The government has published an updated green finance strategy, outlining how they will become the world’s first net zero financial centre. Rashim Arora looks at the key initiatives and what this means for financial services firms.

The updated green finance strategy outlines ambitious plans for achieving a net zero economy by 2050. The strategy is supported by a wider set of papers covering Powering up Britain, the Nature Markets Framework, International Climate Finance Strategy, and UK 2030 Strategic Framework for Climate and Nature. Collectively, they demonstrate how the UK plans to access billions of private investment through green finance, and build a resilient, nature-positive economy, through greater transparency, improved market tools, and exploring key transmission channels towards net zero.

To achieve these ambitions, the government has outlined five key objectives for the Green Finance Strategy. Meeting these objectives will be important in building trust in the market and encouraging green investment as we transition towards a net zero economy.

1 Boosting UK financial services growth and competitiveness

The government aims to support the UK financial sector through the transition towards net zero targets, so it's well-positioned to meet the challenges and take advantage of the opportunities.

2 Drive investment in the green economy

A successful transition relies on adequate investment from the private sector. This includes an additional £50-60 billion of capital each year between 2020 and 2030 to support the move to net zero. Investment will support new technologies, help sectors adapt, and contribute to levelling up formerly industrial areas.

3 Maintain financial stability

The finance sector needs adequate information to safely manage the risks caused by climate change and nature loss. The green finance strategy recognises the importance of this, and highlights that a disorderly transition could cost UK banks around £110 billion by 2050, with insurers potentially worse affected.

4 Inclusion of nature and climate adaptation

The new green finance policy framework includes nature and climate adaptation, recognising the need for investment and risk management in these areas. This follows the Kunming-Montreal Global Biodiversity Framework agreed at the Biological Diversity COP in December 2022, which saw greater financial commitments to help maintain biodiversity and restore ecosystems.

5 Align global investment to climate and nature objectives

The UK aims to collaborate with international partners to align with global financial frameworks, and drive green investment in emerging and developing markets. While this will support the global effort towards net zero targets, it also offers significant economic opportunities for the UK.

Aligning the market to UK climate and environmental goals

To achieve these objectives the Green Finance Strategy looks at five key areas. This should mobilise private capital, give market participants the right information to make informed decisions, and protect against greenwashing.

A roadmap to sustainable investing

In its 2021 publication ‘Greening Finance: A roadmap to sustainable investing’, the government committed to drive capital investment by building trust and helping market participants manage the associated risks.

To achieve this, the Green Finance Strategy will consult on introducing transition plan disclosures for the UK’s largest companies on a comply or explain basis, in line with the FCAs current rules for listed companies, and large asset owners and managers. This will draw on pending best practice guidelines from the Transition Plan Taskforce, and will be published in Autumn/Winter 2023. It will support IFRS’s new International Sustainability Standards Board (ISSB) and assess potential for adopting their standards once finalised in Summer 2023. A call for evidence will be launched on a cost-benefit analysis of scope three greenhouse gas emissions reporting, and current environmental reporting guidelines will be updated.

The government will also work with industry to improve climate resilience assessment and disclosure practices, with further guidance and metrics; due in 2024.

Supporting industry

As the financial sector continues to develop market frameworks, tools and expertise, the government will support industry by consulting on a UK Green Taxonomy, due in Autumn 2023, to improve standards, labelling and disclosure practices, including a push to recognise nuclear technology as a green alternative to help reach net zero. Reporting against the taxonomy will be proportionate and voluntary for two years before becoming mandatory. Addressing ESG investment trends to protect UK markets and consumers, including proposed regulation of ESG ratings providers and the work in progress ESG data and ratings code of conduct. Building greater skill sets and understanding of sustainable finance, by relaunching the Green Finance Educational Charter.

Enabling key transmission channels

There are a range of approaches, or transmission channels, that the government will target to help business maximise opportunities while moving to net zero. These include working with the regulators to introduce Solvency UK and provide greater liquidity. This initiative aims to work boost the value of insurance investments over the next ten years, while protecting policyholders. It will also work with the FCA, Pensions Regulator and FRC to review stewardship regulations, including the UK Stewardship Code, and review by the Department for Work and Pensions to assess how well firms are aligning to their Stewardship Guidance (due in later 2023), and clarify fiduciary duty.

Engaging with regulators and international partners

The government will continue to work closely with financial regulators to make sure the regulatory framework actively supports green finance. Internationally, the government will align with other bodies to create a net zero global economy by using their voice on the international stage to promote alignment of the global financial system. It will also deliver on key commitments such as alignment of new bilateral UK Official Development Assistance (ODA) with the Paris Agreement, ensuring ODA spending doesn’t harm nature, and stopping new support for the overseas fossil fuel energy sector (apart for exceptional circumstances). Good practice and alignment international alignment will be promoted through partnering with emerging markets and developing countries.

Mobilising and creating opportunities for green investment

The Green Finance Strategy aims to create green investment opportunities and mobilise finance to establish a net zero, resilient and nature positive global economy. This will need significant investment, including the £6 billion for energy efficiency in the Autumn Budget (among others). The government has provided further clarity on investment pathways. It will publish a plan to grow investment across the country: consisting of two papers on ‘Powering up Britain’ and the ‘Environmental Improvement Plan’. This includes £20 billion funding for carbon capture usage and Storage (CCUS) plans, with additional private funding to boost sustainable industry and create jobs.

Key initiatives the government will deliver include increasing the use of low carbon hydrogen; launching Great British Nuclear to drive nuclear projects; developing the Great British insulation scheme to invest in energy efficiency; and launching the floating offshore wind manufacturing investment scheme. Roadmaps for net-zero investment will be developed for each sector, showing how these needs will be met. A nature-positive roadmap will be published by 2024.

The government will support investment opportunities by working with local authorities to help them attract private investment. A generous capital allowance regime and a higher R&D expenditure credit will also encourage UK companies to invest in green finance. The new Net Zero Business and Investment Group will also drive investment partnerships, with further support from the Global Investment Summit in September 2023, which will help drive foreign investment in the UK.

The Green Finance Strategy also looks at how to drive voluntary carbon and nature markets, while protecting against greenwashing. The government has published a new Nature Markets Framework to explore key principles and priorities. A further consultation is due in this space, alongside a set of nature investment standards.

What does the strategy actually mean?

While the new Green Finance Strategy is undoubtedly ambitious, it doesn’t go as far as the US Inflation Reduction Act or the EU Green Deal. That said, it does bring the conversation forward with the inclusion of nature and climate adaptation, which could make a substantial difference in terms of driving green investment in the UK. Steps to reduce greenwashing and assess the value of key metrics (such as scope 3 emissions), will build trust in the market and drive private investment.

For more insight and guidance get in touch with Rashim Arora.

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