Select Committee statement
We now come to the second Select Committee statement. The procedure is the same as for the previous statement. I call the Chair of the Environmental Audit Committee.
I begin by thanking the Backbench Business Committee for allocating time today for me to present the Environmental Audit Committee’s recent report on greening finance. We launched our green finance inquiry in November to examine how the UK could mobilise investment in clean energy and encourage greater consideration of climate risk in financial decision making to avoid a carbon bubble. We held hearings with investors, asset owners, experts, financial regulators and Ministers. We also wrote to the 25 largest pension funds in the UK—responsible for nearly half a trillion pounds of assets—to see whether and how they are incorporating climate risk into their investment decisions.
The situation is vital to us all. The Committee on Climate Change estimates that we need to spend up to 1% of GDP, or £22 billion a year, to meet our carbon budgets. The Environmental Audit Committee found a dramatic collapse in low-carbon energy investment since 2015 that threatens the UK’s ability to meet its carbon budgets and tackle climate damage. Last year, Britain generated twice as much energy from wind as from coal, but green investment is faltering. In cash terms, investment in clean energy fell by 10% in 2016 and 56% in 2017. Annual investment in clean energy is now at its lowest level for 10 years. Is that a trend or a blip? It is too early to tell.
The Government must publish further details in time for the 2018 Budget on how they intend to secure the investment they need to meet our carbon targets. Providing clarity on the future of fixed-price contracts for renewables will be key to ensuring a pipeline of projects. We also need continuing access to development finance. The UK Government should negotiate to maintain the UK’s relationship with the European Investment Bank to provide funding for riskier, early-stage green infrastructure projects in the UK.
Let me set out how we want to see a green thread running through the investment chain. The 2008 financial crisis revealed the dangers of short-termism in our financial system. Climate change already poses material threats to our economy, our investments and our pensions. Seventeen of the 18 hottest years since records began have occurred since 2001. That means more droughts, heatwaves and wildfires and more extreme rainfall and flooding. Those risks will grow. In the time it takes today’s young people to reach retirement, the physical risks from sea level rise and more extreme weather will grow. That will affect investment in food, farming, infrastructure, home building and insurance, to name just a few.
Companies that do not make a timely low-carbon transition could also face costly legal or regulatory action. Some companies will be left behind by firms with cleaner, more efficient new technologies. Fossil fuel companies could be left with stranded assets in an overvalued carbon bubble—oil and coal deposits that they cannot burn—if we are to keep global temperature rise to less than 2° C. They also face increasing liability risks. The city of New York is taking legal action against five fossil fuel firms to recover the costs of protecting the city from flooding from rising seas caused by climate change.
The direction of travel for the global economy is clear from the Paris agreement and from what scientists are telling us about the risks of climate change. Despite that, the short-term horizons of many financial institutions, businesses and investment managers mean that sustainability risks are not always factored into financial decisions. The quarterly earnings cycle and structure of remuneration for investment consultants and fund managers encourages the pursuit of short-term returns rather than long-term considerations. Institutional investors can be prevented from acting on climate change due to confusion about the extent to which pension trustees have a fiduciary duty to consider environmental risks. KPMG’s 2017 corporate responsibility survey found that almost three quarters of large companies worldwide do not acknowledge the financial risks of climate change in their annual reports. More than half of institutional investors surveyed by HSBC said they were receiving “highly inadequate” information from companies about their approach to climate change.
The disclosure of climate-related risks would help financial markets work more efficiently. It would enable UK institutions and investors to position themselves ahead of the market to benefit from the low-carbon transition. My Committee is calling on the Government to clarify that pension schemes and company directors have a fiduciary duty to protect long-term value and should consider climate risks. Pension savers should be given opportunities to engage with decision makers about where their money is invested. Ministers must make it mandatory for large companies and asset owners to report their exposure to climate change risks and opportunities by 2022.
The UK’s existing framework of financial law and governance could and should be used to implement climate-related risk reporting. The Government should issue guidance making it clear that the Companies Act 2006 already requires companies to disclose climate change risks where they are financially material. Companies with high exposure to carbon-intensive activities should already be reporting on climate risks in their annual reports. UK financial regulators such as the Financial Reporting Council, the Pensions Regulator and the Financial Conduct Authority should amend their codes, rules and guidance to require climate-related financial disclosures. Companies and asset owners need time to develop how they report, but only if reporting is mandatory are we likely to see comprehensive and comparable climate risk disclosures. Embedding climate risk reporting in UK corporate governance and reporting frameworks could negate the need for new legislation. However, if regulators fail to implement that, there may be a need for new sustainability reporting legislation, such as France’s climate reporting law: article 173.
To those who ask whether we must do this, I say yes, we must. Climate change poses material financial risks to our pensions and our investments. To those who ask whether we are doing this, I say yes. The transition to a low-carbon economy presents exciting opportunities in clean energy, clean transport and tech that could benefit UK businesses. And to those who ask whether we will do this, I say that London is the centre of global finance, so let us make it a global centre for green finance.
I commend the report to the House.
I congratulate the Chair of the Environmental Audit Committee on, as always, doing a sterling job of steering us through the inquiry.
The Overseas Development Institute said in its evidence to our inquiry that the UK’s clean growth strategy is “undermined and contradicted” by our continued support for fossil fuel production overseas through UK Export Finance, which has been averaging £551 million a year in recent years. Does my hon. Friend agree it undermines our international climate commitments and our efforts to decarbonise our economy if we continue to support fossil fuel investment by British companies overseas?
I pay tribute to my hon. Friend’s always excellent and assiduous attendance and contributions. She is a real trailblazer and we are lucky to have her on our Committee.
