Finance is critical to transition
Nearly one-quarter of Chapter Zero’s membership are non-executive directors and others working across the financial services industry. The UK – as a centre of global finance – has a vital role to play in both global climate leadership and global climate finance.
Trillions of dollars per annum are needed to meet net zero goals globally. Private finance is crucial to meeting those goals. At the same time, financial services (FS) firms have significant and growing exposures to climate risk across their investment portfolios as well as their lending and insurance books as physical climate risks accelerate and crystallise.
It is crucial that climate change is embedded in financial services firms’ strategies. Responding and contributing to the climate transition, through their financing activities, is an important part of protecting and enhancing the long-term value and resilience of these firms.
In terms of the wider net zero transition, financial services firms have significant agency. They take decisions that can have outsized impacts across economies. They sit at the centre of the economic system and have a defining role in the role of the private sector in managing the risks and opportunities of climate change.
It is for this reason that Chapter Zero has chosen to launch the UK FS Community to equip and inspire non-executive directors throughout the financial services landscape. Working in close partnership with the Climate Governance Initiative (CGI), Chapter Zero will build a community through convening and curating resources for NEDs around key topics, issues and inspiration points that are relevant to their work across a number of critical areas, including: banking, asset management, insurance, and investment. Our partnership with the CGI’s global FS Programme will also foster opportunities for peer exchange and networking on an international basis.
What will the Community do?
The objectives of the Chapter Zero FS Community are characterised as follows:
- to equip and inspire non-executive directors to use their unique agency to maintain climate resilience, and respond and contribute to the climate transition,
- to equip non-executive directors to engage in strategic discussions with their boards around how to navigate a changing policy, legal and regulatory environment, including how to fulfil their legal and fiduciary responsibilities in relation to climate (this is vital given the extent of financial service regulation),
- to encourage non-executive directors across the financial services ecosystem to connect and collaborate, and
- to harness the power of our financial services non-executive director members as part of a global ecosystem.
The Transition Finance Market Review (TFMR) in context
One of the first convenings of the new community will be to explore opportunities for non-executive directors in the financial services arising from the findings of the Transition Finance Market Review.
This government-commissioned independent review looked at how to support companies in the UK and abroad to access the capital they need to decarbonise and deliver our net zero ambitions. It was all about building a robust market for transition finance in the UK.
The review explored the financial flows, products and services that will facilitate an economy-wide transition to net zero, consistent with the Paris Agreement. It recognised that much of the focus in recent years has been on green finance, but an effective transition will not be achieved if finance is directed to green activity alone. We also need to direct finance to those activities that are in the process of becoming greener – that are decarbonising.
In other words, capital must be directed towards high-emitting sectors and towards activities that may not yet be commercially viable, like lower carbon hydrogen, carbon capture and storage, and lower carbon retrofitting of buildings and infrastructure.
Ultimately, we need to shift the mindset away from binary thinking about whether a financing opportunity is either green or brown, and towards scaling finance for the transition by addressing some of the barriers to finance and putting in place the right conditions for the UK to become a leader in transition finance.
Why does this matter to non-executive directors?
It is both a climate imperative and a commercial imperative to ensure finance flows to where it needs to go to facilitate the transition. If the financial services market scales in pursuit of net zero, there should be simultaneous significant commercial opportunity in that pursuit.
Non-executive directors can make the most of this opportunity by thinking about the extent to which they are:
- building transition finance into their forward strategies,
- equipped to do that effectively,
- equipped to do that in a way that will allow them to take advantage of the commercial opportunities while, at the same time, playing their part in responding and contributing to the transition.
There are several ways in which the TFMR delivers a good steer for non-executive directors. Firstly, the findings of the review are very much around key barriers to the scaling of transition finance. An important theme is the shortage of commercially viable projects as opposed to a lack of capital (leading to questions around engagement in public policy to change the economics and unlock private capital, and also to questions around innovation in financial products). Building credibility and integrity in relation to transition finance is also a priority theme, particularly to safeguard against greenwashing concerns.
Some areas of boardroom discussion that could help firms’ approach to financing the transition, include:
- How does our approach identify and assess credible transition finance opportunities?
- How does our approach align with the objectives, priorities and targets that we've set as an entity around net zero?
- What are our governance processes, systems and controls, and how do they ensure that we are able to take up the opportunity of transition finance, embed and ensure our long-term resilience, and do so in a way that that doesn't open us up to reputational concerns and greenwashing accusations?
- And how are we responding and contributing to the transition as a firm, embedding this in our financing decisions? And how, to deliver on our objectives, are we going to use the information in real economy companies’ transition plans in order to determine where we want to allocate our capital?
Ultimately, transition planning needs to be embedded right across the economy so that financial services firms can support the transition of real economy companies in the most effective way, by using the information in those transition plans to inform financing decisions. The Chapter Zero Transition Planning Toolkit is a good starting point for boards to develop and refine their transition plans.
About the author
Mark Manning is an independent advisor on sustainable finance. He works as a senior advisor with Chapter Zero, providing strategic direction to the development of the Financial Services Community. Alongside this role, Mark with works with a number of other organisations across policy, academia and civil society, with a focus on transition planning, system change, sustainability reporting and sustainable investment. Among his engagements, Mark works with the London School of Economics and Political Science (Grantham Research Institute, Centre for Economic Transition Expertise), the IFRS Foundation, the World Bank, the International Organization for Standardization, and the World Business Council for Sustainable Development. Mark spent much of his prior career working in the official sector, holding various senior policy and research roles in central banking and securities regulation in London and Sydney – with the Bank of England, the Reserve Bank of Australia and the UK’s Financial Conduct Authority. Mark holds Master’s degrees in Economics and Finance, from University College London and London Business School, respectively.
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