“Hope” is the thing with feathers | The Radical Old Idea with Prof. Tim Jackson

In our latest Radical Old Idea, Royal London’s Kaisie Rayner was joined by Professor Tim Jackson to discuss his latest book, ‘Post-Growth: Life after Capitalism’. In a discussion that ranged from Adam Smith to the teachings of Buddhism, to maintaining hope in the face of despair. Professor Jackson called for a complete rethink on how we define prosperity. Watch the full session now on EFx.

While Professor Jackson’s previous book, ‘Prosperity without Growth’, was close to a policy manual for governments, ‘Post Growth: Life After Capitalism’ is a philosophical examination on the failings of our current economic model. Although written during the Covid pandemic and certainly partly influenced by the fallout of the last 18 months, it is more a culmination of years of reflection from one of the world’s leading ecological economists.  

The session started with Adam Smith, the so-called ‘father of capitalism’. Professor Jackson described how the legacy of Adam Smith has been “used and abused” by free-market capitalism. Proponents of lassez-faire capitalism seized on the ‘invisible hand of the market’, as evidence that Smith would be an advocate of today’s economy.

Professor Jackson disagrees, arguing that Smith would have been appalled by the modern markets, and their domination by monopoly power. Smith believed markets relied upon trust and community, and that the state had a fundamental role in countering unrestrained self-interest. The power wielded by conglomerates over governments today was something Smith warned against, not something he would have lauded.

In his book, Professor Jackson also mentions another great thinker who has had one of their ideas take on a life of its own, psychologist Abraham Maslow. Maslow’s 'hierarchy of needs' has been used as evidence that a linear relationship exists between fundamental human needs such as food or shelter, and social or psychological needs.

Without the former, humans do not engage with the latter. Maslow later upturned this hierarchy – something which has been lost in history. Social and psychological needs are not ‘nice to haves’ but fundamental to human wellbeing. Our physical needs can be secondary to our social needs – a lesson reinforced by our experiences over the last 18 months.   

Professor Jackson also spoke of how Buddhism and capitalism start in the same place – the recognition of suffering. The message of capitalism is to escape from this suffering, to struggle to ensure we escape poverty and ensure that we are not the worst off in society, turning life into a competitive endeavour. The recent trend of billionaires to conquer space is perhaps a manifestation of our existential anxiety to get as far away from suffering as possible.

By contrast, Buddhism teaches to face suffering head on and with compassion, not to escape it. We can learn from Buddhism in many ways, finding joy in being human and not from the material consumption essential for a society dependent on growth. If we can change our definition of prosperity to mean health and balance rather than having more, we will see a powerful transformation at every level.  

To finish, Kaisie asked Professor Jackson if he still has hope for humanity. To answer, he drew on the poetry of Emily Dickinson: 

“Hope” is the thing with feathers

That perches in the soul

And sings the tune without the words

And never stops - at all 

 Something in the human soul means that hope will not abandon us. Hope must however turn to action, and action is the antidote to despair.


Allocate new multilateral finance to developing countries, says COP26 President Alok Sharma

We need to allocate new multilateral finance to developing countries, says COP26 President Alok Sharma. On 11 July, COP26 President Alok Sharma told an audience in Venice that "climate change is the greatest challenge that we face", and "to keep that 1.5 degree limit within reach, we must halve global emissions by 2030, and these efforts depend on finance. Without it, the task ahead is near impossible."

One of the UK government's key aims for COP26 is to "get finance flowing to climate action, both public finance and private finance", with a particular focus on emerging markets and developing countries, "where the need is greatest".

Sharma claimed it was "essential that developed countries deliver the $100billion a year that they have promised to developing countries", a sum that promises to be a major sticking point in the upcoming negotiations. Agreed at Copenhagen, the failure to deliver on this promise has seriously damaged trust from developing countries in industralised countries' committment to global climate action.

One solution to this is a $650bn allocation of Special Drawing Rights (SDRs), a multi-currency lending facility, being prepared by the IMF. The G7 has argued that they want to "channel almost a sixth of the newly allocated SDRs to support healthy, green and resilient recoveries from Covid-19 in the poorest and most vulnerable countries", said Sharma, calling for a more ambitious level of SDR recycling than during the aftermath of the Global Financial Crisis.

