‘Long on aspiration’? Don’t overlook central banks for green investment

A cross-party group of MPs have issued a firm rebuke to the UK government’s climate and environmental policy. The Environmental Audit Committee launched an inquiry into ‘green finance’ in late 2017, the final report of which has been published today. The report makes for troubling reading for those committed to transforming the UK economy along green lines.

The committee’s role is to scrutinise policy for its impact on sustainable development and environmental protection. The Government talked up its vision for green finance – aiming to ‘build on the UK’s global leadership in the sector’- when it launched the Green Finance Taskforce in October to support the financial aspect of its Clean Growth Strategy. Now the initial optimism among climate campaigners and researchers has faded, as the government’s approach is starting to look less substantial than many had hoped for. In the words of Mary Creagh MP, the committee’s chair, the Strategy is ‘long on aspiration, but short on detail.’

The principal disappointment highlighted by the report is the rapid fall in the volume of clean energy investment in the UK: in cash terms, a 56% decrease in 2017. Trends in investment will fluctuate with wider, global shifts in the industry. But the committee points the finger at an unreliable policy framework. Since 2015 several decisions have been made that put building momentum in green investment into jeopardy.

A turning point in British climate policy often criticised by environmentalists was the privatisation of the Green Investment Bank, now known as the Green Investment Group (GIG) following its sale to the Australian investment bank Macquarie in 2017. Since then, only one of the GIG’s first four investments has been located in the UK.

With the European Investment Bank’s role in the UK potentially hamstrung after the Brexit referendum, the absence of a major, publicly owned development bank with a sustainable agenda is a serious weakness. As Sini Matikainen from the Grantham Research Institute on Climate Change and the Environment told the committee, it is highly plausible that ‘[the GIG] is going to be a private sector actor competing with other private sector actors for similar types of projects, as opposed to a Government entity that is perhaps taking on higher risk projects or projects that private sector actors would be unwilling to fund.’ The committee rejected ‘the Government’s assertion that the market failures the Green Investment Bank was set up to address have been resolved.’ It is wise to do so, given the scale of the energy transition still ahead of us.  

The committee’s verdict comes only a day after Positive Money launched its own report on monetary and environmental matters. ‘A Green Bank of England’ highlights the importance of the central bank in any discussions surrounding finance and climate change. The Bank of England would not stand in as a development bank. But it should play a role befitting its position at the very heart of the monetary and financial system.

Positive Money submitted evidence to the inquiry arguing that reform to the central bank is a crucial piece of the green finance puzzle. The intersection of central banking with climate change is a novel topic, but it is fast gaining attention. Mark Carney, the Bank of England Governor, has given high-profile speeches on the topic.

Yet Mr Carney’s characterisation of the problem closes off opportunities even as it opens the debate. Central banks have been hot on the issue of new forms of financial risk created by a changing climate and the low-carbon transition. At the same time, they shirk responsibility for helping to galvanise green investment. In his most recent speech, Mr Carney declared that ‘financial policymakers will not drive the transition to a low-carbon economy.’

While strong on detail, the Bank of England could use a dose of aspiration. The importance of the Environmental Audit Committee’s work is that it re-focuses the wider debate squarely on the shortfall in investment. Our report argues that worrying over financial instability as the Bank of England professes to do looks incoherent over time unless it takes into account the future viability of the economy. Monetary policy and financial regulation could have significant environmental benefits and help raise green investment, both public and private, even while achieving their traditional primary objectives. This is especially true in the context of another downturn, where the Bank could apply stimulus designed to meet green objectives.

What the Clean Growth Strategy has done right is to conceive climate policy as a cross-departmental issue, instead of compartmentalising the problem. As the planet deteriorates, sustainability needs to be integrated holistically, into how we live and work, and how economic policy is decided. The report out today shows that a credible, stable policy framework is of the utmost importance to mobilise finance. Both these lessons apply to the Bank of England as much as to the government. If the UK is to escalate green finance, monetary and financial policy must be hardwired for sustainability.