Written Evidence Submitted by Greenpeace

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Written evidence submitted by Greenpeace

Greenpeace is an international environmental campaigning organization with presence in around 50 countries around the world. It has been campaigning for more action on climate change for well over quarter of a century. The finance industry has come into particular focus recently as a recalcitrant sector in the fight to contain climate change to levels which are not catastrophic.

Summary

Climate Change is sufficiently serious that it needs to be considered one of the core challenges of modern government. In the context of recovery from the pandemic, support packages from the government for companies being supported by state funds should come with strict environmental and social conditions, whilst analysis shows that spending on green infrastructure is an effective economic tool.

The Treasury now needs to adopt a ‘net zero rule’ so that all public spending and taxation get us on track to net-zero and 1.5°C. It should also require all UK-regulated financial institutions to have a transition plan in place by the end of 2021 to meet the objectives of the Paris Agreement, expand the Bank of England’s mandate to include climate and nature protection, and set up a Climate Infrastructure Bank. A series of further recommendations on how Treasury could actually support necessary climate action in transport, power, buildings and in a just transition are outlined below. Above all it needs to evolve its approach to focus on delivering whole economy transformation, rather than least-cost carbon cuts based on 5-yearly carbon budgets.

The stranded asset risk associated with exposure to fossil fuel sectors has now become a mainstream finance issue. However there is an increased recognition that significant financial risks arise from climate impact - the consequences of failing to deliver the Paris Agreement goals and the resulting catastrophic environmental, human and economic impact. Thus there are expectations on financial institutions to move beyond climate-related risk management and disclosure, to aligning activities more strategically with the internationally agreed objectives on climate change.

Unfortunately, whilst Governors of the Bank of England have said and promised much on climate, little change has been apparent in practice, and fossil fuel companies are still major beneficiaries this year of Covid Corporate Financing.

Should the Treasury’s support package to business distinguish between companies based on how much they pollute?

The general presumption should be that all support packages would assist companies to move to compliance with net zero. This will vary depending on the sector of the companies concerned DEC0013 and the ease with which workers can be retrained of their skill are confined to those required in a high carbon economy. Strict environmental and social conditions should be attached so that the public funds are not simply used to prop up the status quo of polluting behaviour or poor treatment of staff. Instead, bailout support at this time should be used as an inflection point to force dramatic changes in corporate behaviour so that the economy can become aligned with our climate change commitments and the need to treat workers fairly.

Before committing to give away any funds to companies, the Treasury should ensure they can be confident that any companies receiving state funds will actually deliver on the stringent environmental and social conditions attached. Part of this comes down to ensuring the right enforcement and monitoring mechanisms are in place, but the historic track record of corporate behaviour in terms of wider climate and social obligations should also be taken into account.

Should the Treasury be directly funding Green infrastructure as part of its Coronavirus spending package?

Yes, all infrastructure investment should be green infrastructure investment at this point given the government is legally bound to deliver net zero emissions by 2050, and is also committed to leaving the environment in a better state for the next generation.

Indeed all infrastructure should go through a test of a ‘Net Zero Rule’ (see below) and should not be built if it cannot be aligned with climate obligations.

Green infrastructure investment will often be a very good source of stimulus spending - as a recent study by Oxford University Smith School said, “there is strong evidence that green stimulus policies are economically advantageous when compared with traditional fiscal stimuli.”1

Are there any green related policies that the Treasury should change or commence due to the Coronavirus in order to facilitate the transition to meeting Net Zero?

● Net-Zero Rule - The Treasury must set the foundation for a sustainable, resilient and inclusive recovery by adopting a new economic test to ensure the UK economic recovery plan, public spending and taxation get us on track to net-zero and 1.5°C. The Rule should also require that policy should help level up UK and is delivered in harmony with nature. Bailouts for business (see above) must also be conditional on plans and action to align with net-zero and 1.5°C. This economic rule should be independently verified and monitored by the Committee on Climate Change and the Office for Budget Responsibility.2

● Financial regulations and incentives - The Treasury should:

1 https://www.smithschool.ox.ac.uk/publications/wpapers/workingpaper20-01.pdf 2 https://static1.squarespace.com/static/58b40fe1be65940cc4889d33/t/5eec99dff809127782261619/15925 64208100/Green+recovery+plan+final+1.pdf DEC0013

