The financial sector is finally turning up the heat on fossil fuels – it’s about time

One of the reasons I became an economist was a fascination with the complex machine that is our economy – a system made up of the moving parts of our work, the goods and services we buy, the things we do for each other, paid and unpaid. While we see these bits and pieces, what we tend to overlook is the fuel that keeps this machine running: in a capitalist economy, that fuel is money. Where we direct that fuel will determine what our economy does, so it is vital that we shift it away from fossil fuels and towards the sustainable industries and businesses of the future.

Infuriatingly, in spite of all the hot air produced about the climate emergency in recent years, the financial system still supports and encourages the very fossil fuel industries that are destroying the global climate. But this is beginning to shift, with greater transparency and changes to the rules under which banks operate.

At the level of retail banking and financial services, we all have a right to know what the banks are doing with our money. That may seem an obvious statement, but I was astonished to find that it was controversial and a principle I had to fight for as an MEP. When people found that there was horse meat rather than beef in their lasagne, there was an outcry, but when the equivalent happens in the financial sector, customers don’t even have the right to know. Our fight was largely successful and the EU mandatory disclosure regime known as SFDR came into force last month.

It specifies the requirements for investment companies, pension funds, insurance companies and banks that provide investment services, to disclose how they take the environmental or social impacts of their investments into account. With a few limitations that we were forced to concede during negotiations, it requires all large financial market players (those with more than 500 employees) to gather and make public this detailed information about the impacts of their investments. Any firm that markets its financial products as “sustainable” faces even stricter disclosure requirements to prevent greenwashing.

Greens have long challenged the political consensus that central banks should be politically neutral – refusing to accept that the extraordinary power to create money should be exercised in secret, for the benefit of a tiny minority, and often at the expense of the planet. We have supported a policy known as “credit guidance”, meaning that the power to create money, and therefore to direct economic activity, should be used to ensure we accelerate the sustainability transition. Perhaps the Bank of England could set a declining proportion of bank lending for fossil sectors and set a minimum proportion for sustainable sectors, for example.

There were some encouraging signs in this year’s Budget that we may finally be moving in this direction and that our Bank of England might use our national currency to support rather than undermine the sustainability transition. Following a long campaign led by Positive Money and others, the chancellor changed the Bank’s mandate so that it now has to align its lending with the government’s net-zero target in order to “reflect the importance of environmental sustainability and the transition to net zero”.

This should mean an end to the Bank buying bonds from fossil fuel companies, thus using publicly created money to accelerate the climate crisis. It should also mean something we have long been calling for: a reassessment of the value of assets against which banks can make loans.

Net-zero carbon means we are eliminating fossil fuels from our economy, so the assets of fossil companies have limited and declining value. Central and commercial banks should be required to conduct “carbon stress tests” to identify where these assets are and replace them with assets that will have a value in our net-zero future.

And while the change has not gone as far as a policy of credit guidance might, it does mean that the Bank should prioritise using its money creation power to invest in sustainable infrastructure and transitional projects such as major home-retrofit programmes, perhaps via the proposed National Infrastructure Bank. In addition, programmes of cheap lending like the Term Funding Scheme should now incentivise lending to sustainable and future-proofed businesses.

It is worth concluding that for a green economist this is just the beginning of the story and that, ultimately, money should be less of a fuel and more of a lubricant to a system that is balanced and in harmony with nature rather than designed for destructive growth.

Within the parameters of a global capitalist economy, money is the most powerful tool – one that needs to be used for social good and to address the climate and ecological emergencies that its misuse over centuries has caused. We can see encouraging signs that we are finally moving in that direction.