Green the UK financial system
To deliver a Green New Deal we must rethink the role of government, the Bank of England and financial institutions.
A rapid decarbonisation will not be possible without a radical transformation of the financial system as a whole. Our financial system provides many loans to carbon-intensive activities, invests only partially in green projects and supports our unsustainable ways of living. In short, our financial system is not fit for purpose. Here are four measures to resolve this:
1. Develop and support green banks
The financial system should have green banks at its core. This shouldn’t be limited to a re-nationalised Green Investment Bank. A financial system intent on decarbonisation would need to include small banks that have ethical targets, support local communities and are active in financing projects in renewables and energy efficiency. Strong support for these banks could reduce the power of the larger banks that provide the vast majority of carbon-intensive loans.
2. Green the Bank of England’s monetary policy
Over the last few years, the Bank of England and other central banks around the globe have implemented Quantitative Easing programmes. However, researchers have shown that the corporate QE programme implemented by the Bank of England has favoured sectors that contribute more to the generation of greenhouse gas emissions.
Instead of continuing a QE programme based on criteria that support the status quo, the Bank of England could easily shift to exclusively buying green bonds with the help of a green QE programme. Through this, it could actively lower the cost of funding for green projects that rely on bond finance, making green investment more viable across our society.
The Bank could also adopt a more climate-aligned approach to the way that it lends money to commercial banks, eg by excluding loans or securities linked with projects that generate a large amount of greenhouse gas emissions from acceptable collateral.
3. Green financial regulation
Financial regulators could penalise banks that provide too many carbon-intensive loans. One way would be to ask commercial banks to hold more capital against such loans. This could restrict the expansion of “brown” credit.
Financial regulation could also incentivise banks to provide more green loans through lower capital requirements. But this would require careful consideration because it could undermine financial stability.
4. Make climate-related financial disclosures mandatory
Banks, pension funds and insurance companies should not be allowed to ignore the risks that can lead to climate-related financial fragility. Financial institutions should disclose such risks using widely accepted methodologies, rather than internally defined criteria. This would allow financial regulators to assess the exposure of these institutions to climate risks and act upon this. It would also allow investors to be aware of the greenness/brownness of their portfolio and reallocate their investments accordingly.