintermsoflosttaxrevenue;developrobustdefinitionof“green”start-uptoavoidmisuseoftheincentive.

CHAPTER 3 Theme 1: Raising ambition further: additional recommendations

Theoptions/costofdifferentfiscalincentivesto promote green lendingbybanks

i. EffectofreducingStampDuty Reserve TaxandCapitalGainsTaxonallgreensecuritiesforfiveyearsongreenproductdevelopment.Assesscostof5bpsand10bpsforinstitutionalinvestorsand50and100bpsforretailinvestors(say50bps).Considertheoptionofadeclininglevelofsupportfor5-10years.

ii. Whatisthescopeforadjustingthebanklevytopromotethegrowthofgreenfinancialproductdevelopmentbybanks?

iii. Howcouldgreentaggingandagreensupportingfactorbeusedtoincentivisegreenfinancialproductdevelopmentbybanks?WhatdefinitionsandstandardswouldbeneededtoidentifyassetsforwhichaGreenSupportingFactorcouldbeconsidered.Isthereacaseforlowercapitalrequirementsforthoseassets?Whatwouldbetheriskstomakingthesechanges(e.g.concentrationrisk)?

CHAPTER SECTION RESEARCH PROJECT FOCUS

CHAPTER SECTION RESEARCH PROJECT FOCUS

CHAPTER 2 Theme 1: Relaunch UK green finance activities under a new unified brand

GreenFintechHub i. TheGFIWorkingGrouponData,DisclosureandRiskbeingchargedwithformulatingthefollowingfortheGreenFinanceHub:1)abusinessplan,2)adetailedbusinesscaseforHMGtoprovideco-funding,and3)findingsomeco-fundingfromfinancialinstitutionsandothers.Thequestionsthatwouldbebottomedoutinprocesswouldinclude: Whatexactlydoesitdoandhow?Wheredoesthefundingcomefrom?Whatdoesitsgovernancelooklike,andwhereisitbestpositionedinstitutionallytodeliver(isitCityofLondonCorporation,anewnon-profit,orbasedelsewhereinthelongerterm)?

CHAPTER 2 Theme 4: Drive demand and supply for green lending products

Literaturereviewofdigital passport and utilisingnewandexistingdata

i. Aliteraturereviewshouldbecommissionedconcerning:theestablishmentofaDigitalPassportforbuildings;datacollectionrelatedtoenergyefficiencyandconsumption;andpotentialforadigitalpassporttoassistindecarbonisingtheUK’scommercialandresidentialbuildingstock.Thiswouldprovideguidanceonhowtoutilisethedatathatisalreadyavailable. There are practical elements to this recommendations that needtobeexplored,including:mappingoutexistingdataresources/stakeholder,understandinglegalconstraintsof sharing collected data and technology needs for data collection(e.g.sensors,satellites),thelattershouldbeconstructedtobeflexibleandexpandable.

ii. Whatwouldthecostofatimeorvolume-limitedhelptobuy,100%grantorpartialguaranteeschemebetosupportthepumpprimingofthegreenmortgagemarkettohelphomesandbusinessestomeettheC-ratingEPCsetoutbytheCleanGrowthStrategyby2035?

iii. Howwouldabonus-malusstampdutyrating(higherenergyefficiencyperformanceattractslowerstampduty)affectdemandforretrofitimprovements?WhatwouldthecostbetoHMTreasuryandcoulditbedesignedtobefiscallyneutral?Howcouldatrialbedesignedtoassessefficacyandcostofsuchascheme?

A report to Government by the Green Finance Taskforce

95

Page 98: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

Accelerating Green Finance

96

Page 99: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across
Page 100: Accelerating green finance: a report by the Green Finance Taskforce · 2018-04-30 · Green Finance Taskforce members and Chairman, and the huge range of contributors from across

ACCELERATING GREEN FINANCE IN THE UK A report to Government by the Green Finance Taskforce