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Country rankings shift in the Green Finance Index

Author: ICAEW Insights

Published: 04 Jun 2021

A new index ranking financial centres according to their green credentials has warned that Europe’s domination is under increasing pressure from Asia Pacific and North American financial hubs.

Amsterdam moved up one place to take first place in the latest global Green Finance Index (GGFI 7) produced by Z/Yen, narrowly pipping Zurich, with London retaining its 3rd place. Although Western Europe continues to dominate the top 10 places, Z/Yen has warned that its crown may be slipping with such stiff competition from both the North America and Asia/Pacific regions. 

Tokyo, Beijing, Sydney, and Singapore all consolidated gains displacing incumbents from Western Europe in the rankings. A number of leading Western European centres are likely to be displaced from the top 10 over the next two or three editions of the GGFI if this trend continues, Z/Yen warns. 

The analysis shows that ratings of green finance rose in all centres for both depth and quality. As ESG (environmental, social, governance) reporting, green bonds, policy performance bonds, and other aspects of green finance penetrate mainstream financial activity, there is growing confidence in the development of green finance across all regions, Z/Yen says.

Professor Michael Mainelli, Executive Chairman of Z/Yen Group and former Binder Hamlyn senior partner, said the encouraging focus on green and sustainable finance by financial centres could materially improve the nature of economic recovery from the Covid-19 pandemic. 

“London’s performance on green finance is due to solid support from the City of London Corporation and HM Government, as evidenced in the Green Finance Institute,” Mainelli said. “Yet there is no room for complacency. Continental centres have actually led London in a number of areas, despite London’s reputation for innovation. A good example has been policy performance bonds (aka performance incentive bonds or sustainability-linked bonds).

“What could really make London stand out would be HM Government issuing a policy performance bond or gilt for net zero 2050, a bond that paid no interest if annual targets were met, but higher interest if they weren’t. It would resemble an inflation linked bond for the environment,” Mainelli added.

The government’s Green Finance Strategy, published in July 2019, outlines the opportunities presented to the UK’s financial services sector by the transition to net zero and stresses that green finance is at the heart of the Government’s approach. Just last month, the government opened a new UK Centre for Greening Finance and Investment (CGFI) with physical hubs in Leeds and London to provide data and analytics to financial institutions and investors to help them understand the environmental impact of their investment and business decisions.

Speaking at CGFI’s launch, Energy and Clean Growth Minister Anne-Marie Trevelyan, an ICAEW-qualified chartered accountant, said the government will not reach its net zero target without mobilising private capital and unleashing the power of the free market. 

“The UK Centre for Greening Finance and Investment in London and Leeds will encourage financial services to turn the tide of their investments and focus on sectors and companies that have a smaller environmental footprint. Doing so will support industries and businesses to develop clean green innovations, creating thousands of jobs across the country – ensuring we build back greener,” Trevelyan said.

However, new research from Greenpeace UK and WFF has criticised financial institutions for not doing enough to tackle climate change in the UK, despite the focus on green financing. UK banks and asset managers were responsible for financing 805m tonnes of carbon in 2019, equivalent to 1.8 times the annual net emissions of the UK as a whole, the report finds. 

Despite a new government target to reduce emissions by 78% by 2035 announced last month, Greenpeace and WWF insist that neither the government nor relevant regulators have taken adequate action to ensure the activities of UK financial institutions are aligned with this target, the net-zero target or the goals of the Paris Agreement. The charities are calling for legislation that requires all UK regulated financial institutions to adopt and implement a transition plan that is in keeping with the goal of limiting global temperature rises to 1.5°C.

Dr Ben Caldecott, Director of the Oxford Sustainable Finance Programme and the UK Centre for Greening Finance & Investment, said: “UK financial institutions need to stop financing capex that will result in carbon lock-in and stranded assets. There is a huge opportunity to help clients rapidly transition towards net zero carbon and nature positive.”

David Petrie, ICAEW’s Head of Corporate Finance, said: “There is very significant expertise on green finance within ICAEW member firms that has contributed to London being in the top three in this Green Finance Index. Our member firms have developed the expertise to not only provide the advice sought after by clients, but also to assist in developing policy that achieves the very ambitious targets that the government has set. 

“Bearing in mind the government’s ambitious emissions reduction targets, it is essential that we have stability in government policy. The UK’s leading role in COP 26 also provides a platform for further clarity on long-term targets and energy policy.” Petrie added.