Government ‘mixed messages’ put financial sector green progress at risk, MPs warn

The financial sector’s progress towards net zero risks stalling due to “mixed messages” from the government on green issues, a group of MPs has warned.

Breakthroughs achieved at COP26 on protecting nature and low carbon investment could be undone by ministerial confusion, the Environmental Audit Committee has today revealed.

Relying on investor behaviour may not lead to fast enough action on the climate, their report, titled ‘The financial sector and the UK’s net zero transition’, found, while so-called ‘comply or explain’ tactics would allow firms to comply by stating they have no green transition plan.

Committee chairman Philip Dunne said: “Globally, banks continue to pump trillions of dollars into fossil fuels, and we are not turning the dial fast enough to tackle the climate crisis.”

He urged ministers to “swiftly implement” mandatory transition plans — to avoid self-defeating ‘comply or explain’ policies — UK green taxonomy and carbon leakage mitigation measures.

And Dunne warned that “any delay” could “send mixed messages to the financial sector that the UK is wavering on its COP26 ambitions to become the first net zero-aligned financial centre”.

It comes as a report by centrist thinktank Demos said mandating firms to put environmental, social and governance (ESG) measures at the heart of their “directors’ duties” via reforming the UK Companies Act could lead to a seven per cent — or £149bn – boost to UK GDP a year.

In 2021, global banks financed approximately $742 billion on fossil fuels, while fossil fuel investment continues to significantly outpace renewables, the report stated.

But in 2023, the Global Green Finance Index ranked London as the leading green finance centre for the fourth time – and MPs are urging ministers to take action to maintain this.

They want to see a compulsory task force on nature-related financial disclosures (TNFD) within the next five years, and a carbon border adjustment mechanism as soon as possible.

While the government should publish quarterly reports highlighting moves towards energy independence while staying on track to meet net zero, the report urged, as well as calling for an independent body to be tasked with tracking net zero and high-carbon investment.

“Enormous strides have been made in the last few years to champion a low carbon economy, but we’re at risk of this good work stalling through complacency,” Dunne added.

“Government must turbocharge its efforts once again in green finance.

“It is an enormous opportunity to shape the carbon financial markets of the future, yet the market alone cannot revolutionise in the way needed.”

A government spokesperson said: “This report fails to recognise the huge progress we’ve made in funding renewables, having attracted £200bn in low carbon investment since 2010, with a further £100bn expected by 2030 – powering up Britain and supporting up to 480,000 jobs.

“At this week’s Global Investment Summit, we also attracted nearly £30bn worth of commitments to invest in a range of projects including renewables production, grid capacity and heat pump manufacturing.

“We were the first major country to publish a green finance strategy in 2019, which we are using to further strengthen our leadership in green finance and provide the financial backing for our energy security, net zero and environmental targets.”

Ian Bhullar, principle for strategic and sustainability policy at banking trade body UK Finance, told City A.M.: “The UK is a global centre for financial services, and green finance will play a key part in delivering the transition to net zero, by providing capital to the low-carbon sectors of the future and supporting high-emitting sectors with finance to transition rapidly.

“But the Environmental Audit Committee is absolutely right that to deliver this transition activity, the City needs a clear policy framework, including tracking levels of investment into net zero and making sure that government funding for businesses is aligned with policy plans. These are things we recently called for in our Mobilising Capital for the Net Zero Transition paper.”