“I care nothing about the line or what is done with the money. If the East India Company choose to throw the money away, it is nothing to us.” This was how a British investor described the opportunity to fund a railway connecting the lush cotton fields of Gujarat to the port-city of Dholera, reported in an edition of Herapath’s Railway Journal in 1851.
Investors in London almost exclusively financed India’s first railways, but knowledge of the opportunities was scarce. All that mattered was that the British Raj guaranteed a 5% return, and if that meant taxing the Indian people when real returns fell short, then so be it.
It’s been some time since London could rely on the hard power of the British Empire to maintain its position as a dominant financial centre. The City today offers a deep pool of capital precisely because it depends on people who have an intimate knowledge of foreign markets and boasts decades of institutional experience. This makes capital cheaper and attracts worldwide business.
That is why last year, the Indian Railways came back to London Stock Exchange to raise $500m in green bonds to fund the electrification of their network and the replacement of their diesel trains.
That the state-backed company issued green bonds is significant. Britain’s trailblazing approach to climate change and London’s role as a financial hub present a golden opportunity for the UK to be a world-leader in financing the transition to low-carbon economies.
Financial instruments that are ‘green’ are those that fund projects that are defined as environmentally sustainable. As states implement the COP21 Paris Agreement to limit global warming to below 2°C, including regulatory actions that restrict high-carbon activities, the demand from governments and corporates for finance to support sustainable investment will grow.
Savers also increasingly care about how their money is used beyond its financial return. According to State Street Global Advisors, a quarter of all professionally managed assets (or $23trn) has an ESG mandate, growing by over 10% last year.
The OECD estimates that $44trn is needed in additional investments until 2050 to put the world on a sustainable footing. The investment opportunities are huge, from funding low-carbon infrastructure in booming African cities such as Lagos, to supporting China’s plans to build a vast renewable electricity grid across Eurasia, powering its Belt and Road project.
Low carbon investment more than pays for itself in the long-run through fuel savings but the infrastructure requires more up-front capital than dirty alternatives. Providing capital efficiently therefore matters.
London’s opportunity is to arrange and structure global green investments, and to manage assets with green mandates. The world needs deep, liquid, information-rich and well-regulated capital markets for green investments. Global investors want green financial products they can trust.
While Brexit threatens to weaken London’s lucrative role in underwriting European debt, it is unlikely to preclude steps to make the City attractive for emerging markets.
The Government’s Green Finance Taskforce recently presented a range of proposals that would advance London’s position. These include leading on regulatory standards in sustainable finance and on the corporate disclosure of climate risks and opportunities, as well as supporting research into the new field of green finance.
By providing these services, London can attract new business while keeping capital costs low for issuers, quickening the green transition.
The UK also needs to promote green finance at home. Britain has led the world in cutting emissions, down 43% on 1990, but it needs to go further. The next steps in decarbonisation, which include improvements in electricity storage and the development of hydrogen fuels for industry, will be harder to achieve and require more concerted support from the state.
The Green Finance Taskforce recommends that the government issue its own sovereign green bond, but it could go further.
In support of its Industrial Strategy, the government should set up a national development bank to allocate the proceeds of multiple green bond issuances, supporting research, the development of early-stage technologies, and emerging companies. It would create further opportunities for private capital to support.
Bank of England Governor Mark Carney last week spoke about the risks to financial stability posed by a delayed transition to sustainable economies. There is a case for reviewing the Bank’s mandate to allow it to favour green bonds in its asset purchasing programme. Boosting the availability of green finance through the central bank looks prudent.
The government through its Brexit strategy wants a Global Britain. Its 25-Year Environmental Plan aims for a green Britain, too. Green finance connects the two. It offers a new role for the nation that introduced the world to the industrial method and whose imperial legacy still touches billions of people.
Green finance presents an opportunity for the London and the wider UK to lead, at home and abroad, on the biggest issue facing our shared home. It’s time to seize it.
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