As JPMorgan Chase chairman and CEO Jamie Dimon made clear this week, Paris keeps chipping away at London’s financial dominance. The next prize at stake: becoming the global capital of green banking, and the trillions of dollars of deals that it will bring.
Paris and London are competing to dominate this burgeoning world of investment products tailored for environmental, social and governance factors, which Bloomberg Intelligence estimates could grow to more than US$53 trillion of assets by 2025 — a sum that is greater than the global market for corporate bonds.
For the City of London, this battle is “key to its future,” said Ben Caldecott, director of the Oxford Sustainable Finance Programme at the University of Oxford. Just as New York dominates equities trading and Chicago is the home of options, the city that establishes itself as the world’s green finance hub is set to benefit from a surge in sustainable trading and investing.
Illustration: Yusha
The stakes have been heightened by Brexit, which has sent international banks away from London. JPMorgan added to London’s woes Tuesday when Dimon announced that Paris will be the firm’s post-Brexit “trading hub” in the EU and confirmed a plan to move several hundred traders to the French capital.
A number of JPMorgan’s biggest US rivals, including Bank of America and Goldman Sachs, also have thrown their weight behind Paris.
On most measures of financial clout, the French city is no match for London. The UK capital employs more than twice as many people in financial services, its asset managers oversee more money than their peers in France, Germany and Switzerland combined, and the city is the leading global center for trading currencies and eurobonds.
THE FRENCH ADVANTAGE
Still, France was home to sustainable funds worth more than 140 billion euros (US$167 billion) at the end of March, almost 40 percent more than was based in the UK, data compiled by financial services company Morningstar show. France also has sold the most green bonds in the world, with the UK yet to issue its inaugural deal.
In a survey of more than 6,000 CFA Institute members published in May, 75 percent of respondents from France agreed that ESG-compliant products “will dominate the financial landscape within the next 10 years,” the highest of any country.
Green finance is not an exclusively European affair, although major hubs such as New York and Hong Kong lag far behind. While Western European cities accounted for eight of the top 10 green finance centers in an April ranking by Z/Yen, the consultancy said that a number of them might be displaced over the next two years by centers in North America and Asia. The biggest change is happening in the US, where the administration of US President Joe Biden is pushing the finance sector to rapidly improve climate disclosures and better support the energy transition.
Rhian-Mari Thomas, chief executive of the British government-funded Green Finance Institute, set up to promote sustainable investing, said that Paris is often seen as her city’s biggest competitor.
“Just because London has some of the deepest pools of capital and enviable pedigree doesn’t mean by osmosis it will turn green,” she said.
Winning the race to dominate the world of green finance is a matter of pride and a core pillar of Britain’s mission to remain a leading world financial center. For more than three decades after former British prime minister Margaret Thatcher liberalized finance in the “Big Bang” overhaul of 1986, London was the unrivaled financial hub of Europe.
London provided Wall Street and Asian financial firms with a gateway into European markets and, in return, it powered the British economy, with the financial sector paying 10 percent of taxes last year.
“Many people have said that we can be nimble post-Brexit and this is the first real opportunity to put that into practice,” said Nicky Morgan, a member of the British House of Lords and former chair of the British parliament’s Treasury Committee overseeing financial services.
“If London were not to build a leading position in green finance, we’d have to look around for what’s the next thing, which might not be immediately obvious,” she said.
One deficit the UK is trying to remedy is its lack of a sovereign green bond, which Thomas calls “the fly in the ointment” for London’s green credentials.
The nation’s plan to sell at least ￡15 billion (US$21 billion) of green bonds starting in September is “probably the most ambitious green sovereign gilt issue of any major country in the world,” British Chancellor of the Exchequer Rishi Sunak said in a TV interview on Thursday, after he delivered a speech promising to bolster the British finance industry’s competitive edge.
For France, it was the 2015 UN talks that were the turning point. Policy makers passed a law that year forcing the country’s fund managers to disclose how they incorporate ESG issues into their investment decisions, along with the climate impact of those trades. French insurers, asset managers and lenders were the first to start restricting some services, including lending and underwriting to coal companies.
Today, the nation’s financial sector leads on climate analysis, such as portfolio warming metrics and efforts to mobilize financial markets to protect biodiversity.
Meanwhile, companies listed on the British FTSE 100 have fallen far behind their French peers in setting climate goals that pass muster with the Science-Based Targets initiative, a group of experts that sets widely respected standards on what it takes for a company to reach net zero.
UK BATTLING TO KEEP UP
The emissions-reduction targets set by British benchmark companies are in line with global warming of 3.1°C from pre-industrial levels — a scenario where large parts of the planet will be uninhabitable due to extreme heat.
“This is no longer a niche,” said Anne-Claire Roux, who set up Finance For Tomorrow to champion the French capital as a sustainability hub. The initiative, which officially launched in 2017, pushes French firms to embrace ESG while promoting their expertise, including through the One Planet Summit backed by French President Emmanuel Macron.
“Green finance is seen in London as a key business issue, but there is a level of competition between financial centers and Paris is above its peers,” Roux said.
As competition heats up to dominate green finance cash flows, setting the rules is becoming a battleground. One major advantage Paris has is the EU’s development of a taxonomy that defines what counts as a green investment, starting with bonds. The detailed rules should make it easier to issue sustainable debt, especially if the taxonomy becomes a global standard, putting French banks even further ahead of their peers. (The US is also attempting to develop a benchmark for Wall Street.)
While the EU has a clear lead over rival jurisdictions such as the UK, the real test will be which standard is most widely adopted. The UK has said it plans to take metrics from the EU’s taxonomy as the basis for its own, but aims to align its rules with more ambitious targets to cut emissions. Striking the right balance between financial interests and climate goals could determine which taxonomy is seen as more credible.
Thomas, whose institute is helping to advise the British government on how to implement a taxonomy, said the UK could set itself apart by developing a classification of transition activities. The goal would be to help clarify when activities in the most-polluting sectors make a significant contribution to environmental objectives.
It is fraught territory. Climate experts have warned the EU against including some natural gas projects in its taxonomy, while some finance executives say that fossil fuel financing will be needed before there are zero-emission alternatives.
That British banks continue to fund some of the most carbon-intensive activities is another mark against the UK’s green aspirations. While the biggest French and British banks favor fossil fuels over green projects, British banks finance more coal than their French counterparts, data compiled by environmental nonprofits Reclaim Finance and Urgewald show. Their figures showed UK-based banks provided US$131 billion to coal-linked companies between January 2016 and October last year, compared with the US$87 billion of financing from French lenders.
The upcoming UN Climate Change Conference — known as COP26 — to be hosted by the UK in Glasgow in November, presents an opportunity for the nation to bolster its green image and highlight the good its bankers can do. Selling British know-how to the world will be a driving part of the UK’s strategy, including talking up London as the preeminent city for green finance.
If the Parisian experience is anything to go by, the conference could give London a boost.
“It helped us in Paris to be the host country in 2015 and it will help the UK to host COP26,” Roux said. “London is aware it is a very important opportunity to showcase what it is doing and to accelerate that.”
However, French officials are not easing up on their charm offensive, either.
“I love the idea that you love France,” Macron joked with Dimon at the bank’s event in Paris this week. “You put your money and your people here. This is the best evidence of love.”
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