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Why the financial sector is at the heart of net zero progress

Author: ICAEW Insights

Published: 01 Mar 2024

We’re at a point of major change, says the CEO of TheCityUK. It’s time for the finance sector to step up and meet the challenges ahead.

The role of a successful financial and professional services ecosystem has always been about meeting economic and social challenges, says Miles Celic, CEO of TheCityUK, which represents financial and related professional services firms in the UK. “It goes back to Mesopotamia and the Italian city states. It’s always been central to the role of a successful financial centre.”

That is why the industry is well placed to meet the challenges of reaching net zero which is, he explains, both an economic and a social challenge: “This is absolutely a moment where the industry can step up and support governments, support civil society and the third sector. The challenge of reaching net zero is greater than any single part of society can meet. It’s going to need a collective effort in order to achieve it.”

One of the critical problems for industry to solve is how to increase the flows of private finance to the economies that need it most. It’s often positioned as a global south or emerging economies issue, but Celic believes it’s a truly global challenge: “No single country can do this by itself and no single sector can do this by itself. It’s going to need a partnership approach.”

Finance must be seen as part of the solution, and so the industry must be given the ability to be part of that solution. There is a massive opportunity to harness trillions of dollars’ worth of assets under management that could play a role in dealing with some of the socioeconomic challenges the world is facing, he says. 

“Let’s take an example. If you’re an insurer who can invest in a piece of green infrastructure that helps deliver the transition to net zero, it’s the sort of asset that historically can provide a return you can conceivably use to pay claims to support life insurance returns or retirement products, which is part of the solution to deal with the challenges of an ageing population. So there’s a virtuous circle we can create here, if we get it right.”

The industry also has the power to funnel investments into net zero technologies and industries. It all makes good business sense, says Celic: “This is an area that’s a bit of a frontier in many ways, and will continue to be a frontier. When you look at the technological developments, the consumer and financial elements, all of this is about recognising that we are on a journey, and that it is an evolving process.”

There are many financial centres around the world that want to be seen as a global leader in financing net zero, which should drive healthy competition and, in turn, encourage innovation. To enable this, it’s essential that the regulatory environment is right, he says: “It’s about making sure we’ve got a regulatory environment that supports innovation while recognising, as I say, that this is a process of trying things, learning as we go to find the right solutions to what are very new problems.” 

He is hopeful that the world is on the threshold of an acceleration in action towards net zero, and that the demand is there for that to happen. It requires a considerable amount of finance, a significant proportion of which will have to come from the private sector. According to McKinsey, the world needs to invest another $3.5trn a year on top of current spending in order to achieve net zero by 2050.

Reporting standards from bodies such as the International Sustainability Standards Board have been welcomed by the finance sector, says Celic. Regulatory fragmentation should be avoided; while different jurisdictions will have different needs and approaches, there must be interoperability between standards. 

“We also need to ensure that there isn’t a proliferation of standards, which would cause fragmentation. There needs to be clarity. Otherwise you will end up with a range of different standards and codes – some of which, if you’re not careful, may end up exacerbating the problem rather than helping solve it.” 

Reaching net zero is a core strategic priority for TheCityUK, which has recognised how important and transformative it could be for finance. It is engaging in policy discussions to ensure the best environment for the development of appropriate regulatory frameworks and reporting standards to support the net zero transition. 

The sector needs to recognise that reaching net zero is an enormous opportunity, he says, particularly for the UK, which is one of the world’s leading financial centres: “This ought to be an area where we are absolutely in the vanguard of the adaptation challenge, responding to that challenge and ensuring that we can harness finance to green and sustainable ends.” 

The US stepped up its net zero efforts with the Inflation Reduction Act, and the EU responded with its Green Deal. It’s important that the UK is in the best possible position to attract investment to fund the transition,to attract inward investment and invest externally in the best possible opportunities: “We need to deal with any barriers to green growth and to embed the UK as one of the leading centres for green finance. So we’re very, very supportive of the direction of travel in the UK. This is a race; we need to be the global centre for carbon markets. And we need to ensure that the policy and cooperation in the UK between the government, the authorities and the industry is pointing us all in that direction.”

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