The Reading West MP urged Multilateral Development Banks (MDBs) to take action, suggesting that "every MDB should set a date by which they will align with the Paris Agreement, as the World Bank and the EBRD have done." We will be working with the Islamic Development Bank on our Path to COP26 campaign.

"Every MDB should meet their climate finance targets, increasing them where possible, and develop plans to mobilise more private finance", said Sharma. This will be key to overcoming the significant barriers that still exist to investment in emerging markets, which can seem too risky to attract large-scale institutional capital, despite the enormous investment opportunities.

The COP26 President urged MDBs and private financial firms to "increase their collaboration, and scale-up blended finance initiatives and technical assistance, and to improve the conditions for investment within countries, and build pipelines of high-quality, bankable projects". One initiative in this vein has been the IsDB's Transform Fund, which Hayat Sindi, Scientific Adviser to then President of IsDB, spoke about during our SDG financing panel at Ethical Finance 2021.


The case against a growing economy

Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist

When Boulding spoke those words in the 1970s, the environmental movement was but a shadow of what it is now. In the decades since, climate change has moved from fringe concern to being at the centre – rhetorically at least – of how we think about our economies. As the problem of climate change takes centre stage, so the question of growth has followed, with countries including Scotland, New Zealand and Bhutan have made moves towards going beyond GDP in their national accounts.

They are still very much in the minority; since the industrial revolution, finance and economics have taken a constantly growing economy to be both a fact of life and an ideal state of being, something to take for granted and to strive for. But there have been voices of dissent. Before he was tragically killed, Bobby Kennedy had raised concerns about the idea of limitless growth. As Prof. Tim Jackson notes in his excellent new book Post Growth: Life After Capitalism, the younger Kennedy had, in a 1968 speech, raised concerns about the accuracy of GDP measuring social wellbeing, and the impact that pursuing it would have on the planet and its people.

Prof. Jackson, Director of the Centre for the Understanding of Sustainable Prosperity (CUSP) will be appearing in an interview with Kaisie Rayner, Climate Change Lead at Royal London on 14 July at 14:00 BST as part of our Radical Old Idea series. In the spirit of that series, inspired by the Scottish Enlightenment, the ideas discussed go back even further: John Stuart Mill professed a sympathy towards a steady state economy in 1848’s Principles of Political Economy, at the start of the industrial revolution.

Despite the constant presence of economic growth since the industrial revolution, it has changed over time. The 5% rates of growth typical in Western countries during the “golden age of capitalism” immediately following World War II had given way to rates of just 1-2%, even before the Global Financial Crisis.

Why is this? Labour productivity has been in decline. While it grows, social tensions between classes can easily be resolved. As the pie grows, we can all content ourselves with a growing slice. When it stops growing, getting a bigger slice for yourself becomes a zero-sum game. In fact, it is arguable that the astonishing growth rates of the post-war period were in fact only possible due to an increasing exploitation of the natural environment.

Since the 1980s, the social contract that characterised post-war capitalism has been broken, as the embrace of neoliberalism by Thatcher and Reagan removed any restrictions on uninhibited profit. Smith would have disagreed, railed against “those who live by profit” – a Radical Old Idea indeed – and advocated state regulation to guard against their capture of the economy. It had lead to a finance system that, as Lord Turner stated in the wake of the financial crisis, includes a lot of “socially useless” activity, focused on pursuing and capturing rents, not allocating capital to where it is most needed.

Can we continue to grow? 1972’s Limits to Growth pushed this question towards the mainstream. Fundamentally, as Jackson argues, people do not like being told their lives are limited. The idea of limits is anathema to most economists. Green growth is the preferred solution. But is it possible? There is, after all, “no growth on a dead planet”, as Jackson states.

So far, we have not decoupled economic output from material input to a great enough degree. Relative decoupling has been achieved: the carbon intensity of economic activity has fallen by a third since the 60s, but this is not enough. To reduce our impact on the planet, we have to decouple faster than we grow, and that is not happening. The solution, according to Jackson, is a reimagining of what prosperity means, moving beyond simple expansion of material wealth.

Indeed, there have been serious questions raised about whether expanding material wealth truly does entail “true” prosperity. The Easterlin Paradox was the remarkable finding by economist Richard Easterlin that, beyond a certain amount, raising average national income does almost nothing for happiness. Once you cross a threshold of roughly $20,000 per person (which suggests that growth is still important for the poorest countries), and extreme poverty and basic needs are taken care of, an ever-increasing average fails to deliver any meaningful progress.

