UK Prime Minister Rishi Sunak’s decision last September to delay the UK’s ban on sales of new petrol and diesel vehicles, from 2030 to 2035 exemplifies the type of policy flip-flopping that is frustrating efforts by the banking sector to deliver on the Paris Agreement.

So says Heather Buchanan, chief executive of Bankers for Net Zero, a four-year-old initiative that brings together banks, businesses, policymakers and regulators in an effort to galvanise credible, demonstrable leadership from UK banks on climate change.

Buchanan points to the September announcement as an illustrative example of the UK’s government’s growing vacillation towards the goal of “net zero”, as per its commitment under the Paris Agreement to keep global warming since pre-industrial times under 1.5 degrees Celsius by 2050.

The High Court in London recently lent support to her argument, ruling that the Sunak government’s Carbon Budget Delivery Plan breached the 2008 Climate Change Act, legislation that requires successive governments to set legally binding carbon budgets as stepping stones to meeting long-term climate change objectives.

But Buchanan said the delay in plans to get fossil fuel vehicles off Britain’s roads, in particular, had dented investor confidence and caused a “wider picture around risk” to become attached to the transition agenda.

Climate policy uncertainty is not just an affliction of central government in Westminster. In Scotland, the ruling SNP party surprised its Green Party allies in April by reneging on the country’s flagship target of reducing emissions by 75% by 2030 - a move that ultimately led to First Minister Humza Yousaf’s resignation.

“What I'm seeing now is increasing frustration that policy and regulation aren't keeping up with the commitments that have been made,” says Buchanan.

Nevertheless, Buchanan says the 15 banks and five corporations that her organisation represents - including HSBC UK, Santander, NatWest, PwC and KPMG - are “too invested” in the transition to turn back.

“If anything, what I see is a lot of leaning into a greater understanding of how to measure the risk that comes from climate change and how to start incorporating that into your financial models,” she notes.

More than subsidies or incentives, Buchanan argues, companies are looking for “clarity of the direction of travel”. To that end, Bankers for Net Zero has issued a variety of detailed policy reports, since its inception in 2020, with a particular focus on two of the UK economies highest-emitting sectors: real estate and agriculture.

Nowhere is the need for policy consistency clearer than in the area of domestic retrofitting, an area of huge potential for housing-linked emissions reduction. Despite multiple government schemes - with the Green Deal, and the Green Homes Grant, among the most notable - none have stayed in place long enough for the supply side to scale and use the financial incentives available, says Buchanan.

UK policymakers would do well to look to other countries for inspiration, she suggests, highlighting in particular the U.S. model of Property Assessed Clean Energy. The scheme facilitates householders and business owners to take out zero-interest or low-interest loans to improve the energy efficiency of their properties, with the loan repayments attached to the property rather than the initial loan recipient. The scheme, which has enabled the investment of over $15 billion of capital, in the United States, encourages property owners to undertake upgrades even if they plan to sell the property in the near or medium-term future, Buchanan explains.

Bankers for Net Zero has also been trying to facilitate innovation to bring down the cost of the transition, particularly to small businesses. Buchanan cites a recently launched pilot scheme, in partnership with climate data specialist Icebeaker One, to enable small businesses that are in the supply chains of companies with net zero targets to automatically collect, verify, and share information on their electricity consumption.

“We are starting with one data point around electricity, which doesn't currently exist in a shareable format, (with) the idea to broaden it out to four or five of the most material data points and automate these as much as possible,” Buchanan explains.

But innovation - particularly in the policy space - cannot be done in isolation. She would like to see a “pact” between business, finance and government that would “bring together people who have differing opinions” in order to have honest discussions.

“To get through the policy blockers, it's going to require a political kind of private engagement that's not really been done before,” Buchanan says. “And also, let's face it, lobbying has taken on a dirty connotation, but actually, in order to get to where we need to be, there's going to have to be a lot more discussion that needs to happen.”

Such dialogue, she insists, would help iron out the kinks that currently hinder well-meaning policies from effecting real change.

Take retrofits again. The message to UK banks from the government is to simply “keep coming up with more green mortgages”. Banks, however, counter that there are “plenty of products out there” but precious little consumer demand.

“What I say to them (Bankers for Net Zero’s members) is, you know, ‘You’ve got your own risk portfolio profiles and regulatory requirements. Well, politicians have the same. So, how do you de-risk some of the bigger decisions for politicians?” she states.

Such policy discussions would be easier if trust levels were not so low. Just as Buchanan’s members grumble about flip-flopping, policymakers complain about dubious practices within the banking sector.

Back in February, for example, Barclays, Britain’s biggest lender, won plaudits when it published its Transition Finance Framework, pledging to desist from financing new oil and gas projects.

However, subsequent analysis by the shareholder activist group ShareAction suggested that the bank’s new energy policy contains “loopholes” that could see it continue to finance fracking in the future.

While Buchanan doesn’t defend intentional misleading of the market, she argues strongly that the route to net zero is likely to be paved with “mistakes along the way”, and that an element of inconsistency between a bank’s current performance and its future aspirations is inevitable.

What is important, she argues, is to have “very robust” transition plans in place that are transparent and detailed enough to provide the accountability that external stakeholders are now demanding. “This (transition) is not a black-and-white subject, as we well know. When you look at the curve for transition finance for hard-to-abate sectors, for instance, emissions go up in the first instance before they taper down.”

Going forward, Buchanan anticipates a bumpy ride. She draws comparisons with the 2008 financial crash, with banks having to deal with carbon on their balance sheets as they did back then with sub-prime mortgages.

The benefit this time round is that the financial sector knows full well what is heading its way, Buchanan reflects: “Unlike 2008, when everything just kind of dropped out from the sky, we can see that we're going to go into another period where institutions need to clean up the balance sheets … so how do we actually get ahead of that conversation?”

It's a moot question. And one that - by beginning to talk openly, honestly, and across the divide - Buchanan is answering through her own example.

  - Reuters