Don’t count on the government to expedite a green transition

Article originally published in Mortgage Finance Gazette on 13th October 2022

In April, the Intergovernmental Panel on Climate Change warned that greenhouse gas emissions had reached their highest level in human history over the previous decade. Without immediate and deep reductions in emissions, the possibility of limiting rising sea levels and preventing irreversible environmental damage would be beyond reach.

Some environmental experts are convinced the problem is fixable. We have the technological knowhow to combat the threat.

I don’t buy it.

First, because, to have a chance of keeping global warming below the target ceiling, the wind and solar industries would need to sustain compound growth rates of 20% every year until 2030. These figures sound… ambitious.

And second, because I think the world is incapable of galvanising collective action at the necessary speed and scale to address climate change.  Tackling climate change represents a cost to governments.  As such, politicians will find it easier not to act.  Governments need to pursue systemic reforms that create incentives for businesses and consumers to make different choices.

Well, the government is hardly going to “rewrite the rules of the market” – not as they rip up regulations trying to boost growth.  Governments tend to have five-year horizons.  They might seek short term headlines to demonstrate they are “driving change”. But if you scratch the surface, easier solutions — the vested interests, like oil and gas — remain.

We have form here.  Politicians hailed the success of the Paris climate change agreement in 2015, vowing to cut harmful emissions. Since then, however, the world’s 60 biggest banks have poured $4.6tn into financing the fossil fuel industry.

And surging energy prices triggered by the war in Ukraine, are tempting politicians to revert to dependence on fossil fuels.  .

In the face of reality, what must lenders do?

Well, they need to watch their own backs.  Don’t expect anyone else to dig you out of this hole.

First, they need to understand and incorporate climate change risk into their prudential thinking.  The Bank of England’s stress testing exercise now extends into new business.  While there are greater short term exchange rate shocks, they need to think for the longer term on climate.

Second, lenders must ensure property lawyers acting for them know conveyancers owe a duty to pass on to lenders information which may affect their security.  If a lender requires an assessment of climate change risk in the letter of instruction this is a contractual responsibility for conveyancers.

Valuers are focused on current market value and, it appears, not accounting for the effect that climate could potentially have on that value in 30 years’ time.  So lenders and conveyancers cannot automatically rely on this.  On the contrary, it’s time for lenders to make their own luck and update their conveyancing guidance. They need to stipulate the requirement of climate risks search tools at the point of instruction.

Looking out for number one also means looking out for borrowers. There are ethics to lending and an ESG angle, too but in very simple terms the TCF (Treating Customers Fairly) implications of failing to do so would be ruinous.  Lenders need to apply greater scrutiny — not just to their own financial exposure.

Lenders need to ensure their panels of conveyancers are doing the right thing through their supply chain.  Are they applying the right level of client care by signposting climate risk?  Is it part of their retainer?  Are they commenting on it (as clauses like those with the Chancery Lane Project are freely available now)?

In short, lenders need to ensure their panels uphold their duty of care.  The latest legal advice comes from Stephen Tromans KC, the leading practitioner in environmental law in the UK who states that licensed conveyancers and solicitors owe a duty to clients to provide warning and advice as to risks (such as those associated with climate change) which they are, or should be, aware of and which may adversely affect the property being purchased.  There is no question in my mind that this impacts conveyancers’ TCF compliance.  Indeed, Matt Jupp of UK Finance suggested as much over the summer.

Smart lenders should prepare themselves.