Net zero targets should be mandatory for financial institutions – UK expert group

Investor stewardship should be extended, say advisors to climate committee

Net zero targets should be mandatory for financial institutions and investor stewardship should be extended to incorporate zero emissions, according to an expert group advising the UK’s Climate Change Committee (CCC).

The expert group also called for the government to work with finance to define “green, brown and grey” investments and how they fit in environmental, social and governance (ESG) portfolios.

The recommendations were revealed in the CCC’s sixth ‘carbon budget’ today — which it hailed as the “first ever detailed route map for a fully decarbonised nation. A world first”.

The committee is headed by former Environment Secretary Lord Deben (the former John Gummer) and is an independent body established under the 2008 Climate Change Act.

Under the heading ‘Financial regulation recommendations’ the committee cites the work of the Expert Advisory Group on Financing Net Zero, which was chaired by London School of Economics Professor Nick Robins, as stating: “The UK should fully integrate climate risk and Net Zero into financial regulation and monetary policy. 

“Net Zero targets should be made mandatory for financial institutions. Investor stewardship should be extended to incorporate achievement of Net Zero. Clear metrics are needed for the Net Zero transition at an institutional and investment level.”

Aside from Robins, supported by Roberta Pierfederici, the expert group consisted of Andy Howard (Schroders), Dr Ben Caldecott (Oxford University), Daniel Klier (HSBC), Ingrid Holmes (Federated Hermes), Rishi Madlani (RBS), Dr Rhian-Mari Thomas (Green Finance Institute) and Steve Waygood (Aviva).

The Climate Change Committee cited the expert group as saying the UK financial sector will need to be capable of classifying ‘green’, ‘brown’ and ‘grey’ investments.

 • Green investments. Investments into low-carbon technologies or sectors (e.g. a company that exclusively builds wind turbines). 

• Brown investments. Investments into high-carbon, non-transitioning technologies or sectors (e.g. a company specialised in building coal fired power plants with no CCS). 

• Grey investments. These investments are more difficult to classify, and refer to technologies or sectors that may be transitioning, or capable of transitioning (e.g. a utilities company with high current emissions but a robust Net Zero target). 

Tracking these flows, the report says “will require a new or expanded institution, distinct from Government, with analytical capability and expertise in the financial sector”.

Overall, the document shows the pathway to net zero, showing that polluting emissions must fall by almost 80% by 2035, compared to 1990 levels. It calls for a “major investment programme” across the country “delivered, in large measure by the private sector”. 

Lord Deben said: “As we emerge from the COVID-19 pandemic, the Sixth Carbon Budget is a chance to jump-start the UK’s economic recovery. Anything less would shut us out of new economic opportunities. It would also undermine our role as President of the next UN climate talks.”

See RI’s interview with Nick Robins and Mark Campanale here