New green finance centre to bring robust ESG metrics

The new centre is led by the University of Oxford, in partnership with the Bristol, Leeds and Reading universities, Imperial College London, The Alan Turing Institute, Satellite Applications Catapult, and the Science and Technology Facilities Council.

The CGFI will provide data and analytics to help banks, insurers and investors, such as pension funds, to make environmentally sustainable decisions and support a greener global economy.

By collaborating with financial institutions and the wider financial industry, the CFGI will support the efficient pricing and the reallocation of capital away from at-risk assets to those that are more resilient

Specifically, the centre will allow financial institutions to access scientifically robust climate and environmental data for any point on planet Earth now and projected into the future, and for every major sector of the global economy. 

The CGFI, will enable UK science and UK finance to work together to support the global economic transition to a net-zero and climate-resilient future. It will draw upon world-leading UK innovation, including geospatial and climate analytics, earth observation and artificial intelligence. 

Integrating climate and environmental data and analytics into investment decision-making across financial services will enhance the solvency of individual institutions, and also contribute to improving the resilience of the global financial system. 

Pension funds have a key role in transition

Pension funds are going to be key in financing and supporting the transition to net-zero. 

In the UK alone, there is around £3tn of assets under management in pensions. At the same time, as long-term investors pension funds are uniquely exposed to the risks of climate change such as stranded assets. 

It is therefore crucial that asset owners incorporate climate and environmental risk analytics into their decision-making.

Moreover, asset owners can influence the actions of their investee companies. Based on an analysis of pension funds, if all the policies of companies are combined, then this implies an increase in global temperatures of 3.7C to 3.8C, according to former Bank of England governor Mark Carney. 

This is far more than the 1.5C target necessary to avoid a climate emergency that has been set by most governments.

Three key roles for asset owners

Asset owners therefore have three key roles in this transition. First is to understand what risks sit in their portfolio from ‘at-risk’ sectors and seek to mitigate this. 

Second is to fund and finance those investments that will enable a climate-resilient future. Third is to make investee companies do more to reduce their individual contributions to climate change. 

The ambition of the CFGI is significant. Pensions and asset management is only one of six areas the centre is working on. 

By collaborating with financial institutions and the wider financial industry, and by bringing the best science and technology to this problem, the CFGI will support the efficient pricing and the reallocation of capital away from at-risk assets to those that are more resilient. 

Ultimately, this means that financial institutions will move capital away from business activities that harm the environment, such as coal-fired power, towards activities that support the transition to a net-zero carbon future that are less harmful and less risky, such as renewable power and sustainable agriculture. 

In doing so, financial institutions will support the global economy as it moves to net-zero carbon, and this will increase the resilience of the global financial system and the world economy.

Iain Clacher is pro-dean international and professor of pensions and finance at the University of Leeds