The updated Green Finance Strategy (the Strategy) published on 30 March 2023 is the latest policy blueprint developed by HM Treasury, the Department for Energy Security and Net Zero and Department for Environment, Food and Rural Affairs. The Strategy sets out the plan for a global transition to a resilient, nature-positive, Net Zero economy with “trillions of pounds” reallocated and invested in new technologies and services and infrastructure. It updates the previous 2019 Green Finance Strategy.
Updated Green Finance Strategy: UK green finance growth opportunity
Recognising the positive role of UK financial and related professional services in achieving the transition to Net Zero, the Strategy summarises the “huge opportunities” in the global transition ranging from venture capital supporting climate and nature tech solutions to banks funding major renewables projects. The UK government will pursue its ambition to become the world’s first Net Zero aligned Financial Centre and will look to the UK’s world-leading financial services sector to drive every step of the global transition to Net Zero and supporting nature and climate adaptation.
As set out in the Chancellor’s 2022 Autumn Statement, there is a growing demand for green financial services. Unlocking the potential of green finance is therefore integral to the vision of making financial services and green industries key growth sectors for the UK. The Strategy sets out how global Environmental, Social and Governance (ESG) assets under management (AUM) have increased from $2.2 trillion in 2015 to $18.4 trillion in 2021 and are predicted to reach $34 trillion in 2026. ESG-oriented AUM is set to grow much faster than the asset and wealth management market as a whole. This trend translates as asset managers developing new funds to service clients’ growing demand for exposure to green and transition industries and green companies raising money through capital markets to finance their growth and expansion.
The UK financial services industry has made significant progress in developing itself as a global green finance centre and London has been ranked on the Global Green Finance Index as the leading financial centre for the third consecutive year. The Strategy also sets out how the devolved governments in Scotland and Wales will play a key role in delivering the UK’s Net Zero targets.
Building on the momentum of the UK’s COP26 Presidency in 2021 and the commitment of the Glasgow Financial Alliance for Net Zero (GFANZ) to a Net Zero future, the UK will look to use its leadership and expertise of its financial sector to accelerate the shift to a green global financial system and catalyse green financing globally, including in emerging and developing markets. The Strategy sets out how these economies are crucial for tackling climate change and halting nature’s decline. The Strategy also sets out next steps on transition planning and the UK Green Taxonomy as further detailed below.
The Green Finance Strategy: Key objectives
This Strategy aims to reinforce and expand the UK’s position as a world leader on green finance and investment, delivering five key objectives including:
- UK financial services growth and competitiveness – The UK will support the financial services sector to prosper from a transitioning global economy. From venture capital supporting innovative climate tech solutions, banks lending to major renewables projects and asset managers allocating capital to support the companies of the future.
- Investment in the green economy – In order to deliver the UK’s Net Zero ambitions, through the late 2020s and 2030s, it is estimated that an additional £50-60 billion capital investment will be needed each year.
- Financial stability – An effective green finance framework will ensure the finance sector has the information it needs to manage risks from climate change and nature loss.
- Incorporation of nature and adaptation – To reflect the significant progress of nature finance since 2019 culminating in the Kunming-Montreal Global Biodiversity Framework, the Strategy now explicitly incorporates both nature and climate adaptation into the government’s green finance policy framework.
- Alignment of global financial flows with climate and nature objectives – the UK will collaborate with international partners to support the alignment of global financial frameworks and stimulate investment towards emerging and developing markets where capital needs are highest.
Pillars of strategic action for green finance
In response to the May 2022 Call for Evidence in developing the Strategy, chapters 2 and 3 set out two pillars of strategic action where the UK government will act to unlock green finance:
- Align (greening finance)– this is the regulatory framework, tools and channels to enable the financial services sector to align activity with a pathway to Net Zero, resilient and nature positive global economy – greening the financial system.
- Invest (financing green) – this outlines how government and public finance institutions are mobilising private capital into the sectors and technologies needed to deliver the targets of financing green objectives.
Transition finance opportunities and a new Transition Finance Market Review
In responses to the Call for Evidence, stakeholders focused on the need for government to support industry to develop and deploy innovative financial products and services to continue to attract international business and the need for government to work with industry to develop a high integrity approach to transition financing.
Transition finance is especially relevant for heavy industries, which will need to undertake deep decarbonisation over a longer time period. Reaching Net Zero is going to require a whole economy transition, so decarbonising these industries will be critical, and as such it is vital they are able to maintain access to finance. New instruments such as sustainability-linked loans and bonds and transition bonds have grown rapidly, unlocking a broader scope of investment opportunities. To uphold market integrity, transition finance should be consistent with global climate and nature goals and used by companies with clear transition plans and quantified targets. The UK will also commission an independent Transition Finance Market Review to consider what the UK financial and professional services ecosystem needs to do to become a leading provider of transition financial services and innovative instruments on the pathway to 2050.
