Published by social enterprise and think tank New Financial, the report estimates claims that the value of green finance in Europe increased by 97% in 2021 compared to 2020 levels, reaching €311 billion. It concludes that government issuance has tripled, with several countries issuing sovereign green bonds as part of their Covid-19 recovery plans. Meanwhile, activity in the private sector doubled year-on-year.
In terms of the private sector, the report concludes that companies whose core activities include tackling climate change, such as renewable energy developers, have collectively raised around €100 billion over the past five years. Another €400 billion was raised during this period by other businesses for “green” purposes.
These headlines are promising, but New Financial has caution. The report reiterates the Intergovernmental Panel on Climate Change’s (IPCC) estimate that annual global green investment will need to be €1 trillion each year by 2050 if humanity is to have the best chance of limiting global temperature increases to 1 ,5C.
Turning specifically to Europe, the report notes that green finance will account for just 12% of all capital markets activity across the continent in 2021, despite a large increase. This means that much of the other activity is in support of activities that will worsen climate change. New Financial estimates that for every euro raised by companies whose primary business involves tackling climate change, firms engaged in activities that make the problem worse collect €18. Sectors included in this category include oil and gas expansion and sectors that are major drivers of deforestation.
The report also notes growing concern about greenwashing. It notes that around half of the capital raised through green bonds in 2021 could be used to finance or refinance existing projects, which could limit their real-world impact on reducing emissions and improving mitigation. Also noted is the fact that only 40-50% of the green bond market can be classified as “dark green” or “active green” – the class with the greatest positive impact on the environment.
On all these key issues, the report states that the UK is lagging behind the EU. Green finance accounts for 6-7% of all capital markets activity in the UK in 2021, making penetration worse than in the EU. New Financial estimates that it will take the UK four years to reach the penetration position the EU is currently in.
At COP26, Chancellor Rishi Sunak announced plans to make the UK “the world’s first net-zero financial centre” and contribute to global efforts to “re-engineer the financial system for net-zero”. Measures taken to support this transition include the launch of a £16 billion sovereign green bond package and the launch of a net-zero transition plan mandate for large, high-emitting businesses from 2023.
Organizations including WWF, Aviva and the Aldersgate Group have warned recently that more political intervention is needed to realize Sunak’s vision. They are calling for strict requirements for net-zero transition plans and measures to stop public finances from being directed to projects that would certainly undermine the transition to net-zero, among other changes.
The Howard-Boyd Green Eye Warning
In related news, Environment Agency chair Emma Howard-Boyd is calling for action to reduce greenwashing in the financial sector. Notably, she is also interim chair of the Green Finance Institute (GFI) as a permanent replacement for the late Sir Roger Gifford is sought.
She appeared on BBC Radio 4 this morning (July 4) ahead of a speech at the UK Green Finance and Investment Centre’s annual forum. During that speech, she said that businesses are “embedding responsibility” and “retaining risk for their investors” by underestimating their climate risks and overestimating the actions they are taking to reduce emissions and build climate adaptation.
The UK actually moved to mandate climate risk disclosure for some large businesses in April and will expand the scope of the mandate in the coming years.
Howard-Boyd wants this to be followed up with a government review of the economics of climate resilience, which will quantify national risks and opportunities and identify how decisions made by government and the private sector can reduce risks. This could contribute to new climate adaptation standards and add new stress tests to the underlying solutions. Similar reviews have already been done on biodiversity and food systems.
The Bank of England’s first climate stress test concluded that UK banks and insurers would incur nearly £340bn worth of climate-related losses by 2050 without better mitigation and adaptation efforts. Separately, the GFI estimates that almost £650 billion of infrastructure investment by UK organizations planned to take place this decade will face “significant” climate risk.
As the government updates its approach, Howard-Boyd urges investors to demand more detailed information from the firms they support and for firms to disclose more information. These disclosures should also, she stressed, be used to inform strategy to avoid becoming a tick-box exercise.
She said: “The more businesses are transparent about their plans to move to net zero and prepare for climate shocks, the easier it is to compare best practice, set standards and praise companies that really deliver your commitments. As with the government’s ambition of net zero by 2050, ensuring climate resilience and nature restoration requires robust, consistent and reliable data.”
Howard-Boyd’s speech comes shortly after the Financial Conduct Authority said it would welcome being instructed by the government to provide tighter regulations for providers of ESG data and ratings to help tackle greenwashing.
Also last week, the Climate Change Committee’s (CCC) annual progress report to parliament warned that overall progress on reducing emissions and improving resilience was too weak. On resilience, it reminded ministers that “anticipated changes in the UK’s climate will lead to risks across all areas of the UK’s economy, society and environment” and that “adaptation action must be taken today, to prepare for these impacts and is essential alongside (but not instead of) efforts to reach net zero”.
Join the conversation during edie Green Finance Focus Week
Readers interested in ESG investing and net zero financing are encouraged to bookmark the upcoming issue of edie Green Finance Focus Week (July 18-22) in your diaries.
Throughout the week, edie’s editorial team will publish a range of articles, interviews, reports and more to inform and inspire readers to make sense of the ESG landscape and increase funding to accelerate the transition to a sustainable future. We will also be hosting a series of online inspiration sessions on the afternoon of Thursday, July 21, sponsored by Inspired Energy and featuring expert speakers from organizations including Natwest, Standard Chartered and the We Mean Business Coalition. Click here for details and to register.
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