Four Takeaways from the Green Finance Taskforce report

It is now over two years since a landmark climate deal was agreed at COP21 in Paris. Since then, much of the public attention has focused on the USA’s attitude to the agreement, but behind the scenes, attention has turned to making the ambition of a low-carbon world a reality. The UK Green Finance Taskforce (GFT) recently published its much-anticipated report, setting out 30 recommendations to maximise the UK’s investment to underpin the low-carbon transition. Here are my four key takeaways.

1. Momentum is building in sustainable finance

There has been a lot of noise in this space in recent months. The Taskforce on Climate-related Financial Disclosures (TCFD) aims to drive disclosure of climate risks within corporate reporting, while the EC High Level Expert Group on Sustainable Finance put recommendations to the European Commission early in 2018. What differentiates the GFT report is its specific UK focus and tangible policy recommendations. This represents a real effort to get the UK ahead of the curve in creating an environment for green investment, and we strongly welcome this.  

2. Data and technology are key to unlocking the low-carbon economy.

It is striking how data and technology are woven through a number of the recommendations – from clean tech development funding to the admirable focus on climate analytics. But it is Recommendation ‘2’ – establishing a Green Fintech Hub – that is the most exciting. In particular, it would be a real game changer if such a hub could facilitate tech that helps unlock retail investors’ growing desire for sustainable and ethical investing.

3. Disclosure and reporting are important, but must be implemented sensibly.

The GFT report reinforces the TCFD recommendations on the disclosure of climate risks and exposures across the economy. There is no doubt that climate disclosures will have a profound impact on the data available to capital markets, and a number of insurers have spoken passionately about taking a lead in doing this. However with insurers’ financial reporting teams under a lot of pressure amidst Solvency II reporting, and with IFRS 17 on the way, firms will not be grateful for overly burdensome expectations being set.

4. More change is needed to be a catalyst for insurers specifically.

In addition to the GFT recommendations, there is more that could be done for insurers. In particular, the existing prudential regulation environment – Solvency II – could be tweaked to make it more attractive for insurers to invest in long-term, sustainable infrastructure. The key here is the Matching Adjustment – which gives insurers capital relief through an adjustment to the valuation of their liabilities, for holding a portfolio of eligible long-term assets that match the cash flows of their long-term liabilities. The Matching Adjustment’s strict criteria, combined with the PRA’s current interpretation of MA rules, restrict insurers to assets with fully-fixed cash flows, ruling out many sustainable infrastructure projects. A more principles-based mechanism, and greater flexibility from the PRA on their interpretation of the Matching Adjustment would be a big step forward.