● Require all UK-regulated financial institutions to have a transition plan in place by the end of 2021 to meet the objectives of the Paris Agreement, extending across firms’ global practices: ○ The Treasury should present this as a requirement for UK-regulated financial institutions to develop plans to align credit and investment portfolios with the Paris Agreement within a science-based timeline. UK financial regulators should then oversee mandatory reporting on these transition plans and their implementation. ○ The plans must cover all sectors of the economy, not just those relating to fossil fuels, because implementing the Paris Agreement requires a whole economy transformation. They must also address issues such as land use change and deforestation. ○ The plans must take into account the whole global activities of the institutions concerned, including all their portfolios (asset management, investment and lending, including both project and corporate loans) and financial services such as advisory services and raising of capital for clients. ● Present a report to Parliament each year, informed by Bank of England analysis, on the level of embedded carbon in UK-regulated financial institutions and the effectiveness of the institutions’ plans to meet the objectives of the Paris Agreement. These reports should highlight where financial institutions’ levels of embedded carbon are too high and/or their plans to meet the objectives of the Paris Agreement are inadequate. Where this is the case, the Treasury should mandate institutions to reduce their climate exposure and improve their plans accordingly. ● Expand the Bank of England’s mandate to include climate and nature protection as a core priority. ● Set up a Climate Infrastructure Bank to provide an institution dedicated to leveraging private investment to speed up the transition to net zero, while levelling up the UK.

The Bank of England should: ● Supervise the creation of UK-regulated financial institutions’ climate transition plans, as described above. ● Mandate companies and financial institutions to expose climate risks, through mechanisms such as mandatory climate risk disclosure.3 ● End support for fossil fuel companies through corporate bond purchases. Recent reports suggest that the Bank has been preparing to continue with business as usual in this regard, implying that much of its climate-related rhetoric so far has had limited impact in practice.4

● Treasury should ensure that tax and spend aligns UK with the Paris Agreement targets and delivery of net zero emissions. Four priority areas for UK government action that would meet these requirements are:

a) Redesigning the transport system

3 https://www.edie.net/news/7/Will-2020-be-the-year-of-mandatory-climate-disclosure-/ 4 https://www.theguardian.com/business/2020/apr/16/bank-of-england-failing-climate-with-covid-19-stimulus- programme-oil-firms-debt-bond-governor DEC0013

● Support an increase in government and local authority procurement of electric vehicles ● Expand, electrify and increase the affordability of public transport, to enhance connections outside of the South East, increase access to employment opportunities and ease congestion. The Treasury should significantly increase investment in buses, trains, walking and cycling- to the level of at least £10 billion additional funding per year, while clawing back the vast majority of the £133 billion currently allocated for road building and HS2. We estimate that at least £10 billion a year more public investment is needed in low carbon transport infrastructure, including for active travel, buses and rail.5

b) Making UK buildings fit for the 21st century

● confirm and if necessary add to existing £9.2 billion manifesto spending commitments on energy efficiency and low carbon heating, and establish incentive structures to encourage more private-sector investment – especially by able-to-pay households ● Establish and sufficiently fund a new Warm Homes Agency to provide market confidence and encourage private investment by supporting, enforcing and guaranteeing the delivery of targets and regulations for building efficiency and low carbon heating. The Treasury should provide sufficient funding to enable the Agency to fulfil all of its functions effectively.

5 The figure is based on the following calculations: £3bn per year to make all bus travel free of charge in England; At least £184 million per year to switch buses and coaches across the UK to zero-emission power; £1.3 billion per year to restore the bus routes that have been cut significantly since 2014 and add new routes where local authorities deem necessary; At least £5.52 billion additional capital funding per year to enhance the UK’s railways - specifically works to improve the core north-south UK mainlines, extend electrification, reopen lines and create new lines; At least £6bn extra over the next 5 years for walking and cycling. References are in these two reports: https://www.greenpeace.org.uk/wp-content/uploads/2019/08/Government-Investment-for-a-greener-and- fairer-economy-FINAL-30.08.19.pdf and https://www.greenpeace.org.uk/wp-content/uploads/2020/06/A- green-recovery-how-we-get-there-Greenpeace-UK.pdf From the total required, we have subtracted the relevant sums announced by the Government this year (assuming spend in each case is over a 5-year period, unless otherwise stated): £2bn for walking and cycling over the next 5 yrs £4.2 billion for city region transport settlements £10 million to develop plans for improving the reliability and capacity of the Manchester rail network £589m to kickstart work on the Transpennine main line between Leeds, Huddersfield and Manchester £20 million for a Midlands Rail Hub £1bn Transforming Cities Fund DEC0013

