By Emmet McNamee (@inEmmetable), Senior Policy Analyst, PRI
Regulatory expectations for investors in the UK to take account of climate change in their investment approach are on the rise. Perhaps most significantly, the Pensions Bill would require large pension schemes to disclose their climate risk exposure and their governance approach to climate change. The FCA is also consulting on introducing requirements based on the Task Force for Climate-Related Financial Disclosures (TCFD) recommendations for certain listed companies, which should improve the quality of data for investors when assessing their own climate risk.
Such efforts to green the financial system are necessary to improve the alignment between markets and the government’s public policy agenda, notably its commitment to achieve net zero greenhouse gas emissions by 2050. As we approach COP26 next year, hosted by the UK, such efforts must intensify. The FCA has already indicated that greenwashing will be an issue increasingly in its crosshairs going forward. One possibility being considered is alignment with the EU Taxonomy, a measure for which many investors have expressed support.
It is clear, however, that a limit to the sustainability of the financial system is the sustainability of the assets that underpin it – in other words, the real economy.
The transition to net zero will see a wholesale transformation of many sectors of the UK economy, and the recent launch of the Race to Zero campaign shows that there is no shortage of private actors willing to step up. That being said, decisive and early action by policymakers is a prerequisite if the UK is to get on a net zero trajectory. This has global implications; the rest of the world is watching the COP26 hosts to see whether there is substance to its commitments. Domestic leadership by the UK can catalyse global ambition.
There have been signs of progress in 2020. The exclusion of onshore wind and solar from government subsidies was reversed. The ban on sales of diesel, petrol and hybrid vehicles is planned to be brought forward to 2035. Glimpses of a post-Brexit emissions trading system have been revealed.
Progress, to be sure, yet the pace of change is not nearly enough. The PRI has partnered with Vivid Economics to develop policy pathways to a net zero economy for several countries, starting with the UK. We have now published a briefing setting out the key actions needed in the UK which would be consistent with a green recovery from COVID-19, relying on the policy levers identified under the Inevitable Policy Response project. We have found four priority areas for action:
The acceleration of the sales ban is a good start, but we need more than a date. There needs to be a plan to ensure adequate numbers of people are switching to electric vehicles today; government should set targets to ensure a smooth transition. Given that electric vehicles won’t achieve price parity with traditional vehicles until later this decade, a combination of subsidies and grants are necessary to ensure consumers are incentivised to opt for electric vehicles as soon as possible.
Low-carbon capacity must be significantly increased. The 2030 government target for low-carbon power generation should be increased from 57% to 75-85%, with prioritisation given to cost-competitive forms of power generation. This would mean expanding the envelope for Contracts for Difference auctions to attain annual deployment targets of 1GW for onshore wind and 4GW for solar PV.
3: Land use
Government tree planting targets have been set and missed on more than one occasion. Afforestation of at least 30,000 hectares per year to 2050 is required to meet the UK’s net zero commitments. Rather than going it alone, the government should leverage private investment through the creation of a market mechanism which would guarantee a fixed payment at the start of the contract. These measures could increase forest cover from 13% to 17% of UK land.
4: Energy efficiency
The UK cannot meet its target for net zero emissions by 2050 without near-complete decarbonisation of the UK housing stock. It will need to set strict requirements for new buildings from 2025 via its Future Homes Standard, along with a package of policies to decarbonise existing buildings. In particular, a major green retrofit programme will be required nationwide.
The PRI will be engaging with policymakers on these issues over the coming months. But we must not act alone; it is time for investors to find their voices and communicate their unequivocal support for urgent climate action to policymakers. In our briefing we have identified key opportunities for investors to influence policy developments in this space, and have set up a collaboration group for investors to coordinate on this agenda.
The COVID-19 crisis has and will require an unprecedented level of public spending to support people and businesses across the country. With such spending comes opportunity; measures such as a nationwide retrofit programme can cut emissions, save consumers money and stimulate localised economic recoveries around the country. Responsible investment sometimes focuses excessively on the “win-wins” and avoids more difficult conversations around trade-offs; but done right, a green recovery can improve the prospects of both people and planet.
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