A pathway towards a UK Net Zero-aligned Financial Centre
The Strategy sets out the government’s plans for creating a Net Zero-aligned Financial Centre, a commitment made by Rishi Sunak at COP26 in 2021. The Net Zero-aligned Financial Centre framework sets out how the government’s green and sustainable finance policies work toward bringing about the Net Zero transition in the real economy and provide Government oversight to ensure the shifting of financial flows. Public and private sector action will be brought together in three related areas:
- Transparency: ensuring the data flows from the real economy to financial firms and from financial services to end investors to inform stakeholders. This will support financial firms’ own disclosure and investors’ capital allocation.
- Tools for transformation: support will be provided in developing tools and frameworks that all financial market participants will need to incorporate information into investment decisions and monitor their progress on sustainability so that financial markets can act upon the data provided.
- Transmission channels: government policy levers will be used to shift and scale up the availability of finance for the transition to Net Zero by i) de-risking green investments and lowering their cost of capital, ii) broadening pools of capital and the investor base, and iii) enabling investors to influence corporate practice.
Sustainability Disclosure Requirements
The Strategy sets out that the government is committed to implementing SDR with close coordination between the government and relevant regulators in line with the recommendation of the Independent Net Zero Review. The Strategy sets out that further detail on the implementation of SDR will occur in the summer to reflect the rapid development of international standards. As we reported in our article of 30 March 2023, final rules and a policy statement on the SDR has been delayed until Q3 2023 following an update from the FCA.
The Strategy sets out plans to implement the components of the SDR regime including:
- Disclosure of transition plans – the government intends to consult in autumn or winter 2023 on transition plan proposals, requiring the largest companies to disclose Net Zero transition plans and will work with the FCA to ensure transition plan requirements are delivered proportionality across the financial service sector alongside requirements for listed companies.
- International Sustainability Standards Board's (ISSB) IFRS Sustainability Disclosure Standards – Once the first two standards are published in June 2023, a formal assessment mechanism will be launched to ensure the standards endorsed for use in the UK are appropriate for UK companies. Implementation of FCA requirements for listed companies will be taken forward independently once the standards are endorsed for use in the UK. The government intends to establish two advisory committees, the first will be government-led and will have a remit covering matters of public policy. The second will be supported by the Financial Reporting Council (FRC) and independently chaired, will have a technical focus and will consider how the standards fit alongside existing reporting requirements for UK companies in scope. These committees are expected to be established by the time the ISSB launches its first two standards and framework documents which will be published shortly. The government’s aim is for an endorsement decision to be made within 12 months of the final standards being published, but a decision will be made sooner if possible.
- Supporting companies to understand and report on their greenhouse gas (GHG) emissions, nature-related financial risks and impacts and physical climate risks – the UK government will explore how it can support Scope 3 GHG emissions reporting and will launch a call for evidence to gather stakeholder views. The UK government will also explore how best the final TNFD framework, due to be published in September 2023, should be incorporated into UK policy and legislative architecture, in line with Target 15 of the Global Biodiversity Framework.
- Fund labels and FCA approach to SDR including a UK Green Taxonomy - Within its proposals on SDR and investment labels, the FCA noted that a UK Green Taxonomy, once developed, could be one way of demonstrating that assets meet a credible standard of sustainability.
A UK Green Taxonomy
The Strategy sets out the government’s commitment to implementing a usable and useful UK Green Taxonomy. Acknowledging that developing an appropriate taxonomy is complex, the government is keen to learn the lessons from taxonomies introduced in other jurisdictions. This will involve developing the building blocks of the UK Green Taxonomy, such as environmental objectives and the relevant criteria, and considering whether it is appropriate to pursue a ‘Transition Taxonomy’, which was a recommendation of the Net Zero Review, or include certain transitional activities within one Taxonomy. Nuclear energy as a source of reliable low carbon energy is expected to be included in the Taxonomy subject to a consultation on the UK Green Taxonomy which is expected to take place in Autumn 2023.
In the longer term, it is intended that mandatory company disclosures against a future UK Taxonomy will be introduced although it is intended that a testing period of voluntary disclosures for at least two reporting years will be introduced before the mandatory obligations are introduced. This recognises the usability challenges that have been experienced internationally and ensures that a future Taxonomy provides accessible and reliable information that is useful to markets and can be applied proportionately.
