An ironic graffiti from Glasgow during COP26 read: “Cannae afford a carbon footprint”.
As energy prices and the cost of living soar this spring, there is a risk that consumers will be more worried about paying for the carbon footprint they already have, than about reducing it. Already last autumn, our own polling suggested consumer support in principle for decarbonisation fades away as the costs rise much beyond a solar panel or two, and while a record 300,000 electric vehicles are expected to be bought in the UK this year, that still leaves 32 million internal combustion engine cars on the road. Globally, energy and especially gas price volatility is driving emerging markets like China and India towards more, not less coal.
As a country or individual, you shouldn’t have to be rich to be green. A narrative where economic and environmental successes offset each other will never deliver success at scale, as it demands financial sacrifices which, even if they wanted to, most ordinary people can’t afford to make. Governments answerable to taxpayers know this. Carbon taxes are a good example: governments apply them sporadically under different names and at different prices – think of Vehicle Tax and Air Passenger Duty. They also know that a comprehensive, transparently-priced, and explicit Carbon Tax would work better, but they don’t know how to apply it and get re-elected.
Consumer support in principle for decarbonisation fades away as the costs rise much beyond a solar panel or two
This is where greener capitalism comes in. For the first time in Glasgow, business and finance were front and centre. Nogrowth ecological fundamentalists might not like it, but Mark Carney’s achievement in aligning $130 trillion to the slowing of global warming was a huge achievement. Just as important was the announcement that International Sustainability Reporting Standards (ISRS) will place climate reporting on a par with IFRS financial reporting and make sure greenwashing becomes as difficult and as consequential for a company as misstating its balance sheet.
Business has to lead on climate action. Governments relying on constrained taxpayers can’t foot the bill for climate change alone. There is a huge cost to climate change, but the global financial system boosted by all that quantitative easing contains more money than ever before; defined contribution and defined benefit pensions in the UK amount to around £3 trillion. The good news is that addressing climate change is not just the biggest challenge, but also the greatest investment opportunity of our lifetimes, and consumers can share in those returns.
Capitalism is driven by risk and reward – colloquially by fear and greed. The lesson of the increasingly mainstream environmental, social, and governance (ESG) investment framework is that ever more sophisticated climate risk management frameworks and metrics are influencing where capital is invested. Nobody wants to end up owning a stranded asset. This is, however, a debate with an important nuance. Achieving a just and effective climate transition requires investors to steward and support responsible companies on their journeys to net zero.
When it comes to research and development, we are great at the ‘R’ and poor at the ‘D’ – we need real focus on commercialising technology
Engagement – particularly ‘engagement with consequences’ – achieves better outcomes than knee-jerk disinvestment which can result in assets being owned by less environmentally responsible, more short-term players. Divesting is the polar opposite of stewardship, and examples are not hard to find.
Capital allocation frameworks are catching up – in part thanks to earlier government nudges, there is a healthy market for renewable power generation assets, and we have seen dramatic falls in the price of solar energy as markets have worked their magic. But there is more to do, and this is where our focus needs to be if we are to achieve not just ‘the greening of finance’ but also ‘the financing of green’, and hence better planetary outcomes. This requires government and business alignment: government’s role is setting policy and providing nudges, while the private sector can play to its strengths in delivery.
There are three broad areas where capitalism can, and should, step up – and each requires political nudges and a stable policy framework.
Firstly, identifying the right climate technologies to back, and where they need it, engaging them with government to make them investable. One prime candidate is nuclear, both large-scale replacements of the existing nuclear fleet and small nuclear plants of the sort being pioneered by RollsRoyce. Renewable generation is relatively straightforwardly financeable and the issue of intermittency is one which nuclear could solve. Safety arguments are proven, but politics gets in the way, driving climatically perverse outcomes, particularly notably in Germany – this is difficult for investors.
For the UK, with its outstanding universities and science, developing new climate-friendly technologies is a natural fit. However, when it comes to research and development, we are great at the ‘R’ and poor at the ‘D’ – we need real focus on commercialising technology and scaling it up, especially outside the ‘Golden Triangle’ of Oxford, Cambridge, and London. University spin-outs are generally sub-scale, VC is too concentrated in the South East, and regulation gets in the way of investing more institutional money in venture capital. These problems need to be addressed.
Secondly, the innovative strengths of capitalism, in particular in the UK, have to be harnessed in the interests of global climate transition. The City of London played a pioneering role in the Eurobond market 50 years ago, and the same qualities need to emerge to provide leadership in the green finance space. Investment managers looking to decarbonise portfolios need to look to London for their ‘how to’ guide, and our skills in structuring project finance, our legal system, and regulatory systems should make us the natural centre for structuring deals to finance green projects and insurance against catastrophic climate risks in emerging markets.
We can go further though. Most commentators believe that achieving net zero will require not just cutting carbon emissions to address flow, but also using both technological and nature-based solutions to sequester carbon to reduce stock of carbon dioxide. This will become increasingly important in the second half of the transition as residual emissions from hard-to-abate sectors become increasingly difficult to cut.
This explains the pivot to nature and deforestation at COP26 and is closely related to the issue of carbon trading and offsets. The UK can lead on carbon capture and storage under the North Sea, on developing viable financing mechanisms for natural solutions like peat bogs, mangrove swamps, and kelp farms, and in developing a respectable, regulated, and verifiable market in offsetting, based in London. The last of these could be the 21st Century’s equivalent of the City’s London Metal Exchange.
Tackling climate change has huge attractions, including the potential to earn good returns while helping deliver levelling up and regional growth
Thirdly, capitalism must work with government to support consumer engagement in climate, in such a way that all benefit economically as well as environmentally. Business finances electric vehicle charging systems, but investment is underpinned by the existence of a hard expiry date for new petrol and diesel cars. Investment in heat pumps is similarly backed up by deadlines for new gas boiler installation. The confidence that a market will exist in both cases makes it reasonable to expect that costs will come down as technology improves and production scales up, as it has for photovoltaic panels.
Housing retrofit is much more difficult than cars or new-build homes, but it is hugely important. Warming our homes contributes 20-25% of emissions – and most of the homes we will be living in by net zero 2050 have already been built. The Green Deal and other policy initiatives to date have not been effective: there are no nudges to tie the value of a home to its environmental performance, so large capital expenditures are linked to very long paybacks which are of limited practical use and are avoided by most home-owners. A radical solution would be to extend the nudge: tools could include differential rates of Council Tax, or given housing is taxed when it changes hands, in Stamp Duty or Inheritance Tax. These could turn it to the homeowner’s advantage to take the right steps, environmentally: a nudge which is more carrot than stick, prompting the creation of a retrofitting industry.
The ‘Can’t afford Green’ meme will grow in volume over the next few months, but as an investment theme, tackling climate change has huge attractions, including the potential to earn good returns while helping deliver levelling up and regional growth.
Capitalists are good at articulating an investment case – they need to keep doing so around climate and its ability to benefit all parts of the UK as well as investors, companies they invest in, their customers, and employees.
John Godfrey is the Corporate Affairs Director at Legal & General and former Director of the Number 10 Policy Unit. This article first appeared in our Centre Write magazine Favourable climate? Views expressed in this article are those of the author, not necessarily those of Bright Blue. [Image: Pixabay]
