COP 26: Treasury Rules Demand UK Firms Plan To Hit Net Zero

COP 26 Treasury Rules Demand UK Firms Plan To Hit Net Zero

Under proposed Treasury rules, most large UK corporations and financial institutions will be required to demonstrate how they plan to meet climate change targets. By 2023, they must have thorough public plans in place for how they will transition to a low-carbon future, in line with the UK’s net-zero aim of 2050. To guarantee that the proposals are not just spin, an expert panel will determine the requirements that they must meet. Any commitments will be optional. Green groups argue that this is insufficient. When a company or a country achieves a net zero balance between the quantity of carbon it emits and the carbon it removes from the atmosphere, it is known as net-zero.

Firms and their shareholders will be free to select how to adapt their enterprises to this transition, including how to decarbonize. Despite the fact that the plans must be made public, the government stated that “the aim is to increase transparency and accountability,” and that the UK is not “making firm-level net-zero commitments mandatory.” According to the Treasury, the market will evaluate whether companies’ proposals are credible.

Chancellor Rishi Sunak said at the COP26 climate summit that the UK was leading the world in creating the “first-ever net-zero aligned global financial centre.”

“Better and more consistent climate data; sovereign green bonds; mandatory sustainability disclosures; proper climate risk surveillance; and proper global reporting standards,” he claimed the improvements would entail.

In total, 450 companies representing 40% of global financial assets worth $130 trillion (£95 trillion) have vowed to restrict global warming to 1.5 degrees Celsius over pre-industrial levels.

But are the processes fast enough?

The pledges, however, are “doomed to fail” without regulation, according to campaign group Global Witness.

“Banks and financiers are the lifeblood of the fossil fuel companies and destructive agribusinesses fueling the climate crisis, so it’s right that focus should be on them at COP26,” said Veronica Oakeshott, head of forests policy and advocacy at Global Witness. “However, today’s announcement by banks risks amounting to more greenwashing if it’s not legally binding,” she added.

The purpose was good, but financial firms were nonetheless “pouring billions into environmentally harmful projects,” according to David Barmes, senior economist of the campaign organisation Positive Money.

The ideas’ ambition was lauded by Mark Campanale, founder and executive chair of the Carbon Tracker Initiative, but the details of how they would work were yet unknown.

“None of the financial assets announced is currently aligned with net-zero and no group of companies can say they are meeting the Paris target by continuing to invest in fossil fuels, so that needs to change considerably before London can be lauded as the world’s first net-zero financial centre and a model for the world,” he added. More public sector financing in the UK is needed, according to Shaun Spiers, executive director of environmental think tank Green Alliance.

“Private sector investment is vital, but it will be much easier to achieve on the back of serious investment by the chancellor,” he said. However, a coalition of finance organisations led by former Bank of England governor Mark Carney said that enough money had been committed to keeping global warming below 1.5 degrees Celsius.

More than $130 trillion (£95 trillion) in private capital “is now committed to transforming the economy for net-zero,” according to the Glasgow Financial Alliance for Net Zero (GFANZ). In practice, this implies that bank loans that might otherwise be sent to an oil field or a coal mine are instead directed to renewable energy or a mortgage product that subsidises energy-efficient dwellings.

Bank executives would also be forced to have difficult conversations with clients who wish to build coal-fired power plants, with finance being withheld in developed countries for the time being and in developing ones for the next decade.

Transition Plans

Financial institutions and corporations with shares listed on the London Stock Exchange would be required to develop net-zero transition plans, which will be published starting in 2023, under new Treasury guidelines. The strategies must include targets for reducing greenhouse gas emissions as well as the activities that companies intend to take to achieve those goals.

A panel comprising industry leaders, academics, regulators, and civil society organisations will establish a science-based “gold standard” for the plans to avoid “greenwashing,” or environmental activities that are more about marketing than substance.

The government, on the other hand, stated that there isn’t currently a widely acknowledged benchmark for what a good quality transition plan looks like. Meanwhile, Mr Sunak promised that by 2023, affluent countries will donate $100 billion (£720 million) every year to developing countries to help them transition to net-zero emissions.

The announcement on UK corporations, according to Kay Swinburne, vice-chairman of financial services at KPMG UK, will give the financial services industry a “valuable set of unified metrics to measure progress towards decarbonisation.”

“It is brave to put a gold standard in place for all companies raising funding,” she added.

The measures will “spur demand for green finance and accelerate decarbonisation, not just in the UK but wherever UK firms do business,” according to Dr Ben Caldecott, director of the UK Centre for Greening Finance and Investment.

What is Net-Zero Banking Alliance?

What is Net-Zero Banking Alliance

The UN-convened Net-Zero Banking Alliance, which is driven by the banking industry, brings together banks from around the world, representing over 40% of global banking assets, who are committed to aligning their lending and investment portfolios with net-zero emissions by 2050. This ambitious pledge, which combines near-term action with accountability, sees signatory banks set an intermediate aim for 2030 or sooner, based on robust, science-based principles.

The Alliance will strengthen, accelerate, and promote the implementation of decarbonisation policies by offering a globally consistent framework and operating rules, as well as peer-learning from pioneering institutions. It acknowledges the critical role of banks in assisting the global real-economy transition to net-zero emissions.

What is GFANZ?

Every firm, bank, insurer, and the investor will have to change their business models, build credible plans for a low-carbon, climate-resilient future, and then put those plans into action. Private finance can help fund private sector projects and turn billions of dollars committed to climate investment through public channels into trillions. However, unlocking systemic change will necessitate cross-system collaboration, bold commitments, and immediate action. GFANZ is a global alliance of prominent financial institutions dedicated to hastening the economy’s decarbonization.

Is net-zero the same as Paris aligned?

Two goals are effectively combined in the Paris Agreement. The idea of a ‘Paris-aligned’ investment strategy, on the other hand, has come to mean aligning with the more ambitious aim of attaining net-zero emissions by 2050. In practice, this means shifting capital away from fossil-fuel-intensive sectors and toward zero-carbon alternatives at a rate that will reduce global carbon emissions by 40-50 per cent by 2030 and by an average annual rate of 8% between now and 2050. It also entails a significant increase in the proportion of portfolios dedicated to climate solutions. Furthermore, any exposure to carbon-intensive companies should be limited to those that have realistic and aggressive climate goals.

These principles are enshrined in the Institutional Investors Group on Climate Change (IIGCC) Paris Alignment initiative’s Net Zero Investment Framework. The approach is built on three pillars: directing capital toward climate solutions, accelerating decarbonisation to achieve net-zero alignment by 2050, and maintaining net-zero corporate stewardship.