Last year, the UK government committed to the goal of reaching net zero carbon emissions by 2050. This year, 2020, has opened our eyes as to how quickly the world as we know it can change, in what has been an unprecedented year due to the COVID-19 pandemic. The pandemic has revealed our vulnerabilities, exposing the reality of environmental risks associated with human impact. It has allowed us to observe the real power of the natural world to begin to mend itself during the periods of lockdown that we have experienced.

Looking ahead, to engineer an economic post-pandemic recovery, green finance is a key tool that could be used as an opportunity to help governments worldwide to achieve their environmental goals, while having a significant economic impact.

What is green finance?

Green finance is the financing of investments that seek to provide environmental benefits in the financial risks anticipated from climate change, to help maintain financial stability in the years to come.

Through green finance, lenders and investors are directing flows of finance into products, projects and businesses that are accelerating the way to a net zero carbon future.

Why is green finance important?

It has been highlighted that a rise in living standards, continued population growth, and climate change are putting extreme pressures on the world that we live in. There is a once-in-a-lifetime opportunity to change this, by producing and using resources within safe limits. Green finance is key to meeting this demand, both now and in the future, investing in a sustainable way to achieve green growth.

By funding and investing in sustainable practices and raising and investing capital into projects, products and companies that contribute to a low-carbon and climate-friendly economy, money can be saved through cost efficiencies, innovation and waste reduction.

What could we expect to see more of from lenders in particular, in the post-pandemic world?

To accelerate the growth of green finance, we could see a rise in, and focus on, the following:

  • Small business customers taking advantage of ‘green loans’, to fund sustainable projects and green energy.
  • Investment in environmental entrepreneurs, new start-up environmentally-focused companies and existing environmentally-friendly companies, with additional support provided to turn their innovative, sustainable ideas into a reality.
  • The building and development of product ranges, from both an investment banking and corporate banking perspective, to develop and push products such as; green innovation loans, green asset finance and green trade loans.
  • An active increase to the proportion of green finance across portfolios, with lenders investing in innovative solutions and ideas that accelerate the way to a net zero carbon future with investment and financing focusing on; sustainable transport, energy efficiency and renewable resources.
  • The celebration and recognition of clients who have made a real impact and contribution to environmental and social challenges associated with the low-carbon future goal.

What are the UK government doing to boost the growth of green finance going forward?

The chancellor, Rishi Sunak, has just announced that the UK government will issue its first sovereign green bond in 2021 (subject to market conditions) - debt securities issued by the government where the proceeds raised are used to finance projects with environmental benefits. The UK government then intends to follow up with a series of further issuances to meet growing demand from investors for such instrument as time goes on. The purpose of these bonds is to help finance projects that will help in the fight against climate change, finance infrastructure investment and create green jobs across the UK.

The chancellor also announced a number of other measures to work towards reaching the goal of a net zero future by 2050, which included:

  • The introduction of more robust environmental disclosure standards so that investors and businesses can better understand the material financial impacts of their exposure to climate change, price climate-related risks more accurately, and support the growth of the green economy in the UK.
  • The UK will become the first country in the world to make a task force on climate-related financial disclosures (TCFD) with disclosures fully mandatory across the UK economy by 2025, going beyond the ‘comply or explain’ approach. The rules from the new TCFD will cover a large proportion of the economy including; listed commercial companies, UK-registered large private companies, banks, building societies, insurance companies, UK-authorised asset managers, life insurers, FCA-regulated pension schemes and occupational pension schemes, with many of the rules coming into force by 2023.
  • The UK will also implement a ‘green taxonomy’ which is a framework for determining which activities can be defined as environmentally sustainable. This will improve understanding of the impact of firms’ activities and investments on the environment and support the drive to a sustainable economy. A UK Green Technical Advisory Group will be created to ensure the system is right for the UK market and the UK will join the International Platform on Sustainable Finance, to support the common international standards of taxonomies.

The aim of all of the above is to position the UK at the forefront of green finance, to ensure it is a global leader and to allow for a sustainable, economic recovery in the post-pandemic world. It is very much a case of ‘watch this (soon to be greener) space’.

Read the initial report of the task force on climate-related financial disclosures.