How the City of London can keep its green crown

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.”

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?