My hon. Friend is absolutely right that the Overseas Development Institute has stated that our international approach is being undermined by UK Export Finance, and there is a case for this House, perhaps through a joint meeting of Select Committees, to examine where we are investing overseas, because, first, they may not be smart business investments and, secondly, they are undermining our stated international policy commitments.
There is perhaps a role for the Select Committee on International Development. The UK Government are doing brilliant work through the international climate fund and the UN. That work must not be undermined by businesses that are selling old technology, instead of taking this opportunity to leapfrog and, for example, put solar panels on mud huts in South Sudan, which is something I saw at a conference yesterday. There is an opportunity to leapfrog and not to make the same mistakes we made in our electricity generation.
My hon. Friend makes an excellent point with which I can only passionately agree.
I congratulate my hon. Friend on another excellent report.
I am a bit surprised there was no contribution by the green investment bank, now the Green Investment Group. The bank was set up by Government to look at sustainable investment. I know it has been privatised, but surely it has some ongoing role in trying to get sustainable investment. Will my hon. Friend comment on what has happened to that organisation?
I did not have time to go into our examination of the green investment bank. Our previous report in the 2015 Parliament recommended a green share in a special purpose vehicle, and I am pleased that has been taken up by the Government. The green investment bank was set up in 2012 to address market failure in this area. The question is whether that market failure still exists, and the answer is yes. Do we still need an investment vehicle to create confidence and to create that pipeline? The answer, post Brexit, is emphatically yes, which is why I mentioned access to European Investment Bank finance. Had we known Brexit was going to happen, would we have taken the same decision to privatise the green investment bank? Perhaps not.
Macquarie got the green investment bank, which has now been rebadged as the Green Investment Group, and there are still market failures. There is market failure in green transport, and our Committee heard there is no intermediate body to broker between the City of London and locals authorities that want to decarbonise their local housing schemes and council housing through low-carbon combined heat and power plants. The bank could have been that bridge.
We looked at how the process of privatisation was very disrupted and took longer than we expected, and we are concerned the Green Investment Group is investing in less risky projects. Of the four projects it has financed since privatisation, one is in Ireland, one is offshore wind in Sweden, one is in India and, of course, one is in Wakefield, West Yorkshire, for which I can claim absolutely no credit—obviously it was an excellent decision.
The Committee has an anxiety about where the Green Investment Group is going to go and whether it will focus on easier-to-finance, safer and less risky overseas projects now it is part of an international bank and lose its focus on green investment in the UK. It would be a tragedy if it does that.
I did not intend to ask the hon. Lady a question, but this gives me an opportunity to thank her and the Committee most sincerely for an excellent report. Again, I salute her leadership in this area.
Does the hon. Lady agree that the fact we still have a very substantial, multi-billion pound commitment from the Green Investment Group to invest in exactly the sorts of low-carbon innovation she and I both want to see is a sign of reassurance that the group will continue to access funds, in this case global funds, to invest in the UK and Europe?
I certainly hope that will be the case but, as we mentioned in the report, the Bloomberg figures show there has been a huge collapse in green investment in the UK—it has gone down from about £26 billion to £10 billion. We questioned the Minister on whether things are cheaper, whether there is policy uncertainty and whether there is Brexit uncertainty. I am pleased the Green Investment Group is promising to do that, and we look forward to seeing some of this project pipeline coming through, because we need £22 billion a year. This year we are on £10 billion, so we need to get that ramped up very quickly. I look forward to hearing more about how she will make that happen from a policy point of view.
I very much welcome the report, in which I played a small part. My hon. Friend will know that, globally, the fossil fuel subsidy is some £5.3 trillion, the size of the French and UK economies combined, yet 80% of fossil fuels cannot be exploited if we are to avoid irreversible climate change and to fulfil our Paris agreement. Uranium supplies will run out in 10 years once we start using nuclear to meet 12.5% of global energy needs.
Does my hon. Friend agree that the Government should take market leadership on investing in projects such as the Swansea Bay tidal lagoon and the wider lagoon network, which will provide 100 years of long-term sustainable and predictable energy, and that value for money should be seen in the round, alongside the climate risks identified in the report?
I pay tribute to my hon. Friend’s work and leadership on our Committee. He is right to say that we need a stable policy environment in order to create a pipeline of low-carbon projects. The Committee found that the policy environment has been a bit destabilised by changes to feed-in tariffs and the early closure of some competitions, and things like that.
My hon. Friend is also right to say that low-carbon electricity, particularly new forms of generation, often has high up-front costs but very low operating costs. Obviously once we get it up and running, it will be up and running for the next 50 to 100 years. We need to hear from the Government, sooner rather than later, on what their green growth plan will mean and on the policy environment they will create to enable some of these innovative projects to be brought forward.
In the report, for example, we criticised the cancellation of the carbon capture and storage competition. Carbon capture and storage is tricky, risky and innovative, and companies had invested up to £60 million in research and development on those projects only for the competition to be closed with no notice. We do not want to see the same thing happen to the Swansea Bay tidal lagoon.
Violent Crime (Sentences) Bill
Presentation and First Reading (Standing Order No. 57)
Keith Vaz presented a Bill to increase the minimum custodial sentence on conviction for possession of a knife or other offensive weapon for an offender aged 18 years or over and to increase the minimum period of detention and training order for a person aged 16 or 17; to set a minimum custodial sentence on conviction for an offender in possession of a knife or other weapon and intending to commit any offence or having such a weapon available to use in committing murder; and for connected purposes.
Bill read the First time; to be read a Second time on Friday 26 October, and to be printed (Bill 222).