ESG ratings are becoming increasingly important products for investors trying to assess the environmental performance of a company. The UK is a leader in the ESG related services market– including ESG ratings, data, and verification products. This market has grown rapidly in the past few years, and is projected to exceed $34 trillion globally by 2026.
Alongside the Strategy, HM Treasury has also published a consultation on a ‘Future financial services regulatory regime for Environmental Social and Governance ‘ESG’ ratings providers’. This seeks views on whether ESG ratings providers should be brought into the FCA’s regulatory perimeter and on how this could be done. Government has also joined the industry-led ESG Data and Ratings Working Group, which was convened to develop a voluntary code of conduct for these firms, as an observer.
Building partnerships with emerging markets and developing economies
Emerging markets and developing economies (EMDEs) have the largest investment needs for achieving climate and environment goals, but generally have less developed capital markets. The UK will launch the Financial Services Centre of Expertise to provide tailored support on financial market development in EMDEs with a heavy emphasis on green finance. The Centre is expected to be fully operational by 2025. The aim is to facilitate EMDEs to develop Net Zero aligned financial systems. This will enable the UK financial sector to better support the development of, and provide capital to, Net Zero transitions globally.
Financial Services regulators welcome the Strategy
In a joint statement, the FCA, the FRC, the BoE and the TPR have welcomed the Government's updated Green Finance Strategy.
Nikhil Rathi, Chief Executive Officer of the Financial Conduct Authority said:
'We welcome this updated Green Finance Strategy, which represents an important milestone, building on collective efforts to date and setting out a clear plan for the future. We are working hard to ensure that the UK market is well positioned to support the transition to Net Zero. We’re playing our part in delivering a world-leading framework for transition plan disclosures through our collaboration with the UK Transition Plan Taskforce.
'We’re putting the right information in the hands of investors by working closely with the International Sustainability Standards Board. And we’re continuing our work to help consumers through product labelling. We look forward to continuing to work closely with government and regulators to support the delivery of the Green Finance Strategy.'
Andrew Bailey, Governor of the Bank of England said:
'Climate change affects our planet, our economy and our financial system. It is undeniably relevant to the Bank of England and the objectives it is tasked to meet. We are working to ensure that the macroeconomy, the financial system, and the Bank of England itself are resilient to the risks from climate change and support the transition to net-zero.
'We therefore welcome, and are proud to have contributed to, the UK Government's updated Green Finance Strategy – a strategy that will help to deliver the cross-economy transition that will be required to meet Net Zero.'
The Strategy sets out all key steps on pages 121-122. These include the following:
- A series of Net Zero investment roadmaps and a nature investment roadmap will be published.
- Consultation on the specific steps and interventions needed to mobilise additional finance through high-integrity voluntary markets and protect against the risk of greenwashing.
- Work with UK financial institutions to start a series of Government convened roundtables, to further tackle deforestation-linked finance.
- Host a series of roundtables to engage stakeholders on how the fiduciary duty can be clarified.
- Consult on the UK Green Taxonomy.
- Bring into force amended regulations to implement pensions reforms, subject to Parliamentary approval, as early as April 2023.
- First meeting of Net Zero Business and Investment Group.
- Launch a formal assessment mechanism as soon as the first two IFRS Sustainability Disclosure Standards are published (expected in June 2023).
- Set out further detail on the SDR implementation timeline to reflect the rapid development of international standards.
- Engage stakeholders on an update to the Environmental Reporting Guidelines, which provide voluntary environmental reporting guidance for UK organisations.
- Launch a call for evidence on scope 3 GHG emissions reporting.
- Publish the first impact report detailing the environmental impacts and any social co-benefits resulting from the expenditures of the Green Financing Programme, in September 2023.
- Host the Global Investment Summit 2023.
- Provide further information and clarity for trustees on their fiduciary duty in the context of the Net Zero transition by reviewing Stewardship Guidance (late 2023).
- Consult on the introduction of requirements for the UK’s largest companies to disclose their transition plan if they have them. This consultation will take place once the TPT has completed its work in Autumn/Winter 2023.
- Explore how best the final TNFD framework (expected September 2023) should be incorporated into UK policy and legislative architecture, in line with Target 15 of the Global Biodiversity Framework.
- The FRC – working with the FCA, government and The Pensions Regulator – will review the regulatory framework for effective stewardship, including the operation of the Stewardship Code.
- Set out adaption finance deliverables and action plan
For further advice and guidance in relation to the regulatory points raised in the updated Strategy or for any wider ESG and sustainable finance queries on the proposed SDR regime or wider UK/EU proposals, please get in touch with our specialist Sustainable Finance and Investment Practice who would be happy to provide further details.
Authored by Julia Cripps and Melanie Johnson.