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

Some environmental experts are convinced that the problem can be solved. We have the technological know-how to combat the threat.

I don’t buy it.

First, because to have a chance of keeping global warming below the target cap, the wind and solar industries would need to sustain compound growth rates of 20% each year through 2030. Those numbers sound…ambitious.

And second, because I think the world is incapable of galvanizing collective action at the speed and scale needed to fight climate change. The fight against climate change represents a cost for governments. This will make it easier for politicians not to act. Governments must pursue systemic reforms that encourage businesses and consumers to make different choices.

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

We have the form here. Politicians hailed the success of the Paris agreement on climate change in 2015, pledging to cut harmful emissions. Since then, however, the world’s 60 largest banks have invested $4.6 billion in financing the fossil fuel industry.

And soaring energy prices triggered by the war in Ukraine are prompting politicians to return to reliance on fossil fuels. Just look at the first days of the new prime minister’s mandate. Liz Truss has announced that the ban on fracking will be lifted as part of plans to speed up the UK’s domestic energy supply. She said lifting the moratorium will allow developers to apply for planning permission for fracking and get gas flowing as early as six months, “setting a new ambition for our country.” “Far from being dependent on the global energy market and the actions of malicious actors, we will ensure the UK is a net exporter of energy by 2040,” she said. Yet another example of a government looking for a good headline.

Faced with reality, what should lenders do?

Well, they have to watch their backs. Don’t expect anyone else to pull you out of this hole.

First, they must understand and integrate the risk linked to climate change into their prudential thinking. The Bank of England’s stress test exercise now extends to new business. Although there are larger short-term exchange rate shocks, they need to think longer term about climate.

Second, lenders must ensure that the real estate lawyers who act for them know that transfer agents have an obligation to pass on information to lenders that could affect their security. If a lender requires a climate change risk assessment in the letter of instruction, this is a contractual responsibility for transfer agents.

Appraisers focus on current market value and, it seems, do not take into account the effect that climate could potentially have on this value 30 years from now. So, lenders and transfer agents cannot automatically rely on this. On the contrary, it is time for lenders to take their own chances and update their conveyancing guidance. They must stipulate the requirement for climate risk research tools at the point of instruction.

Searching for number one also means searching for borrowers. There is also an ethics in lending and an ESG angle, but put very simply, the TCF (Treating Customers Fairly) implications of not doing so would be ruinous. Lenders need to exercise greater scrutiny, and not just of their own financial exposure.

Lenders need to ensure that their panels of real estate agents are doing the right thing throughout their supply chain. Are they applying the right level of care to customers in reporting climate risk? Is this part of their mandate? Are they commenting on this (since clauses like the ones in the Chancery Lane project are now freely available)?

In short, lenders must ensure that their panels meet their duty of care. The latest legal advice comes from Stephen Tromans KC, the UK’s leading environmental law practitioner, who says transfer agents and licensed solicitors have a duty to clients to provide warnings and advice as to risks (such as those associated with climate change) of which they are, or should be, aware and which may adversely affect the property purchased. There is no doubt in my mind that this has an impact on the TCF compliance of real estate practitioners. Indeed, UK Finance’s Matt Jupp suggested it over the summer.

Savvy lenders need to prepare.

David Kempster is a director at Groundsure