c) Delivering a clean power system

● unblock policy bottlenecks for offshore wind and increase government investment in skills training, supply chain expansion and port infrastructure in the North East, Scotland and Wales. ● improve and streamline the planning regime and support for rooftop solar by means of procurement on public sector roofs and fiscal incentives, such as lower business rates to encourage private investment. ● set ambitious targets and stimulate routes to market for renewable ‘green’ hydrogen, interconnection (physical links allowing the transfer of electricity across borders), battery storage and demand-side response.

d) Supporting nature and creating a circular economy

● add to the existing manifesto and March 2020 Budget spending commitments on nature enhancement, flood and coastal resilience and marine protection, to invest at least £2.5 billion per year. £2.6 billion per year should also be maintained for the new Environmental Land Management scheme until at least 2027, to support sustainable agricultural livelihoods. ● allocate £1 billion to leverage faster private investment in waste reduction and genuine recycling infrastructure – not incineration.

In which ways will the new economy post-Coronavirus allow the Government to change the way it finances meeting the Net Zero Target?

It is important that financing options, especially change in taxation, are sensitive to the precarious situation of many households post-pandemic and must seek to promote social and economic equality. Fairness and effectiveness of carbon taxation require that those affected be in a position either to pay or to change their behaviour so as to avoid the tax. And in practice will need to be delivered alongside other policies to deliver net zero emissions. An example of how to do this fairly would be aviation, where a frequent flier levy – which would impose the highest taxes on those who fly frequently and have the largest carbon impact – would work alongside demand constraint and a ban on new runways - as well as financial incentives for low[er] carbon travel modes, such as long distance rail services

With a renewed recognition of the importance of resilience and shorter supply chains being resistant to supply chain shocks, more domestic production can be expected to be a policy objective. The sector of industrial emissions is important, but investment in low and zero emissions technology is held back by the expectation - real or imagined - that it will disadvantage those companies investing against international competition. Under these circumstances, the UK should impose border taxes to penalise imports and provide a level playing field. DEC0013

Are there outcomes from the Coronavirus that will enable the Treasury and HMRC to meet the Net Zero target more easily?

The historically low interest rates favour continuing significant government borrowing and productive green investment in new technology. As we have seen from offshore wind, investment early can deliver world leading industries in UK which are set to be export providers - Global Wind Energy Council estimate that the global industry will quintuple in size (GW installed per year) over the next decade6. This illustrates the importance of investment in key growth sectors in the zero carbon transition

How might HMT deliver a regionally balanced and ‘just’ transition across the UK?

There are many opportunities for regionally balanced recovery most obviously in renewables and energy efficiency. However the specific opportunities will best be recognised locally. Government will need to support and properly fund local authorities to deliver the economic transformation at scale. Mistakes made during the dismantling of the UK’s coal mining industry must not be repeated. Reskilling workers and supporting their transition from older, more polluting industries to the new green economy should be prioritised wherever possible. This should include regional industrial diversification strategies, including investment in training, reskilling and relocation where required and where local consent is obtained, for areas that are currently dependent on high carbon sectors (particularly oil, gas, coal, high intensity farming and vehicle manufacture).

The proposed oil and gas industrial strategy sector deal should become the oil and gas transition sector deal, which would focus on reskilling people to work in renewables and other low-carbon growth sectors. Local authorities will need the necessary powers, money, skills, expert support and enforcement functions to deliver on local dimensions of the just transition

What is HMT’s current strategy, and approach to, UK decarbonisation, and is it fit for purpose?

HMT needs to evolve its approach to focus on delivering whole economy transformation, rather than least-cost carbon cuts based on 5-yearly carbon budgets. It entrenches a carving-off within policy-making of “actions that are needed to meet our carbon budgets” vs “opportunities to transform and improve major parts of the economy, while eliminating greenhouse gasses”.

