Staying on top as a pre-eminent global financial centre requires constant reinvention and the City of London has been doing it for hundreds of years. Brexit is the latest catalyst, factor in climate change and you have a new cause célèbre. Chancellor Rishi Sunak and the Treasury think they have the answer and want the UK to reinvent itself as a world leader in green finance.
But is the City up to the job? The Global Green Finance Index is a good indicator. It measures depth and quality. Zurich and Amsterdam top the charts, followed by the UK. “If these types of reports are anything to go by, then London may face an uphill struggle in years to come,” says Emily Kreps, global director of capital markets at CDP.
Don’t write London off in the global grand prix for leadership in sustainable finance. Look beneath the bonnet and the engine is increasingly green. “The growth in sustainable investing that we’ve seen this year highlights the resilience of the City of London as a sustainable investment hub. This is at a time when COVID-19 has disrupted the global economy and financial markets,” says David Schwimmer, chief executive of the London Stock Exchange Group.
“The City is uniquely placed to drive commercial innovation in green finance products. It also offers exceptional international market access to liquid, diverse and deep capital markets.”
Historically, the City has always been at the forefront of change
City of London Corporation research shows more than 220 UK organisations have expressed support for the Task Force on Climate-Related Financial Disclosures, the highest number in the world only after Japan, while 577 UK investors are signatories to the United Nations Principles for Responsible Investment, which is the largest number after America.
The UK was the first country to make a legally binding commitment to net-zero greenhouse gases, it is also hosting COP26, the international climate summit, next year. “The UK remains the leading venue for international green bond issuance, now a green gilt would catalyse our domestic sterling green bond market and cement the UK’s position as a leader in green finance. There is strong demand for a green sovereign bond,” says Dr Rhian-Mari Thomas, chief executive of the Green Finance Institute.
A first green sovereign bond for the UK
As luck would have it, chancellor Sunak has now announced that he’ll issue a sovereign bond. It’s not a new financial instrument though. This form of borrowing is already used in 16 countries including Germany and Sweden. Green gilts are being rolled out by governments to fund low-carbon infrastructure projects. But it shows progress.
“The City of London has come from a long way behind on the European Union and fast. It’s caught up with the Nordics and Benelux when it comes to green finance. Historically, the City has always been at the forefront of change. Over centuries it has developed an extremely sophisticated framework from which to drive new initiatives and green finance is no exception,” says Narina Mnatsakanian, director for sustainable investment at Kempen Capital Management.
The big question now is how the City stays ahead of rival financial hubs. It helps that there is an ecosystem approach in London. The UK’s policy and regulatory environment underpins the green economy. There are also numerous initiatives supporting sustainable finance on its markets. Mark Carney, former governor of the Bank of England, has been instrumental in pushing this agenda into mainstream financial thinking.
“Inaction is more of a threat than action; the City now needs to maintain its sense of urgency. However, there are many reasons to believe it will play a pivotal role in green finance, perhaps the pivotal role,” says Faith Ward, chief responsible investment officer at Brunel Pension Partnership.
“Inaction is more of a threat than action; the City now needs to maintain its sense of urgency. However, there are many reasons to believe it will play a pivotal role in green finance, perhaps the pivotal role,” says Faith Ward, chief responsible investment officer at Brunel Pension Partnership.
A marathon, not a sprint for green pre-eminence
Issuers wishing to raise substantial capital linked to sustainable investing goals still look to the City. London also has a strong debt market supporting green funding. But it’s not immune to the uncertainties from a divorce with Europe. “With Brexit, London is at risk of losing some of the green funding to Europe,” says Gordon Kerr, head of European structured finance research at DBRS Morningstar.
“However, one of the main strengths supporting the UK in terms of funding markets is the legal framework. Most issuers prefer to have contracts written under English law due to the market view of its strength as a neutral dispute resolution location. However, bonds using English law have declined in recent years, though it still remains a high proportion of issuance.”
London is also home to the groundbreaking biennial exploratory scenario, an exercise requiring the largest UK banks to disclose the financial impact of climate change on their corporate lending portfolios.
“This is a world first and a critical missing piece of the data and risk management pie, so it’s a huge first step in rightsizing the cost of risk for green, brown and transitioning companies. Once completed by the end of 2021, banks will have a globally leading depth of knowledge into the financial impact of climate change on their corporate lending books,” explains CDP’s Kreps.
The thing about the City of London, European rivals and who takes centre stage in green finance post-Brexit is it’s not a 100-metre sprint where the winner takes all. According to Murray Birt, senior environmental, social and governance strategist at DWS, it’s a marathon.
“The objective in tackling climate change is to have as many people, institutions and countries cross the finish line as soon as possible, achieve lower emissions and greater prosperity through job creation,” he says.
There are few cities on the planet that have a critical mass and a financial ecosystem that can achieve all these green ambitions at once. “The innovation of thought in the City is awe-inspiring,” says Caroline Saul, partner at Osborne Clarke. Maybe London is where it’s at?
