Project Heather’s response to the Decarbonisation of the UK Economy and Green Finance inquiry
By Ilkka Saarinen
Following the launch of an inquiry into the decarbonisation of the UK economy and green finance by the UK Government’s Treasury committee , we at Project Heather gathered our thoughts to respond. Supporting the Government’s climate change commitments is critical to achieving systemic change in capital markets. Project Heather supports efforts made to enhance green finance and decarbonisation. Our full response can be read on our website here, and we’ve summarised it below.
Our response
Decarbonisation has become a mainstream socio-political issue with a target date of 2050 set for carbon neutrality. The team at Project Heather recognises that the UK can take the lead in reaching this goal. Achieving decarbonisation requires not only adherence to development, but also rigorous strategies to ensure that the transition can be as smooth as possible. However, pathways to decarbonisation create economic costs as well as societal and environmental benefits. For instance, decarbonised power and hydrogen production will cost about the same as a high-carbon power system in 2050.
But the economy enhancing benefits which surface through low-carbon industrial opportunities development outweigh the relative costs. Additionally, these technologies will carry cheaper life-time costs. Establishing a wind or solar plant in 2020 will have respective lifetime costs ranging around £50–70 megawatts per hour (Mwh) compared to £70/Mwh in a newly launched gas plant in the same year.
How does this relate to what we are doing? Well, financing the UK’s transition to decarbonisation requires significant growth of the Green Finance sector. UK environmental projects that capture carbon or social projects that enhance communities, and carry a feasible financial return to investors, are a chance for the UK to lead on decarbonisation.
Whether the UK currently holds competitive advantage in this space is debatable. On the one hand, the London Stock Exchange (LSE) is the highest ranking of all exchanges when it comes to Green Finance quality. On the other hand, numerous European cities all rank ahead of any UK city for depth of Green Finance.
With only two sterling denominated green bonds listed on the LSE between 2012–2016, the UK financial services could be doing more to aid in the transition. In order to match commitments and required improvements highlighted through the Committee on Climate Change (CCC), the UK needs to invest approximately £22 billion per year to meet its fifth carbon budget.
The UK government must boost investment into innovative low-carbon technologies and create opportunities for investors to contribute towards the Clean Growth Strategy. With energy and transport sectors requiring £255 billion and £134 billion of investment respectively over the next 15 years, mostly from private sources, UK financial services must construct a blended finance approach combining public and private markets.
To make this vision reality requires a paradigm shift in capital markets. Project Heather will facilitate Green Finance. Our exchange will require companies to produce impact reports communicating their efforts to deliver on a theory of change and intention to create positive impact. We strive to be forward-facing in our macroeconomic, social and regional policies.
Of course, there are barriers and risks surrounding in the complete delivery of green finance. Limited climate-related data, lack of regulation and market uncertainty hinder the uptake of green finance. Furthermore, climate change poses transitional risks to investors through stranded assets and physical risks demonstrated by the devastating effects posed by extreme weather events.
We first need to recognise these barriers and risks, before we can overcome them. Governments should champion new market structures, such as Project Heather, to support decarbonisation efforts. With investor demand for green bonds expected to reach US$1 trillion by 2020, capital markets need to be ready and able to meet it.
