Unleashing investment for a sustainable future

Chris Wilford, Head of Financial Services Policy, CBI

With the race on to reach net zero, the coming decade will require massive investment if we are to transition away from our reliance on fossil fuels and towards a low-carbon economy. Banks will be one of the key drivers of this transition, acting as the primary source of the investment needed to make net zero a reality. The scale on which many of the world’s banks operate means that they are uniquely placed to help businesses throughout all sectors and across the globe accelerate their transition to a net zero future.

The sustainable finance agenda continues to develop at pace, with increasing numbers of financial services companies and their clients using sustainable finance principles as a framework for investment decisions.

This is framed within wider expectations among the public and policymakers for businesses to be active in helping to meet societal challenges – from climate change to modern slavery – and creating a fair, safe and prosperous society as we build back from the pandemic. This is underpinned by range of environmental, social and governance (ESG) criteria.

Innovative new technologies such as big data, artificial intelligence (AI), mobile platforms, blockchain and the Internet of Things (IoT) are also enabling many banks to overcome some of the barriers that have previously prevented sustainable finance from being mobilized at scale.

This sustainable digital finance can enable emerging technologies to be deployed to analyze data, direct investments and create new enterprises in those parts of the economy supporting a transition to net zero.

Green Finance

Green finance is the provision of finance for investments that take into account environmental considerations. Yet while the urgency of climate change is clear, sustainable finance policy must be proportionate and effective in supporting a just, inclusive, and sustainable transition to a decarbonized economy.

To support this transition most effectively, the CBI made five recommendations in its Green Finance Paper.

Smarter regulation that provides long-term clarity to support the move to net zero. This should include a formal collaborative framework between government, regulators, financial services firms, and wider industry to ensure the business voice is heard in developing regulations that promote the use of green finance in a progressive and proportionate way.

More clarity on data and climate-related disclosures. Given the plethora of definitions and standards, policy-makers should work with regulators to ensure availability of data to inform firms’ climate-related disclosures and ensure common reporting standards. Recommendations made by the Taskforce for Climate-Related Financial Disclosure which form the basis of disclosure requirements for all firms across the UK are a good starting point, with government taking a phased approach.

A long-term approach to developing a usable taxonomy that keeps flexibility and dynamism at its core, meeting the different needs of different sectors across the whole economy to support a durable transition. A sustainable route map and system is required for developing the most effective framework.

Effective incentives to encourage industry to move towards green financing. Existing financial legislation should be examined to identify where incentives can be built in to encourage green finance. Banks have capital requirements that could be exchanged for green financing. There are many green taxation opportunities; for example, to incentive companies to move to green vehicle fleets.

Clarification of fiduciary duties in relation to climate-related risk. A clear definition would ensure that the relevance of green issues to investment decisions are considered in a systemic way as part of firms’ fiduciary duties. This will drive the green finance agenda at board level to ensure the necessary changes throughout industry.

The CBI has continued to build on these recommendations, exploring the social and governance aspects of the sustainable finance agenda alongside environmental considerations. It is notable that the CBI’s Sustainable Finance Discussion Paper has been our most downloaded report of the year and we are now working with members on a position paper. We are working with members to accelerate progress, helping to ensure access to a balance of green finance products, generating a resource of case studies of businesses which have been on the journey, as well as promoting understanding of green finance.

Sustainable Finance Agenda

The sustainable finance agenda is expansive, with different sectors and layers progressing at different speeds. The global climate change agreements at the United Nations Climate Change Conferences, with the latest COP26 in Glasgow this year, and the UN’s Sustainability Goals set the principles and direction for responsible investment that must be reflected at every level. That’s one reason why developing common reporting standards and incentives as quickly as possible is so crucial to operationalize and embed sustainable finance. This will replace the fragmented regulatory landscape, with a clearer set of regulatory incentives that expand access to sustainable finance and power the adoption of the technologies that will enable our transition to a net zero future.

While great progress has been made, there is significant work to do to ensure finance can be a lever for sustainable outcomes that deliver on UN and global climate change ambitions.