For many parts of industry, manufacturing and construction there will only be one further set of investments before 2050. Additional expenditure now to get those sectors on track for zero carbon now will actually save money in the longer term. An example is building regulation. The additional cost of making buildings zero carbon now may seem high on a £/tonne CO2 basis (although the actual numbers may in practice be quite low). But the cost of extensive retrofitting

6 https://gwec.net/global-offshore-wind-report-2020/#key-findings DEC0013

- for buildings, or in the case of industry premature retirement of capital stock - means that additional expenditure now is cost effective.

An example of where government got it right and broke free of the ‘least cost’ logic was in 2008 with the decision to back the EU renewables directive which effectively required extensive build of renewable power generation. The government at the time, recognising the public support for renewables and the potential economic opportunity that early investment could bring, agreed to bind the UK to targets like the rest of the EU. At that point, the least cost pathway for decarbonising power appeared to be nuclear – but looking at today’s costs that would have clearly been a bad outcome for UK. As a result of the government’s early stage investment, significant supply chain innovation and cost reduction was able to happen, meaning that the UK now has a world-leading industry in offshore wind.

The phaseout of the internal combustion engine in cars and vans is an example of where this may be playing out again. To meet both climate change and air pollution policy objectives, sales of electric vehicles, including light duty vans, will undergo huge growth over the next 2 decades. Transforming the UK automotive sector to be a strong player in this market entails additional costs now, above what would appear to be the cost-effective level of spending. This would require bringing the UK phaseout date of sales of fossil-fuelled cars and vans to 2030 and then aligning the purchase incentives and charging infrastructure for a rapid roll out. Without this the UK could struggle to maintain its global position within the automotive sector leading to factory closures and fewer jobs in the UK automotive sector.

What role should the 2020 Comprehensive Spending Review play in UK decarbonisation? What projects or measures should receive additional funds through this process?

The Treasury’s new net zero cost review is the first major opportunity to explore this new policy approach. That means costs and opportunities need to be factored in in the most comprehensive possible way for the economic transformation that is now mandated in law – over a short, medium and long term, in terms of public health and quality of life, in terms of social inequality, exclusion and poverty, and in terms of the value of a flourishing natural environment for people across the UK.

What role do UK financial services firms currently play in the decarbonisation of the economy (for example, through stewardship, capital allocation to green projects, green financial products)? What more can they do?

Discussion of the risk of stranded assets resulting from overexposure to fossil fuel and high carbon sectors has gone from the fringes - Global warming’s terrifying new math in Rolling Stone7 in 2012 - to the mainstream - the FT’s Lex Column - The $900 billion cost of ‘stranded

7 https://www.rollingstone.com/politics/politics-news/global-warmings-terrifying-new-math-188550/ DEC0013 energy assets’ today.8 The G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) created a framework to help companies and financial institutions consistently measure, manage, and report their climate-related risk exposures.9 However, disclosure of carbon emissions and the related carbon risk is no longer an adequate response from financial actors. Disclosure can lead to the disposal of high carbon and therefore high risk assets but will not necessarily lead to a reduction in carbon emissions.

Further, the focus on stranded assets - the idea that meeting the goals of the Paris Agreement will create stranded fossil fuel and other high carbon assets obscures the even greater risk. As emissions continue to rise - despite the short reprieve presented by the Covid pandemic10 - there is a very real threat that without increased ambition from Government there is no ‘transition risk’. The far more significant threat comes from climate impact - the consequences of failing to meet the Paris goals and from failing to achieve a rapid and orderly transition to a low carbon economy with resulting catastrophic environmental, human and economic impact.

Therefore expectations on financial institutions to respond to these challenges must evolve, moving beyond climate-related risk management and disclosure, to aligning activities more strategically with the goals and objectives of the Paris Agreement. There is now a growing awareness that COP 26 presents a unique opportunity for the UK to establish much more ambitious reforms for financial institutions to address the systemic economic risks of climate change, and to avoid future destabilisation of financial markets as well as to the global environment and the wider society and economy that those markets serve.11

Are there any barriers (regulatory or otherwise) preventing financial services firms from delivering green finance or investing in ‘green’ assets? What prudential risks does climate change pose?

