3 steps towards a world-leading green finance centre

1) Work with the Bank of England to steer private finance towards green investment

The Bank of England has several tools that could help to direct private investment towards green industries. From greening its collateral framework and capital requirements, to introducing lower interest rates for green investments that have been hit hard by higher interest rates, there are several tools at the Bank’s disposal that can help to steer private financing in the direction we need it to go in. Embracing these tools is essential not only for the Bank to deliver on its primary objectives for price and financial stability - which ecological breakdown threatens - but also to support the government’s economic policy objectives, including the new government’s mission to decarbonise the electricity grid by 2030.

But so far, these tools have been left on the shelf with the Bank of England lagging behind other major central banks, and even reducing its focus on climate in response to the previous government’s damaging net zero roll-back.

But the Bank of England can’t - and shouldn’t - go it alone. A just, green transition must be led by elected governments. To start with, the new Chancellor should clearly signal their support for the Bank to contribute to the UK’s climate and nature goals. This means that the next remit letters for the Bank’s key policy making committees (which are updated each year, usually alongside the Chancellor’s Budget or Spring/Autumn Statement) must reflect the fundamental impact of ecological breakdown on both price and financial stability, and clearly state that the Bank should support the Government’s commitment to tackling the climate and nature emergencies.

2) Introduce 1.5-degree aligned Transition Plans and the UK Green Taxonomy

In addition to the tools under the Bank of England’s control, the government and other financial regulators can take steps to set a clear, green direction for private finance. The Conservative government’s Green Finance Strategy committed to introducing net-zero transition plans for financial institutions, and a UK Green Taxonomy to robustly define ‘greenness’ of investments. But whilst the previous government would have introduced transition plans on a ‘comply or explain’ basis - meaning they would essentially be optional - Labour’s manifesto went further in committing to make transition plans truly mandatory and crucially, ensuring that they are aligned with 1.5 degree pathways. 

These initiatives are already well underway and should be delivered swiftly. Crucially, transition plans should have clear, science-based criteria that are enforced by supervisors.

3) Power up our public banks

Whilst shifting flows of private finance to contribute to the transition is crucial, public finance must lead the way. As political economist Daniela Gabor recently explained, over-reliance on private finance to decarbonise infrastructure at the bedrock of our economy and society will have serious distributional consequences, and will leave us unfit for a future in which climate-change induced weather events lead to more frequent economic shocks. 

For the long-term, we need a fundamental rethink of what it means for macroeconomic policy to be fit for such a future. But in the short-term, public finance can and must be urgently scaled up in aid of a more just and equitable transition. One way to do this is by powering up the UK’s public banking ecosystem. The government has announced a new £7.3 billion National Wealth Fund, which will, at least at first, be allocated through the UK Infrastructure Bank - and indicated that it will reform the British Business Bank. But in contrast to those of other countries, our public banks are unusually constrained by being included in the UK’s strict fiscal rules. Removing public banks from fiscal rules (which undeniably require a broader rethink) would be a first step towards a public finance ecosystem fit for leading the green transition. 

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