Outside of the EU, London is right to focus on sustainable issues in the financial sector.
It came as little surprise, but headlines still delivered a punch when, in February 2021, data showed that equity trading had poured out of London and into several EU centres. Amsterdam soaked up the most activity, with average daily trading in the first month of the year more than four times what it was in December. A total of €9.2bn was exchanged through Euronext Amsterdam and the Dutch arms of CBOE Europe and Turquoise, compared to the €8.6bn that went through London — meaning that the post-Brexit hub has lost its longstanding European primacy in this area.
Amsterdam and other European financial centres have gained from the fact that financial services was not part of the Brexit negotiations and that no equivalence has been established between the EU and the UK supervision. Paris, Frankfurt and Milan all lit up with greater activity in January as the Brexit transition period came to an end.
Much derivatives trading was also lost. Euro-denominated swaps traded in London went from representing 40% of the market in July to just 10% in January. EU and US venues went the other direction, more than doubling to nearly a quarter and a fifth of total, respectively. Among these trades, interest rates swaps may paint the gloomiest picture yet, as London’s share of total dropped from 70% to 20%.
Exodus of jobs
Some, rightly, have pointed out that in terms of revenues, these reductions may not have too big an impact. But they do not help either. And combined with the ongoing uncertainty over the treatment of British financial services outside of the EU, they point to a shaky future.
Crucially, it isn’t only London’s electronic life that has quietened down. Finance jobs have been trickling out of the UK since the 2016 Brexit referendum, with France, Italy, Spain and the Netherlands offering tax breaks for professionals relocating there, and Germany relaxing labour laws to appeal to investment banks. Frankfurt and Paris were the choice for investment bankers; Luxembourg was preferred by asset managers, while back-office operations liked Dublin and Warsaw. Research by think tank New Financial points to a total loss of around 7500 jobs so far.
Even more worryingly, the flow of new jobs has been drying up since the UK voted to leave the European bloc. In 2020, they nearly halved compared to the previous year. The pandemic did not help, of course. London’s financial openings have gone from about 94,000 in 2016 to about 16,000 in 2020, according to recruitment firm Morgan McKinley, and as reported by Bloomberg.
The announcement that the UK government will fund a research centre that would contribute to solve the biggest hurdles in understanding, valuing and managing climate risk in the financial sector is welcome
New initiative
Against this gloomy backdrop, the UK is right to place its hope in green. The announcement that the UK government will fund a research centre that would contribute to solve the biggest hurdles in understanding, valuing and managing climate risk in the financial sector is welcome.
The fact that the project will be a joint effort of leading research centres, some of which have longstanding individual programmes in this area, is noteworthy. The universities of Oxford, Bristol, Leeds and Reading, Imperial College, and the Alan Turing Institute will take part. Their work will complement London’s hopes to become a centre for sustainable finance, while European issuers have traditionally dominated the green bond market.
Further, the UK Centre for Greening Finance and Investment will complement early efforts by the Bank of England (BoE), which has been a leading voice warning against climate-related risks and which is set to run its first green stress test on British banks this year. Former BoE governor Mark Carney now serves as the UN special envoy on climate action and finance. He is also advising the UK government ahead of COP26, the UN climate change conference that will take place in Glasgow in November 2021.
The UK is a credible contender in this space. Now, with Brexit biting, funding green research is a wise way to prop up London’s status as an international financial centre. More, in fact, would be welcome.
Silvia Pavoni is the economics editor at The Banker.
