Financial sector’s progress on net zero risks stalling as Government sends mixed messages, MPs argue
29 November 2023
Progress made at COP26 with ambitious commitments to prioritise investment in low carbon industries and into protecting nature risk being undone through mixed messaging from the Government, the Environmental Audit Committee argues today.
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In its report on ‘The financial sector and the UK’s net zero transition’, the Committee states that the Government’s position to shift the onus of responsibility to the private sector, and rely on market mechanisms, does not go far enough. In 2021 alone, global banks provided financing for approximately $742 billion towards fossil fuels, and investment in fossil fuels continues to outpace significantly that of renewables. Continued leadership, and a robust framework, is required from the Government. There are concerns that relying on investor behaviour will not move the dial fast enough in terms of tackling the nature and climate crises.
During the inquiry, the Committee heard that the UK Government holds the position as being out in front of the peloton with other countries following its lead in terms of transition planning with some of the largest companies and financial institutions in the country. The Global Green Finance Index has also placed London as the leading green finance centre for the fourth year running in 2023. To maintain these positions, the Committee is calling on the Government to take forward a number of initiatives announced at COP26.
The Committee is concerned that the ‘comply or explain’ approach to mandatory transition plans by companies defeats the point of the policy, as a company could meet the requirements by simply disclosing that it does not have a plan. The Committee urges the Government to move towards making transition plans mandatory for companies while effectively monitoring and evaluating their effectiveness. It also recommends that the Government must phase in compulsory Taskforce on Nature related Financial Disclosures (TNFD) over the next three to five years. Following the recent Autumn Statement and speculation that the Government can progress with a Carbon Border Adjustment Mechanism, the Committee repeats earlier recommendations for this to be implemented as soon as possible.
The Committee is concerned that the ‘stop start’ approach of the Government maintaining its ambitions while delaying policy initiatives risks giving mixed messaging to the financial sector which could slow the net zero transition. Witnesses told the Committee that the same can be said of fossil fuels seemingly being prioritised in the name of energy security since Russia’s invasion of Ukraine. To keep the Government on track, the Committee is urging it to publish quarterly reports that highlight its move towards greater energy independence while staying on track to meet net zero. An independent body should also be tasked with tracking net zero and nature-related financial flows, as well as investment in high-carbon projects.
Environmental Audit Committee Chair, Rt Hon Philip Dunne MP, said:
“Globally, banks continue to pump trillions of dollars into fossil fuels, and simply put, we are not turning the dial fast enough to tackle the climate and nature crises. Enormous strides have been made in the last few years to champion a low carbon economy, but we’re at risk of this good work stalling through complacency.
“The UK should be proud of its long-held position in front of the peloton, with other governments following its lead. London is the number one financial centre for commitments to environmental improvements both directly in finance and across the wider economy.
“But this alone is not enough. At COP26, the Government made ambitious commitments to make even greater progress in embedding climate and nature into financial decision making. The Government should implement swiftly its initiatives on mandatory transition plans, a UK green taxonomy, and carbon leakage mitigation measures. Any delay is likely to send mixed messages to the financial sector that the UK is wavering on its ambitions, as set out at COP26, to become the first net zero-aligned financial centre. The Government must turbocharge its efforts once again in green finance: it is an enormous opportunity to shape the carbon financial markets of the future, yet the market alone cannot revolutionise in the way needed. The Government must not underestimate its own influence.”
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