The work of Pickett and Wilkinson in The Spirit Level perhaps goes some way to explaining this – the pair find that equality, rather than material increases, is a more reliable driver of contentment in industrialised economies. Another explanation lies in the idea of “the hedonic treadmill”, introduced by Philip Brickman and Donald T. Campbell, which suggests that humans quickly adjust to new luxuries, moving them from novelties to things they cannot live without, and losing any increase in happiness in the process.

The challenge for humanity – for finance, and for economics – is to find something other than growth to pursue, and to deal with the social consequences of limiting growth. To return to talk of pensions after discussing the future of the economy might seem mundane, but it is important.

To hear Prof. Tim Jackson in conversation with Royal London Climate Change Lead Kaisie Rayner on Wednesday 14th July, exploring these ideas in the context of the pension industry, click here to sign up. We are looking forward to a provocative debate. Tim's latest book Post Growth can be purchased at https://politybooks.com/bookdetail/?isbn=9781509542512.


UK must make its Green Finance ambition work for the whole planet

The UK government has committed to establishing the UK as a global green finance hub, and to propagating consistently high standards around green finance globally. This is a very encouraging move ahead of COP26. At GEFI, we believe very strongly that international cooperation and, in particular, engaging with the global south will be key to developing credible plans for a global net zero economy.

As our co-founder and director Omar Shaikh said:

We welcome the ambition to make the UK a leader in green finance. But Net Zero is a global game and we must use the UK’s financial services position as a global leader to take the opportunity of COP26 to make the green transition fair for every citizen of our shared planet.

Our recent flagship Ethical Finance summit saw a full day devoted to a series of global showcases, bringing in perspectives on sustainable finance from regions including South Asia, West Africa and South East Asia; see our EFx platform to watch all of these and more.

The development and implementation of TCFD and TNFD frameworks must play a crucial role in government and regulatory strategies to ensure climate and biodiversity risks are not only recognised but are measured and reported on by financial institutions. Such developments will drive green finance globally as capital is diverted towards mitigation and adaptation investments.

The emergence of global frameworks provides best practice standards, consistency and transparency the finance sector has been seeking and, in so doing, reduces the threat of greenwashing. You can watch the new TNFD Co-chair Elizabeth Mrema and Mikkel Larsen of DBS Bank, one of the key institutions developing TNFD explain the new nature-focused framework at Ethical Finance 2021.

Ultimately, the financial sector must play a pivotal role in delivering a Net Zero economy, but it cannot do so without international collaboration.

COP26 represents the perfect opportunity for the finance sector to work with governments on a global stage. As the curtain gets set to rise in less than 17 weeks, the UK government must lead from the front to inspire others to commit to a Net Zero and nature positive economy that guarantees both the survival and prosperity of the whole planet. The need to raise awareness and inspire practical action has driven GEFI to convene a powerful group of financial services institutions and stakeholders through our Path to COP26 campaign.

Alongside programmes driving Finance for Nature, and integrating faith perspectives with the SDGs, the campaign aims to unlock the power of ordinary people’s pensions to deliver a better future for everyone, and position both Scotland and the UK at the heart of a global Green Finance that works for the whole planet, ensuring that people (and not simply profit) are allowed to prosper.


Partnership agreed enabling bankers to become a ‘force for positive change’

Partnership agreed enabling bankers to become a ‘force for positive change’

The UK’s largest professional body for bankers has agreed a partnership to promote ethical investment across the globe.

The three-year agreement will see the Chartered Banker Institute and the Scotland-based Global Ethical Finance Initiative (GEFI) work towards positive change in the sector.

They will use the COP26 summit in Glasgow in November as the catalyst to encourage financial institutions to finance the transformation needed in the economy.

The strategic alliance will support bankers to play a leading role in achieving net zero and honouring commitments made at previous COP summits to limit harmful emissions.

The deal will pay particular heed to the ‘Carney Test’ – set by former Bank of England governor Mark Carney – which implores financial institutions to take climate change into account when taking any financial decision.

GEFI, which is based in Edinburgh, said the Covid crisis also presented the financial sector with the opportunity to make changes that would bring long-lasting benefits to the environment.

Recently, the Scottish Government announced it would be a partner for GEFI’s ‘Path to COP26’ campaign in order to show Scotland was playing a key role in the global shift towards environmentally responsible and sustainable finance.

