In a new Social Market Foundation briefing paper by myself and Raúl Rosales of Imperial College Business School, we explore the role of financial services in decarbonising the UK economy. Looking at the exports and jobs opportunities that could arise from the UK capitalising on its comparative advantage in green financial services, the paper calls on policymakers to ensure that financial services can provide the capital needed for British industries to reach net zero.
The full report can be found here: https://www.smf.co.uk/publications/financial-services-and-net-zero/
Coverage of our recommendation that government issue a new sustainability-linked gilt by Larry Elliot, Economics Editor of the Guardian: https://www.theguardian.com/politics/2022/may/02/sunak-green-bonds-higher-returns-climate-goals
Below is a brief summary.
Key Points
A high share of “green jobs” are – and will be – in the professional services sector. New estimates presented in our report show that about 730,000 workers in professional, scientific, and technical services activities are in green jobs, as well as 200,000 workers in the finance and insurance sector. Combined, these industries currently account for about a fifth of all green jobs on our definition.
These industries also have a greater share of the workforce in green jobs than the economy average. The latest ONS data show 27% of professional, scientific, and technical services workers in green jobs and 19% of financial services workers, compared with a UK-wide figure of 16%. While the financial services sector was broadly in line with the economy average share of green jobs in 2009, it is now ahead of the average.
Net zero finance has the potential to become one of the UK’s most successful green exports. London is currently rated number one globally for the quality and depth of its green finance offerings, and low-carbon finance is expected to grow faster than all other low-carbon sub-sectors of the economy.
Financial services will be pivotal in providing other sectors of the economy with the capital needed to support green investments – mobilising private wealth, including pension wealth, to support these projects. While around £800bn worth of UK pensions schemes are working aligned with net zero , most pension schemes (70%), worth £2 trillion, are yet to make net zero commitments and deploy capital in projects net zero-related – suggesting significant potential waiting to be untapped through a combination of government policy and financial services innovation.
Financial innovations are helping organisations – and countries – deliver on and commit to net zero. This includes through relatively new sustainability-linked bonds, where bond issuers face a financial penalty if they fail to meet sustainability targets. March 2022 saw Chile issue the world's first sovereign sustainability-linked bond, which is listed on the London Stock Exchange’s International Securities Market and Sustainable Bond Market.
Next steps for policymakers
In our view, some particularly important next steps for policymakers include:
Creating the right fiscal and financial incentives for pension schemes to invest in green infrastructure. Policymakers must take regulatory steps to empower UK pension funds to invest more in illiquid assets such as green infrastructure and real estate. The seven largest pension markets globally allocate on average 26% to illiquid assets – up from 7% in 2000. In contrast and disappointingly, the UK has remained flat in this period, with pension funds currently allocating just 8% to illiquid assets.
Fostering partnerships between financial services and leading educational institutions. For the innovation phase in hydrogen or new energy technologies, the UK needs business accelerators and centres of excellence backed by leading universities – helping companies to develop the needed business models and proofs of concepts to gain financial backing.
Further, there is evidence that at present there is a shortage of finance professionals with sustainability-related skills; partnerships with leading educational institutions will be needed to address this gap.
Ensuring a sound carbon tax framework aligned with net-zero targets. There is a direct mathematical relationship between carbon taxes and decarbonisation in investment portfolios. Despite this, Britain currently has an “inconsistent hodgepodge of different taxes, subsidies and regulations” that has left businesses and households facing multiple different carbon prices.
A more consistent, fairer approach to carbon taxation would ensure that the value of assets better reflects their sustainability, creating stronger incentives for companies to decarbonise and investors to rebalance their portfolios towards greener opportunities. Singapore’s recent moves on carbon taxation may provide a lesson for the UK.
Government leading the charge on sustainability-linked bonds and making the UK the global centre of sustainability-linked finance. Lastly, the government should continue to be at or near the front of the pack in embracing innovative forms of green finance – spurring others to take action and strengthening the UK’s position as a cutting-edge financial centre.
With this in mind, the Chancellor should explore issuing sustainability-linked Bonds, tied to the UK’s targets on net zero. As well as creating a commitment device for the government to decarbonise Britain, it could help secure the UK as a leading hub of sustainability-linked finance.
We are keen to discuss our conclusions. Feel free to get in touch with Raúl Rosales or myself.
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