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Green investment: Supporting the transition to net zero

Many UK industries are facing up to the effects of climate change, the value of natural capital and the role they can play in prioritising biodiversity and preserve natural resources.

The UK Government has been playing catch up over the last 5 years and the publishing of the 2023 Green Finance Strategy takes their policy a step further; aiming to encourage investment in the green economy and to shift UK culture towards a net zero future.

We now summarise the key objectives of the strategy and focus on the main proposals to enable the market to align with UK climate and environmental goals.

What has been published as regards the 2023 Green Finance Strategy?

The UK Government has published a revised Green Finance Strategy.  The new strategy, “Mobilising Green Investment” looks to support the transition to net zero, and refreshes the 2019 strategy.  It also updates some of the 2021 Roadmap to Sustainable Investing. While the strategy is fairly detailed, it remains a proposal document which is subject to further consultation and implementation measures.

What is the significance of the 2023 Green Finance Strategy?

The Government is looking for the UK to be a leader of green finance and investment.  The 2023 Green Finance Strategy is an attempt to shift the culture towards a net zero future and encourage investment into making that future a reality.  Targeting the “E” in ESG, the strategy addresses the UK’s domestic and international climate change commitments, as well as those for sustainable development and the environment.  Historically a focus on ESG has not been a fundamental principle for business – it’s been an add on, and seen largely as an expense.  To date, investment into natural capital has generally speaking been led by the early adopters in renewable energy but a new asset class is emerging which provides opportunities for investors to drive profits and change.  The Strategy’s incentivisation to invest into “green” assets will be covered in another article, however the 2023 Green Finance Strategy is setting out a clear direction of travel as regards the regulatory landscape of the future.

What are the 2023 Green Finance Strategy objectives?

There are five key objectives aimed at reinforcing and expanding the UK’s position as a “world leader on green finance and investment“:

  • UK financial services growth and competitiveness.
  • Investment in the green economy.
  • Financial stability.
  • Incorporation of nature and adaptation.
  • Alignment of global financial flows with climate and nature objectives.

What is the 2023 Green Finance Strategy intended to achieve?

The Government states that the strategy is “the UK’s comprehensive blueprint that will unlock green finance and investment, reinforcing the UK’s place at the forefront of this market and deliver on the UK’s climate and nature objectives. It sets out the actions the UK Government will take to support our financial services sector and investment community to invest in the green economy; prosper from a transitioning global economy; provide information and tools to the financial sector to manage risks from climate change and nature loss; and support the global transition.

Regulators (the Financial Conduct Authority, the Financial Reporting Council, the Bank of England and The Pensions Regulator in a joint statement) have welcomed the paper, saying they are “working hard to ensure that the UK market is well positioned to support the transition to net zero.

What does the 2023 Green Finance Strategy cover?

The document covers the UK’s approach to green finance in three Chapters:

  • the “foundations” chapter setting the scene in the context of the “twin threats of climate change and biodiversity decline
  • Align” – focussing on enabling the market to align with UK climate and environmental goals to the UK’s “commitment at COP 26 to become the world’s first Net Zero-aligned Financial Centre
  • Invest” – how to mobilise and create opportunities for green investment as the Government see investment as “key to delivering a thriving green economy at home and abroad, and the UK business and investment landscape is one of the most competitive, attractive and innovative in the world“.

This article now concentrates on the “Align” objectives.

Align – What is the overall objective?

The Strategy focusses on the pillars of:

  • Transparency through reporting – throughout the value chain, businesses will need to improve their reporting.
  • Culture of sustainability – development of frameworks for sustainability to be a key part of investment decisions and ongoing monitoring.
  • Transmission channels – increase availability of finance for the net-zero transition.

Align – What are the key proposals from a regulatory perspective?

From a regulatory perspective, the key aspects are focused on the UK becoming the first Net Zero-aligned Financial Centre in the world.  The Align chapter covers the majority of the regulatory implications, and in particular the transparency and culture of sustainability limbs set out above.

Transition plans – the Government is looking to consult on transition plans which could require a “comply or explain” approach for the largest companies on their net zero transition plans – complementing the existing FCA requirements for listed companies and bringing more parity between listed and non-listed companies. It is expected there will be some proportionality on the standards for smaller companies – possibly based on the reporting thresholds under the Companies Act 2006.

IFRS Sustainability Disclosure Standards – after the initial two standards are published in June 2023, a formal assessment will be launched to ensure the standards are appropriate for UK companies.  If these standards are adopted, they are likely to create a foundation for both listed and non-listed company requirements in the future.

Scope 3 GHG emissions reporting – Scope 1 (direct) and Scope 2 (indirect) emissions reporting is already established for the UK’s largest businesses, although this mostly does not apply to Scope 3 (indirect wider value chain) emissions. The Government will explore how it can support Scope 3 GHG emissions reporting with a call for evidence to gather stakeholder views.  In addition, once the final Taskforce for Nature Related Financial Disclosures framework, due to be published in September 2023 is available, the Government intends to consult on its incorporation into UK policy and legislation.

UK Green Taxonomy – the FCA noted that a UK Green Taxonomy, once developed, could be one way of demonstrating that assets meet a credible standard of sustainability.  This tool should provide investors with definitions of which economic activities should be labelled as green – with the intention that (subject to consultation), nuclear will be within the Taxonomy.  Consultations are expected in Autumn 2023. It is intended that the disclosures will initially be voluntary for a 2-reporting year period, after which the Government may move towards a mandatory reporting regime.  Again, it is expected there will be some proportionality on the standards for smaller companies.

ESG Ratings – consulting on regulation to help ensure better outcomes for “green products” with a view to developing a ESG Data and Ratings Code of Conduct.  This consultation includes whether ESG ratings providers should come within the remit of the FCA.

Carbon and Nature Markets – measures are being considered to help voluntary carbon markets reach their potential and to ensure they meet the objective of minimizing emissions.  In addition to the objective of looking at what will be a “good quality” credit, the Government intends to develop a fund to support the development of nature projects across England with support from private sector investment.  See Nature Markets Framework – Michelmores  from Ben Sharples of the Government’s recently published Nature Markets Framework which focusses on development of mechanisms to incentivise investment into nature-positive projects.

Align – What are the key non-regulatory changes?

Focused on the transmission channels limb, the Government will explore possible actions through which financial markets can support businesses to grow as part of a “net zero, resilient and nature positive economy”, including:

Liquidity – supporting the implementation of Solvency UK, which creates the potential for over £100 billion of productive investments from insurers in the next ten years, while maintaining high standards of policyholder protection.

Investor Stewardship – Reviewing the regulatory framework for effective stewardship, including the operation of the UK Stewardship Code, working with the FCA, FRC and TPR.

Fiduciary duty – the DfWP will look at the extent Stewardship Guidance is being followed and the Government will engage with stakeholders on improvements to fiduciary duties.

Collaboration with other regulators – working with financial regulators to create a regulatory framework supporting the growth of green finance.

International collaboration – working with international partners to accelerate the alignment of global financial flows with a net zero, resilient and nature positive global economy based on interoperable principles.

Alignment of development finance – working with international financial institutions and donors to ensure spending “does no harm to nature”.

EMDRs – Building partnerships with emerging markets and developing economies, whose investment needs are significant but whose markets are generally less developed, “to support the growth and alignment of their finance sectors, including actions to enhance sharing of lessons from green finance implementation in the UK“.

How does this strategy affect businesses?

As increasing numbers of businesses across the UK prioritise ESG criteria, it will impact on choices those businesses make about how they use their resources, methods of production, their dealings, and their business relationships.  So, understanding this new strategy is key for all businesses planning for the long-term.