Transition finance but not taxonomies: What’s in the UK’s new Green Finance Strategy?

30 Mar 2023

The UK is aiming to become the world’s first ‘net-zero financial centre’ and has today (30 March) published a new Green Finance Strategy, outlining further steps towards this goal. Crucially, the Strategy also emphasises the need to conserve and restore nature to reach net-zero, outlining new measures to unlock finance for nature.

The Strategy is being published as part of a bumper set of announcements from the UK Government, in what Ministers are branding ‘Energy Security Day’ and what thought leaders have, for weeks now, been calling ‘Green Day’.

While much of the Strategy is spent emphasising the case for green finance reiterating measures that have already been implemented by the UK Government, there are several new updates.

Green Finance Taxonomy update

Green finance taxonomies outline which kinds of investments national or regional governments consider ‘green’, and which they do not. They can either include mandatory targets for increasing the share of ‘green’ finance, or simply encourage changes from investors on a voluntary bases. In either case, the idea is to stimulate the market and unlock much more private capital for activities that reduce emissions and restore nature.

The UK first promised such a taxonomy in 2021 and the need for one has become increasingly clear as the EU has launched its own version.

At the Budget earlier this month, Chancellor Jeremy Hunt confirmed that nuclear power generation would be included in the taxonomy and classed as green. But the Strategy today does not allocate labels to any other activities and states that the taxonomy is still very much under development.

It confirms that civil servants are still mulling whether the taxonomy should include a ‘transition’ class, as the EU’s does, or whether there should be two separate taxonomies. It states that other taxonomy “building blocks” are still being developed. This will doubtless be a disappointment, as the taxonomy was originally due in December 2022.

Transition Finance Market Review

The Strategy explains that ministers have heard arguments for the provision of innovative financial products and services to support high-emitting, hard-to-abate sectors to align with net-zero targets. Such products would be described as transition finance products and would support sectors such as steelmaking and aviation. The Government agrees through the Strategy that it has a key role to play in scaling transition finance.

As such, the Treasury is commissioning a review into how the Government can seize this “opportune time” to scale the UK’s transition finance market. The Strategy states a vision for the UK to become the “best place in the world for raising transition capital” and acknowledges that other nations are already moving in this space.

The Strategy states that an external expert to lead the review will be confirmed shortly, as will a panel of advisors and a secretariat.

Consultations on transition plans

Back at COP26, then-Chancellor Rishi Sunak set the ball into motion on a new mandate for net-zero transition plans. He stated that the mandate should apply to large companies in high-emitting sectors as a priority.

Subsequently, the Government convened a new Transition Plan Task Force to shape a ‘gold standard’ for these plans. A final set of guidance is due this summer, following an initial framework unveiled this February. Guidance in its current form recommends that companies should publish a plan this year, and then an update in 2026. In 2024 and 2025, they are encouraged to provide progress updates through their financial reports.

Today’s Strategy states the Government’s view that transition plans are “crucial in setting out how organisations will both drive change and adapt as the world moves towards a net-zero economy”. It confirms that, in the second half of 2023, a consultation will be launched to determine how to ensure transition planning parity between private and listed firms. The consultation will also be used to determine exactly which organisations should produce plans, avoiding “undue burden” on smaller or lower-emitting firms.

New advisory groups on sustainability reporting standards

In an attempt to unify corporate sustainability disclosures and to better link these with financial disclosures, the not-for-profit International Financial Reporting Standards Foundation (IFRS Foundation) proposed a new International Sustainability Standards Board in early 2021 and launched the Board later that year. The Board is now preparing to launch its first two standards, focused on emissions, this summer.

The Green Finance Strategy states that the UK Government intends to establish two advisory committees on integrated sustainability reporting in line with the ISSB’s frameworks. One will be Government-led and the other will be independently chaired. Their launch should come before the ISSB launches its first standards.

Scope 3 emissions reporting support

Speaking of disclosures, the report states that the Government will update its Environmental Reporting Guidelines – a voluntary framework for companies – to include more guidance on collecting and reporting data on indirect (Scope 3) emissions. The updated framework will be trialled this year ahead of a full release.

Plans to grow the green finance workforce

In June 2020, the UK Government launched a new Green Finance Education Charter, setting out plans to upskill existing finance professionals for the net-zero transition and transition to a nature-positive economy. The Charter also included measures to attract new workers to green finance careers. Several key professional bodies, covering some one million workers, signed up to support the charter, despite the challenges posed by Covid-19.

Today’s Strategy confirms that the Government will re-launch the Charter and rebrand it to ‘sustainable finance’ rather than ‘green finance’. The Government claims the change reflects a need to focus on issues beyond reducing emissions.

Response to calls for increased adaptation funding

The Climate Change Committee (CCC) this week published a report concluding that policymaking in the UK is not sufficient to adapt infrastructure to climate change in the coming decades. This built on a previous call from the CCC for the raising of up to £10bn of adaptation finance for the UK each year.

The new strategy states that the Government is working with the CCC to “scope research requirements in adaptation investment needs”. Final conclusions will be published in 2027, so don’t hold your breath for a major new joined-up programme of work in this field this year.

Changes afoot for nature finance

At the UN biodiversity COP in December 2022, nations agreed on new measures to halt and reverse nature loss this decade. Today’s Strategy acknowledges that delivering on this goal, domestically and internationally, will require more public finance, more innovative ways of unlocking private finance and better governance to ensure that finance is delivering its stated results in the real world.

Alongside the Strategy, the Treasury is publishing the UK’s first Nature Markets Framework, setting out principles for investing in ecosystem services. It includes key recommendations to govern investment in nature-based carbon removal and storage, plus in biodiversity and water quality ‘credits’.The principles are additionality, no double-counting, robust quantification, the delivery of lasting benefits, transparency, and third-party assurance.

Also, the BSI has been selected by the Government to develop a set of nature investment standards going forward.