The organisation is holding a series of events in the run-up to COP26.

In a joint statement, Simon Thompson CEO, Chartered Banker Institute, and Dame Susan Rice, chair of the global steering group, Global Ethical Finance Institute, said:

“Global leaders have a stark choice about the legacy they want to leave our planet.

“Financing this transition will require the deployment of global capital on an unprecedented scale and a transformational shift in the banks and the bankers of the future.

“This important partnership is aimed at supporting bankers to be a force for positive change across the world.

“Merely talking about the scale of the problem climate change presents will not be enough – the banking sector needs to act too.

“Rebuilding the global economy after Covid-19 and delivering on the climate change challenge presents a unique opportunity. 

“That’s an opportunity for bankers across the world to be a force for positive change.”

Read more in The Banker: https://www.thebanker.com/Comment-Profiles/Viewpoint/Bankers-must-pass-the-Carney-test

The Chartered Banker Institute (CBI) and the Global Ethical Finance Initiative (GEFI) have announced a three-year strategic partnership to support bankers to be a force for positive change.

The UN’s 26th climate conference, COP26, taking place in Glasgow this November, presents global leaders with stark choices about the legacy we want to leave for our planet. The scale of change to achieve net-zero carbon emissions is bigger than any transition the global economy has ever seen; to meet the climate targets set in Paris in 2015 will mean an 11% reduction in carbon intensity every year from now to 2050. 

Financing this transition requires the deployment of global capital on an unprecedented scale, and a transformational shift in the banks and the bankers of the future. The Bank of England, under its former governor Mark Carney (now a UN special envoy for climate action and finance, and the UK prime minister’s finance adviser for COP26), set the objective in 2020 of ensuring that “every professional financial decision will need to take climate change into account”. In order to pass the ‘Carney test’, as it has been dubbed, we have identified the need for every finance professional to have the skills and knowledge to accurately assess climate-related risk and opportunities.

The UN Principles for Responsible Banking align banks and their lending decisions with the needs of our planet and its people. This work is well advanced in more than 200 banks worldwide; our two organisations have been helping bankers understand how to implement the principles and supporting the expansion into developing economies, for example, by supporting a group of Islamic banks who want to make this commitment. 

The CBI, the world’s oldest banking institute, launched a green finance education charter at the end of June 2020. It is now supporting its 30,000 members across the world — and its network of affiliated organisations, such as the Asian Institute of Chartered Bankers and Finsia in Australia and New Zealand — to get the skills they need to pass the ‘Carney test’. GEFI has grown in scale and reach over the past decade, as more and more bankers from different disciplines have sought out the expertise they need for the herculean task ahead. It has launched a ‘Path to COP26’ campaign that brings together 40 financial institutions, managing more than £2tn in assets, who are committed to make finance work in support of COP26 and on the road to net-zero. In line with our efforts, we are pleased to see UK banks such as NatWest, a sponsor of COP26, strengthening its climate policies.

But we all need to do more. Knowing how to measure the size of the climate problem and the risks that banks face is not enough. The explosion in fintech and the recovery from the global financial crisis has demonstrated the powerful forces of innovation and adaptation that reside within banks. Leaders in banking must make it clear that they want to see that power mobilised and channelled in this direction. We should expect our banks and individual bankers to be at the forefront of developing solutions and enabling a transition to a greener, fairer and more sustainable future. However, the impact and timing of decisions in the short, medium and long term must also consider how change can provide a socially just transition for customers, communities and society through responsible lending and inclusive, customer-centric services.

Rebuilding the global economy after Covid-19 and delivering on the climate challenge presents a unique opportunity. Now is the time for bankers to be a force for positive change. 


What will the UK Government's 'nature positive' response to Dasgupta mean for finance?

The UK government recently committed to a 'nature positive' response to Prof. Sir Partha Dasgupta's review of the Economics of Biodiversity. At Ethical Finance 2021 last week, Prof. Dasgupta called for a 'World Bank of Biodiversity', arguing that despite the complexity of nature and biodiversity, there are ways of reducing the issues to fairly simple economic principles. The biosphere should be treated as a global public good, argued Prof. Dasgupta at the annual Ethical Finance Summit, explaining that treating it as such would justify paying penalties for its desctruction.