A significant absence is a requirement for all UK-regulated financial institutions to have a transition plan in place by the end of 2021 to meet the objectives of the Paris Agreement, extending across firms’ global practices. This absence undermines the normative pressure from policy experts, civil society and the engaged members of the public for significant reform of finance industry practice.

Further, the lack of climate conditionality placed on loans provided via the Bank of England’s Covid Corporate Financing Facility (CCFF) means that the Bank is failing in its duty to protect the UK’s financial stability by avoiding both exposure to stranded assets and the impacts of climate change in the context of prudential risk posed by climate change.

8 https://www.ft.com/content/95efca74-4299-11ea-a43a-c4b328d9061c 9 https://www.fsb-tcfd.org/ 10 https://www.nature.com/articles/s41558-020-0883-0 11 https://www.responsible-investor.com/articles/with-the-tcfd-in-its-fifth-year-it-s-time-to-make-net-zero- mandatory-for-financial-institutions DEC0013

The recent study by economists including Joseph Stiglitz and Lord Nicholas Stern found that economic stimulus projects which cut emissions provide greater returns on spending than conventional spending,12 and the IMF has also recommended prioritising green projects to power the recovery.13 Yet the majority of CCFF loans have been extended to high-carbon sectors.14

What is the Financial Conduct Authority and the Prudential Regulation Authority doing to support decarbonisation and a ‘greening’ of the financial system?

Beyond welcome public statements emphasising the importance of reducing the exposure of the UK economy and the global financial system to climate risk, the FCA and the PRA have done little. The Bank of England - both under former Governor Mark Carney and present Governor Andrew Bailey have been clear that climate change represents an existential threat to both the global financial system and the UK economy. “Acting early will help to smooth the transition and avoid a sharp and disorderly adjustment. To meet the goals of the Paris agreement requires a whole economy transition: every business, bank and financial institution will need to adapt.”15 Yet the PRA has chosen to delay the imposition of climate stress tests, key tools for exploring the risks presented by climate change.16 Similarly the BoE has failed to act on Governor Andrew Bailey’s promises to the Treasury Select Committee in March that he would take forward aligning the BoE’s corporate bond purchases with the government’s emissions targets as “a priority”. An updated list of eligible bonds for its expanded corporate QE scheme published in April showed that the BoE remained committed to buying bonds from fossil fuel companies, including the likes of BP, Total and Shell’s BG Energy.17 The biggest purchase of bonds in Energy by the Bank of England between 17/03/2020 - 08/07/2020 for the Covid Corporate Financing Facility were Schlumberger and TechnipFMC plc - 2 oil service companies receiving support worth approximately $1.3 BILLION. 18

What expectations do (and should) they place on regulated firms about their role in the transition through their policy and supervisory activities?

See answer to first question:

12 www.smithschool.ox.ac.uk/publications/wpapers/workingpaper20-02.pdf 13www.theguardian.com/business/2020/jul/02/uk-should-prioritise-green-projects-to-kickstart-economy-says-imf 14 http://positivemoney.org/wp-content/uploads/2020/07/CCFF-Final-version.pdf 15 https://www.theguardian.com/commentisfree/2020/jun/05/world-climate-breakdown-pandemic 16https://www.bankofengland.co.uk/prudential-regulation/publication/2020/pra-statement-on-prioritisation- covid19 17 https://www.financialreporter.co.uk/finance-news/bank-of-england-under-fire-for-fossil-fuel-purchases.html 18 https://recovery.influencemap.org/corporate-debt DEC0013

The Bank of England should: ● Supervise the creation of UK-regulated financial institutions’ climate transition plans, as described above. ● Mandate companies and financial institutions to expose climate risks, through mechanisms such as mandatory climate risk disclosure.19 ● End support for fossil fuel companies through corporate bond purchases. Recent reports suggest that the Bank has been preparing to continue with business as usual in this regard, implying that much of its climate-related rhetoric so far has had limited impact in practice.20

August 2020

19 https://www.edie.net/news/7/Will-2020-be-the-year-of-mandatory-climate-disclosure-/ 20 https://www.theguardian.com/business/2020/apr/16/bank-of-england-failing-climate-with-covid-19-stimulus- programme-oil-firms-debt-bond-governor