The rapid decarbonization of the UK economy requires a wider range of policies, from fiscal interventions to a green industrial strategy, a green plan for a National Investment Bank and environmental regulations that will restrict carbon-intensive consumption. These policies need to be accompanied by a rapid transformation of the UK financial system. The UK’s official Green Finance Strategy, published by the Conservative government in July 2019, does not go far enough. It offers a market-led, too much carrot, too little stick, deregulated decarbonisation approach. Yet an ambitious transition to low-carbon will not take place via the market because of a series of market failures that include incompatible time horizons between private finance and climate crisis, incomplete capital markets, corporate market power, and subjective private classifications of green assets. To climate-align private finance, we offer a set of recommendations that aim to (i) establish a robust institutional framework, (ii) green Bank of England/commercial banking and (iii) green shadowbanking/market-based finance (see Figure 1). Recommendation I: Develop a Green Public Taxonomy. An ambitious green finance agenda needs a clear description of what counts as green and what does not. The increasingly popular Environmental, Social and Governance (ESG) private sector approaches suffer from significant shortcomings that open the door to greenwashing. Instead, we suggest a public taxonomy, developed by a UK Technical Expert Group and building on the European Commission’s taxonomy, that identifies economic activities with different degrees of greenness and brownness. The analysis of climate-related financial risks and climate stress-tests should continue in parallel with the development of the Taxonomy. Recommendation II: Make firms disclose the climate impact and risks of their activities. There are two types of information that should be disclosed. First, the degree of greenness and brownness of the financial assets held by financial and non financial corporations should be disclosed based on the Green Public Taxonomy. Second, it is important that disclosure extends to the transition and physical climate risks facing institutions. These risks could be disclosed based on methodologies that are being developed by TCFD and NGFS.
Recommendation III: Set up the Green Finance TaskForce (GFAT). Working towards a path of net-zero emissions by 2030 is a challenging task. Green finance policies should be coordinated with other climate policies (green fiscal, industrial) such that the reduction of emissions will be maximised and the economic disruptions caused by decarbonisation will be minimal. The Green Finance Task Force will closely monitor progress in greening private finance, take actions to tackle transition risks and respond dynamically to obstacles that stand in the way of reorienting private finance towards green activities