In the UK Government's response to Prof. Dasgupta's review, it committed toi a number of actions ahead of the crucial COP26 climate summit in November. These include:

  • Committing up to £3 million additional support to the development of the Taskforce on Nature-related Financial Disclosures framework – a market-led initiative which will support business in assessing emerging nature-related risks and opportunities
  • Working with the Office for National Statistics to improve the way nature is incorporated into our national accounts
  • Further improving Government guidance for embedding environmental considerations into policy-making processes
  • Incorporating biodiversity into the UK Government Green Financing Framework
  • Joining the OECD Paris Collaborative on green budgeting, an initiative to encourage governments to incorporate climate and environmental considerations into their financial and fiscal decisions

These are all no doubt positive developments - necessary steps on the way to creating global frameworks that protect biodiversity and the biosphere. However, given the scale of the challenges we face, are they enough? The Living Planet Report 2020 reports stark statistics regarding biodiversity, including:

  • An average 68% decrease in population sizes of mammals, birds, amphibians, reptiles and fish between 1970 and 2016
  • A 94% decline for the tropical subregions of the Americas over the same period
  • 75% of the Earth’s ice-free land surface has already been significantly altered, most of the oceans are polluted
  • More than 85% of the area of wetlands has been lost
  • Until 1970, humanity’s Ecological Footprint was smaller than the Earth’s rate of regeneration. To feed and fuel our 21st century lifestyles, we are overusing the Earth’s biocapacity by at least 56%
  • Per person, our global stock of natural capital has declined by nearly 40% since the early 1990s, while produced capital has doubled and human capital has increased by 13%

Put simply, nature is in crisis, and as this crisis depens, it will affect our economies more and more. As the Dasgupta review pointed out nature suffers from a 'Tragedy of the Commons' effect - while the benefits for its destruction are privatised, the costs are public - a classic 'Principal-Agent problem', in the economists' parlance. To address this, we desparately need global cooperation between governments, finance, business and civil society on protecting biodiversity, and we need it now. THe steps the UK Government has committed to are a crucial step on the road to protecting nature with a 'World Bank for Biodiversity', but without committments to go further - to not just report and disclose impacts, but actively work to prevent them - there is a risk that this could be too little, too late.

The finance sector needs an urgent, credible plan to make TNFD reporting mandatory, as reporting in line with TCFD is likely to become soon. While TCFD's progress from idea to (in some territories) law has been admirably fast relative to the usual pace of public policy, it has still been too slow relative to the climate crisis. To respond to the crisis of nature and biodiversity that we are seeing, TNFD must be even faster.

At COP26, we will be exploring these issues as part of our Finance for Nature programme in our Path to COP26 campaign, with a dedicated focus on nature discussions in the unique setting of Loch Lomond. Click to learn more.


Ethical Finance Round Table Summary: Leadership is crucial in driving better economies

Leadership is crucial in driving better economies. From fighting the climate crisis, to driving inclusion across business and society, we cannot build a better world without effective leadership. The pandemic, combined with the threat of the climate crisis, has created a uniquely challenging set of circumstances for leaders across the spectrum.

In the latest Ethical Finance Round Table, taking place on 5 May 2021 and entitled ‘Leadership: Embedding Responsibility’, Michael Cole-Fontayn, Chairman at the Chartered Institute for Securities and Investment (CISI) and the Association for Financial Markets in Europe (AFME); Helen Cook, Chief HR Officer at NatWest Group; and Karina Robinson, CEO at Robinson Hambro joined moderator Graham Burnside of GEFI to discuss the role of leadership in driving social and environmental responsibility in organisations. Despite the scale of the challenge, the panel offered optimism that leadership in the finance sector is moving in the right direction.

While the current global health and economic crisis has tested the resolve of leaders throughout finance, Michael Cole-Fontayn emphasised that climate change, biodiversity loss and social inequality offer a challenge many times greater. He added that, on top of these existential pressures, managers in the finance sector are facing increasingly complex demands from clients, governments and regulators.

Helen Cook discussed NatWest Group’s journey to put their purpose at the centre of the bank’s strategy, stressing the importance of action over words. While the NatWest journey began 5 years ago, it has become the bank’s ‘North Star’ during the pandemic by providing a guiding purpose through its three core tenets: enterprise, learning and climate. One manifestation of this has been the shift towards hybrid working, likely to continue after the pandemic. Helen also remarked on the ways in which her role has changed over the years, with investors more concerned than ever about the practical steps companies are taking to look after their employees.

