Yesterday’s updated Green Finance Strategy set out what the UK ‘Net Zero-Aligned Financial Centre’, promised at COP26, will look like in practice. The Green Finance Strategy is a positive step forward – but much remains to be done to get the UK’s financial sector on track to net zero.
Mobilising green investment
The Green Finance Strategy, like Chris Skidmore MP’s Independent Review of Net Zero, recognises that the net zero transition will be the “economic opportunity of the Twenty-First Century”. It focuses on mobilising investment alongside greening the financial system – a subtle but notable shift in tone since 2019. Decarbonising the economy is now seen as the best way to spur growth, create jobs, and rebalance the economy.
Measures to shape the UK’s approach to investing in transition include commitments to develop Key Performance Indicators for the financial sector’s net zero transition, and to consult on extending mandatory transition planning requirements to large private companies. It’s particularly good to see the Strategy express an ambition to leverage domestic momentum towards mandatory transition plans and promote their international uptake.
The Green Finance Strategy went further than expected in its definition of a Net Zero Aligned Financial Centre, proposing a rounded approach including objectives on nature, adaptation, and international leadership. The Strategy also recognises the crucial role that the UK must play in reforming international financial architecture. By including regulatory interoperability, and by supporting the Bridgetown Initiative and Multilateral Development Bank reform, the UK will demonstrate leadership on the world stage and drive much-needed climate finance to assist emerging and developing economies.
However, until the UK also sets out clear expectations for phasing out fossil fuel financing and decarbonising the FTSE, the credibility of the Zero Aligned Financial Centre concept will still be subject to challenge.
Focus turns to delivery
Tangible progress on some critical parts of the green finance puzzle, including the UK Green Taxonomy, has so far been painfully slow. While the Strategy confirms plans to consult on the Taxonomy this autumn, this consultation was initially planned for Q1 2022. If the government is serious about mobilising investment, it will need to turn commitments to consult into concrete action quickly, and across a broad range of policies.
The signals here are mixed. While the Strategy sets out some positive steps to mainstream corporate disclosures, it postpones a decision on the UK’s Sustainability Disclosure Requirements (SDR), promising only to “set out further detail on the implementation of SDR in the summer”. We hope that the coming consultation on the adoption of the ISSB Framework will proceed as planned.
Planning for success
If there was one thing the Green Finance Strategy needed to do above all, it was set out a plan to mobilise the investment required to deliver the Net Zero Strategy and meet the UK’s 2050 emissions target. The Strategy notes that we’ll need an additional £50-60 billion in capital investment annually from 2020 to be on track to meet the government’s legal obligations.
The private sector is eager to invest. However, the market lacks confidence in the Government’s long-term commitment to deliver net zero. The disappointing absence of a UK Net Zero Investment Plan in the Strategy is a setback. The government has not responded to growing private sector calls to give a credible, independent body a mandate to track net zero financial flows.
The good news is that by promising to set out a series of sectoral ‘net zero investment roadmaps’, and to move towards tracking green financial flows at home and abroad, key elements of Net Zero Investment Plan are already in place. These can be built on in the Autumn Budget.
Overall, the Strategy has an appropriate level of ambition and includes many welcome steps. Delivery on the various commitments made will be key, as will filling in some of the gaps before the end of 2023. Now, the delivery phase will determine whether the UK really will be the world’s first Net Zero-Aligned Financial Centre.