London city crowd shopping

A group of retailers – whose members include Aviva, BT, Cemex, Ikea, Kingfisher, M&S, Nestle, Sky and Tesco – have criticised the UK government for not doing enough to improve energy efficiency in non-domestic buildings.

They want to see a target for the UK’s building stock to be nearly zero carbon by 2050, and the establishment of a new zero carbon buildings target to be enforced by 2020, to be followed by a truly net zero carbon buildings standard.

Known as the Aldersgate Group, they took a year to look at structural challenges in financing the creation of low carbon infrastructure, and, based on interviews with businesses and investors, found that a chief problem is a lack of clear policy goals to help unlock private sector finance in order to meet decarbonisation targets.

As part of 30 recommendations for government, business and investors in their new report, Towards the new normal: increasing investment in the UK’s green infrastructure, they are urging the UK government to commit to support the growth of green investment over the long term, set better targets and to “enforce more strictly” existing energy efficiency policies.

They want an increased ambition to upgrade the UK’s domestic buildings to EPC band C by 2035 broadened to apply to commercial buildings.

Alex White, the report’s lead author and senior policy officer for the Aldersgate Group, said: “Over the next three decades, the UK needs hundreds of billions of private investment in green and resilient infrastructure to meet the objectives of the Clean Growth Strategy, Industrial Strategy and 25 Year Environment Plan. But investment isn’t happening fast enough on its own.

“The government must catalyse action on green infrastructure investment now to move the financial system towards a new normal if we are to meet our policy goals cost effectively while maximising benefits for UK plc.”

The group’s report suggests government could engage a wider base of investors by establishing the potential size of the market, and creating tax breaks for energy efficiency investment by businesses. It says government could help boost the uptake of service agreements with energy supply companies by offering short-term guarantees on contractual risks, such as one of the parties going bust.

Government should also lead by example and mandate greater energy efficiency across all publicly owned building stock, the Aldersgate Group says. This would create a project pipeline, increase investment flows and potentially lower costs for private sector firms.

Other recommendations include adjusting financial regulations to encourage long-term investment in green infrastructure, such as introducing a legal duty for all fiduciaries (such as pension fund trustees) to consider financially material environmental and social governance (ESG) risks.

All planned infrastructure spending should pass a “green” test with sustainability requirements in all public procurement, including supporting local government with standardised power purchase agreements and energy management services contracts, Aldersgate Group says, to avoid locking in emissions for the future and to maximise resilience against flooding and future climate-related risks.

Finally, the group wants to see the issuing of a sovereign green bond and municipal green bonds to help fund the delivery of low carbon projects and address a potential drop in financing from institutions such as the European Investment Bank.

The report is released in conjunction with four separate briefings, which explore in detail several of the specific barriers and solutions to key types of green infrastructure investment:

  • Increasing investment in domestic energy efficiency
  • Increasing investment in commercial energy efficiency
  • Increasing investment in low carbon power
  • Increasing investment in natural capital

Steve Waygood, chief responsible investment officer for Aviva Investors, welcomed the call to “use the dormant assets within the insurance and investment sectors to introduce a national financial literacy campaign to educate people about how their money is invested and how this shapes the world they retire into”.

“This would help create sustained demand for sustainable investment, helping to grow the UK economy on a longer term and more sustainable basis for the future.”

Emma Howard Boyd

Emma Howard Boyd, chair of the UK Environment Agency, commented that “some businesses are already alive to the risks and opportunities presented by climate change, but not enough”.

She said that the UK could show international leadership “with financial innovation to counter increased risks from droughts and storms”.

“The government’s Green Finance Taskforce is currently discussing how to accelerate investment in resilience, so this report is timely and helpful.”

Boyd is a member of the taskforce herself, which is a cross-departmental initiative working with industry to accelerate the growth of green finance. She says there are plenty of investment opportunities presented by climate resilience.

“Flood protection is good for the economy,” she argued recently. “It allows companies to do business in severe weather by keeping their properties open, and their supply chains moving, as well as the transport links that bring in customers and trade.”

Are pension funds ready for climate change?

But fiduciary bodies such as pension funds have a long way to go before they can appreciate the risks. A self-selecting survey carried out by the trade magazine Professional Pensions suggested continuing widespread misunderstanding. It found that 53 per cent of trustees, scheme managers and pension professionals did not see climate change as a financially material risk to their own or their clients’ portfolios.

Similar, qualitative research by the pensions law firm Sackers indicates that many trustees do not pay significant attention to ESG issues: “[Trustees]… consider ESG and external governance reviews to be low priorities. Some participants were not sure what ESG meant … Some see ESG as a distraction or potentially detrimental to achieving the scheme’s goals.”

The Financial Conduct Authority is currently considering whether to make reviews of such risks mandatory.

Mary Creagh

As part of a wider inquiry, Mary Creagh, the chair of the UK’s cross-party Environmental Audit Committee, last week wrote to the top 25 pension funds in the UK to ask how they manage such risks.

She said in her letter: “The climate change risks of tomorrow should be considered by pension funds today. A young person auto-enrolled on a pension today may be 45 years away from retirement. Over that timescale these climate change risks will inevitably grow. We are examining whether pension funds are starting to take these risks into account in their financial decision making.”

Pension funds have yet to respond to her, as has the government to the Aldersgate Report’s recommendations. Business as usual will not change without concerted effort and stimulus, and legislation, procurement strategies and tax breaks are three tools the government should deploy.

David Thorpe’s two new books are Passive Solar Architecture Pocket Reference and Solar Energy Pocket Reference.  He’s also the author of  Energy Management in Building and Sustainable Home Refurbishment.

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