Karina Robinson gave an optimistic view of the future: while the finance sector is in no way perfect, there is an effective ‘carrot and stick’ across the industry, with incentives to perform well allied with much-needed effective regulation. Even prior to Covid-19, Karina argues that there was general dissatisfaction with capitalism, consistent across generations and even income levels, and only by addressing this dissatisfaction can the business sector make the case for capitalism.

The session ended with a Q&A; one particularly interesting question asked about the challenge of leading hybrid workforces, creating cohesive teams while some employees are in the office and others work remotely. Michael pointed out that those physically present tend to unconsciously exclude virtual participants, with Karina arguing for effective education to resolve this issue and Helen highlighting the role of behavioural scientists employed by NatWest Group to understand the psychology behind the challenges of a hybrid workforce. “Middle manager” might be a term with negative associations, but as Helen pointed out, it is becoming an increasingly difficult job as working patterns become more complex.


Greenwashing - what it is, and how to avoid it

What is greenwashing, and why does it happen? With Earth Day 2021 coming up, we take a look at a phenomenon which threatens the credibility of green businesses across the spectrum. For those inside the sustainable finance movement, the term is familiar. It is a common enough phenomenon that it has even made its way into the dictionary, with Cambridge Dictionary defining it as “mak[ing] people believe that your company is doing more to protect the environment than it really is”. In finance, this could mean a “green” investment fund which invests in unrepentant fossil fuel companies.

It is not hard to see how this could harm the credibility of both individual businesses and the green business movement more generally. If there are persistent gaps between how companies present themselves and their products and what they are actually doing, this will harm trust, putting customers off green products and causing genuine damage to the environment in the process. To mitigate this risk to both the environment and businesses operating in good faith, there have been numerous attempts to standardise what it means for a financial product to be considered “sustainable”, most notably the EU Sustainable Finance Taxonomy.

The rise of legal standards around sustainable finance implies three distinct types of greenwashing – scientific, legal, and perception. Legal greenwashing refers to falling short of legal standards, scientific to being assessed to fall short of some standard – for example, being consistent with limited global temperature rises to 1.5C – and perception to falling short of public expectations of what a product should mean.

This suggests that there can be both deliberate and accidental greenwashing. As more customers across the financial system demand sustainable products, the incentives to label products as green have increased, and consequently fund managers may consciously or subconsciously respond to this incentive. Fund managers might also sincerely believe in a product which turns out to fall short of legal, scientific or perception standards for what that product should be.

For example, many in the finance industry, such as Lothian Pension Fund’s David Hickey, strongly believe in the power of equity engagement on “brown” stock. The public – as shown in this video from pension campaign group Make My Money Matter – may have limited understanding of the details of how pensions operate and expect even those funds not explicitly engagement in ethically-aware investing to avoid some types of businesses.

With the complex spectrum of greenwashing in mind, it is difficult to put a number on the exact scale of the problem, in finance and beyond. As regulation around sustainable finance improves, and consumers demand more integration of ESG concerns, we will no doubt see some fall short.

How do we solve a problem like greenwashing? Sadly, it seems unlikely that the problem will just go away of its own accord. As sustainability becomes an ever more important part of economic life, greenwashing will continue to be an issue, but one that can be mitigated as regulators, consumers and the financial industry improve their understandings of sustainable finance. In future, assessing whether a financial product’s green credentials are grounded in reality will be as important as assessing whether its financial claims stand to muster.

One innovative solution, touted by Kaisie Rayner, Climate Change Lead at Royal London, at our Ethical Finance 2020 panel on greenwashing, is to flip the situation on its head. With food, Kaisie pointed out, we do not highlight the vegetable content, but rather the sugar and fat. Likewise, instead of labelling some products as “green”, perhaps we should instead be putting health warnings on those that are not.

What can we do to prevent greenwashing?

Be open, honest and transparent about financial products

Financial institutions should disclose the details of their products, and not try to optimistically claim unearned green credentials. Consumers should be able to easily find out the principles and strategies of ethical finance products.

Call out bad practices

Where greenwashing is taking place – intentionally or not – we should call it out.

Strengthen regulation and standardise terminology

Historically, the ethical finance sector has run largely on trust. Firms have been responsible for labelling products as “green”, “ethical” or “ESG”, and consumers have been responsible for assessing whether these labels match their expectations. A standardised set of terms for ethical finance should improve transparency.

