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Three wishes for tomorrow’s UK Budget

2 March 2021
  • Put climate risk and protection of biodiversity at the heart of the evolving framework for green gilts
  • Innovate to green the nation’s steel production, creating jobs and eliminating steel’s carbon footprint
  • Drop GDP for 21st century measures of economic growth and societal wellbeing through Sustainable Domestic Product (SDP)

Ahead of tomorrow’s UK Budget, Eoin Murray, Head of Investment at responsible investment pioneer, the international business of Federated Hermes, reveals what lies at the top of his budget wish list:

1. Embedding both climate and biodiversity within performance-linked bonds

My first wish is that the Chancellor is willing to broaden the scope of his original intentions for the launch of green gilts beyond focusing solely on climate change, to also include measures to reverse biodiversity and ecosystem loss.

Nature’s health and the impacts of climate change pose both immediate and long-term risk to sovereign issuers like the UK and investors. The recent Dasgupta Review on the economics of biodiversity highlights the increasing importance of nature’s role in supporting resilience and economic productivity.  With its publication fresh in our mind, what a great time for the Chancellor to grasp the nettle and instruct the Debt Management Office to expand their work.

The solution to today’s crises must embed both nature and climate risk and opportunities into the sovereign debt markets, building upon the recent growth of sustainability-linked debt that now exceeds $1.5 trillion, and expected to grow to make up 10% of global issuance in 2021 (my aspiration was for 25%, but even 10% is transformative).

Establishing a full-blown nature and climate sovereign bond facility will enable a robust scaling of nature- and climate-linked sovereign debt across diverse policy environments, contexts and needs.  It will integrate nature and climate goals into performance objectives, improving the cost of capital and targeting specific outcomes.

Enormous benefits will also accrue from promoting the standardisation of nature and climate performance outcomes through systematic data collection, analysis and verification.  The UK would be a pioneer.

2. Greening the nation’s steel production

My second wish is for the Chancellor to support development of the kind being undertaken in Sweden around the greening of steel.  This new option is hydrogen-based iron reduction, and the pioneering progress being made is being encouraged by the Swedish Energy Agency.

Since 2014, West Cumbria Mining has been developing plans for the creation of a metallurgical coal mine, known as Woodhouse Colliery, off the coast near Whitehaven in West Cumbria, to supply the UK and European steel-making coal market, which currently imports around 45 million tonnes per annum.  Environmental campaigners and local MPs voiced their fury at the UK government’s decision not to oppose this new opening.  Given all the commitments made towards achieving net zero carbon emissions by 2050, the move seems regressive to many.

The proponents of the mine note that coking coal (used in steel production) is very different to thermal coal (which is used to create the steam that generates electricity).  While all the thermal coal-fired power generation in the UK will end by Oct 2025, that commitment does not extend to coking coal.  And steel remains an essential part of our lives – frameworks for buildings, railways, bridge, cars and general appliances – but at a cost of around 7% of global carbon emissions per annum.  Great work is already afoot to replace existing furnaces with more energy efficient electric arc furnaces, merging iron with recycled steel.

The company behind hydrogen-based iron in Sweden has signalled a willingness to “share knowledge and show others that it’s possible to eliminate steel’s carbon footprint”.  What a bold development it would be, on the back of cancelling the coke mine in Cumbria, to announce a green steel investment in the UK, based in Cumbria, with reskilling and retraining on offer for the affected local workforce.

3. New measures of economic growth and societal wellbeing – Sustainable Domestic Product (SDP)

My third wish is for a new measure that could wean us off GDP – a replacement that would be equally tangible in capturing everything that economies produce, and more-encompassing vis-à-vis the social and environmental goals that we must embrace.

As governments scramble to stimulate their GDPs, a debate rages around whether our output of goods and services can continue apace and have us remain within our planetary boundaries.  There have been many critiques of GDP, most recently in the Dasgupta Review on the Economics of Biodiversity that highlighted the metric’s failure to account for natural capital.  In recent years, the debate has evolved and has produced more advanced measures, more comprehensive benchmarks and new policy approaches, each of which seeks to address at least some of GDP’s limitations.

Among the subjective measures of wellbeing, we have the Bhutan experience with the gross national happiness index, which has developed into the World Happiness Report, now in its ninth edition and covering more than 150 countries globally.

Here in the UK, there is an All Party Parliamentary Group on Wellbeing Economics. But it may prove just too easy for the Chancellor to stick to a well-established measure like GDP..

Fortunately, a number of economists and scientists are indeed working on such a measure, one that will capture our Sustainable Domestic Product (SDP), linking in to all 17 elements captured in the UN’s Sustainable Development Goals.  SDP would retain the principle of measuring the output of goods and services, hence representing a conceptually smaller leap from GDP than other already mentioned alternatives but anchoring the valuation of those goods and services by linking them to achievement of the SDGs.  SDP could represent what countries produce in a way that values their net impact on addressing inequality, poverty, unemployment and a multitude of natural ecosystems.

A Chancellor that introduced a new way of looking at our economic success would go down in history – are you ready, Mr Sunak?

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