'The City's big bet on green finance fails to pay out'

The City is meant to be leading the world in the drive towards “green finance”. But over the past few weeks, it has become clear that it has found reverse gear. Patrick Tiernan, the new CEO of the Lloyd's insurance market, a sector where London is still a world leader, last week indicated that syndicates would no longer be pressured into refusing to cover fossil fuels.

He stressed that the market wanted to be “apolitical”. Earlier in the month, the Net Zero Banking Alliance, a UN-sponsored initiative of which the former Bank of England governor Mark Carney was one of the founders, said it was pressing pause on its work after a whole series of major banks, including Goldman Sachs, HSBC and Barclays, decided to leave. Likewise, a lot of environmental, social and governance (ESG) funds are going to be looking a lot less healthy as the share price of Orsted, one of the favourite stocks for the sector, collapses. Shares in the Danish wind giant have halved in the past year. It turns out it’s a lot harder to make money from windmills than was first predicted. Add it all up, and one point is clear. The “green transition” investment story is turning very sour.

The City's bet on green finance fails to pay out

Much of it was virtue-signalling nonsense from the start. Whatever you think about climate change, fossil fuels are likely to be around for at least a couple more decades, even on the most optimistic scenarios, so it’s hard to see the point of not insuring the companies that produce them. It just meant there was no money to pay out compensation if something went wrong. Likewise, if the major banks refuse to finance fossil fuels, then the companies will just be forced to turn to hedge funds and private credit instead, and the risks will be far harder for central banks to monitor.

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At the same time, it was all very well to mobilise the fund-management industry behind green investment, but as Orsted has shown, just because you stamp “climate change” on a project doesn’t mean it will make any genuine profits. As subsidies get wound down, much of the sector turns out to be fundamentally unprofitable – and if the banks are too heavily exposed, they will only find themselves in trouble.

The City’s bet big on “green finance” driving its growth over the next couple of decades. Everyone knew that leaving the EU would pose a challenge to London as a financial centre, even if it was sometimes exaggerated. The City was the key financial hub for the bloc, financing government and corporate debt, and managing bond and equity issues. As some of that business drifted away, as it inevitably would, London was meant to turn itself into the global centre for “green finance” instead. It would become the place where the hundreds of billions that would have to be invested to transition from oil and gas to wind, solar and nuclear power would be financed, and where environmentally friendly companies could list, and where ESG fund management would flourish. It would be the world’s green finance centre, not just Europe’s. Cheerleaders such as Mark Carney predicted that green finance would be a $5 trillion market. It was the City’s future.

Green finance turns sour

This bet has not worked out well. Over the past five years, the City has stagnated. The number of new companies listed in London has shrunk to almost nothing, very few major bids have been launched, and there is not much sign of the green boom we were promised. That is about to become a lot more apparent as many of the deals struck over the past few years turn sour. We have already seen the best years of green finance, when governments were pouring unlimited sums of money into industries such as wind and solar. We are now seeing a retreat, and that will expose a lot of dud projects.

There has to be a reset. The City needs to start growing again and to replace the markets lost by Brexit. It is not going to be green finance, that much is now clear. London’s financial markets need to ditch the green delusion and move on as quickly as possible – and get back to businesses where they can actually make money.

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