Move towards “health warnings”

It should become standard practice to highlight the aspects of a financial product that consumers might not want to be associated with.


UK Pension Funds Required to Report on Climate Change Impact

UK pension funds are now required to report on their climate change impact.

  • New legislation puts obligations on UK pension trustees to evaluate and report on the risks and opportunities presented by climate change.2
  • It is likely that from October 2021 UK schemes with over £5billion in relevant assets will be required to make disclosures in line with the recommendations from the Task Force on Climate-Related Financial Disclosures (“TCFD”)3 and this requirement may be expanded to smaller schemes as early as 2024.8
  • The TCFD recommendations are designed to guide organisations in providing better information on the impact of climate change to support informed capital allocation.4
  • TCFD-aligned disclosures will be mandatory across non-financial and financial sectors of the UK economy by 2025 and in New Zealand by 2023.5, 9

The impact of climate change will be felt across all aspects of society and across jurisdictions. The process of transition to a low carbon world needs to involve both individuals and governments alike. Consumer led activism has already started in the pensions industry – our recent blog on Make My Money Matter highlighted that 52% of consumers want their pensions to be part of the solution in tackling climate change. The Pensions Schemes Act 2021 (“the Act”), which achieved Royal Assent on 11 February 2021,1 is further pushing the c.£2 trillion in assets under management of UK occupational pension schemes towards considering the impact of climate change.6 The Act has also laid the foundation for a pensions dashboard to enable individuals to view their pensions online, providing greater transparency.10 The Act also includes increased Pensions Regulator powers and associated criminal offences as well as a toughening of the funding regime for defined benefit schemes.12

The Act requires trustees to ensure there is effective governance in respect of the impact of climate change as well as evaluate and report on the risks and opportunities presented by climate change.2 Guy Opperman, Minister for Pensions, said: “This Act makes our pensions safer, better and greener, as we look to build back better from the pandemic. Its passage will reassure savers that they can, and will, have a retirement they deserve.”7

Draft regulations and statutory guidance, closed for consultation on 10 March 2021, propose that schemes with relevant assets of £5 billion or more as well as all authorised master trusts and authorised collective money purchase schemes will have to produce and publish a TCFD report from October 2021.  It is anticipated that these requirements will then be extended to schemes with relevant assets of £1 billion or more from 1 October 2022. An interim review will be carried out in 2023 to determine whether the regulations will be rolled out to smaller schemes, this may be as early as 2024.8

The draft regulations require trustees to:

  • implement climate change governance measures and produce a TCFD report containing associated disclosures; and
  • publish their TCFD report on a publicly available website, accessible free of charge.3

The TCFD was set up in 2015 to deliver a set of recommendations for voluntary company financial disclosures of climate-related risks. The intention of TCFD is to facilitate an orderly transition to a low carbon economy and ensure that climate-related financial disclosures are comparable and consistent. The TCFD recommendations provide guidance on making disclosures on the opportunities and risks presented by climate change, including physical and transition risks.4

Source: TCFD website

The TCFD recommendations are structured around four thematic areas: Governance, Strategy, Risk Management and Metrics & Targets. Each theme has a few recommended items that should be included in the disclosure. For example, the Governance disclosure includes “Describe the board’s oversight of climate-related risks and opportunities.” The TCFD recommendations are intended to be used as a tool to guide organisations on making climate related disclosures rather than an exact prescriptive blueprint.4

The use of the TCFD recommendations is more widespread than the UK pension sector. In September 2020, New Zealand was the first country to announce that the TCFD will become a mandatory framework, it is expected that c.90% of New Zealand’s assets under management will be required to report using TCFD by 2023.9 On the 9th November 2020, Rishi Sunak, the UK Government’s Finance Minister announced that climate risk reporting will become mandatory for some large companies and financial institutions in the UK by 2021 and will be mandatory across the UK economy by 2025.5  The Canadian government made TCFD reporting mandatory for recipients of covid-19 support funding.11

In the run up to COP26 in Glasgow in November, the UK is making firm commitments to force UK pension funds and other organisations to consider and disclose the risks and opportunities presented by climate change.

References

1Pension Schemes Act 2021 - Parliamentary Bills - UK Parliament

2 Pension Schemes Act 2021 (legislation.gov.uk)

3 Aligning your pension scheme with the TCFD recommendations (publishing.service.gov.uk)

4 About | Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org)

5 Chancellor sets out ambition for future of UK financial services - GOV.UK (www.gov.uk)

6 Pension schemes and climate-related risks - GOV.UK (www.gov.uk)

7 Landmark moment for UK pensions as Bill receives Royal Assent - GOV.UK (www.gov.uk)

8 Taking action on climate risk: improving governance and reporting by occupational pension schemes (publishing.service.gov.uk)

9 New Zealand becomes world’s first country to introduce mandatory TCFD disclosure (responsible-investor.com)

10 Passing of the Pensions Schemes Bill: the keystone of pensions dashboards | Pensions Dashboards Programme

11 TCFD adoption continues to grow (accountingforsustainability.org)

12 The Pension Schemes Act 2021.pdf (lcp.uk.com)


The Radical Old Idea with Keith Skeoch | The ESG Enlightenment | Event Summary

Keith Skeoch spoke about the ‘ESG Enlightenment’ and the power of finance to translate ordinary people’s savings into a powerful force for good in the world.

In the latest Radical Old Idea session from the Global Ethical Finance Initiative, the former CEO of Standard Life Aberdeen and interim chair of the Financial Reporting Council sat down with Royal London Climate Change Lead Kaisie Rayner to discuss the legacy of capitalism, the challenge of the climate crisis and what we can learn from Adam Smith. Watch the session now, or read the summary below.

At the start of the session, the audience of finance sector experts were polled on their views around sustainability. Over 40% of respondents said that their organisations had only started putting sustainability into their decision making in the past 5 years, with a further 17% saying that they had yet to do so, while 75% of respondents felt that the finance sector was not on track to support the massive economic transformation needed to deliver climate action.

Capitalism has, over its 400 year history, been a success story, argued Keith. It has collectivised savings into a force far more powerful than individual savers could ever be. “There has never been a more important time to invest in your future and the economy’s future and it’s your savings that will facilitate those investments”, said Keith, adding that this was “a story you only usually hear during wartime.”

Reflecting on Boris Johnson’s recent claim that greed drove the development of the new COVID-19 vaccines, the former Standard Life Aberdeen CEO agreed that it represented a victory for capitalism, but argued that the real story was the success of regulated capitalism, not unfettered greed. By tailoring the approval process for the vaccine to the unique circumstances we find ourselves in, the state and the market worked together for the good of humanity.

This is a story, as Keith and Kaisie discussed, that would have been familiar to the intellectual father of capitalism himself, Adam Smith. While some of Smith’s modern advocates paint him as a proponent of pure, unregulated capitalism, this was far from the truth. Smith’s most well-known work is the Wealth of Nations, but he also wrote at length about ethics in his other great work, the Theory of Moral Sentiments, which provides the moral purpose to the Wealth of Nations.

The point of the metaphor of the invisible hand – which he only used once in the entire Wealth of Nations – is not that markets should never be regulated for the good of society; in fact, Smith was in favour of this. Seen in the context of the fragmented markets of his time, the metaphor was simply an argument not to restrict foreign trade.

In fact, context has often been a driver of economic theory, suggested Keith. From Keynes’s response to the Great Depression in the 1920s and 30s, to Friedman’s theories about runaway inflation in the 1970s, economics has always responded to the situation it finds itself in. Ironically, however, in the years since Smith, average long-run growth rates have remained roughly stable. More than anything else, economic theory has affected the distribution of resources in society, rather than the total size of the pie.

While theories have responded to economic stimuli, over time they become intellectual straitjackets, confining thinking to a narrow policy paradigm until an external shock forces a re-evaluation. With the instability we have seen over the past few year, Keith argued that, in fact, “time is ripe for a fundamental paradigm shift” in economics and finance. The question, he suggested was “what should be the future of the new policy paradigm”, outlining 5 key factors needed in this new paradigm:

  1. Economic models which reflect the relationship between finance and other parts of the economy
  2. A responsible and sustainable corporate sector
  3. A view of regulation as something which helps markets by aligning them to the public interest
  4. A recognition that good behaviour minimises the cost of regulation by building trust
  5. A finance sector committed to putting substance into the mantra of “build back better”

Finance has a huge opportunity to make a difference as we build back better. It is the only way we can build trust and the only way that it will be delivered is by everybody taking personal responsibility: sustainability is everybody’s business.