UK Green Finance Strategy 2023 – the key points

The UK government’s updated Green Finance Strategy entitled Mobilising Green Investment was published on 30 March 2023. We highlight the main points set out in the strategy as well as key dates to consider over the coming years.

On 30 March 2023, the UK government published its updated Green Finance Strategy entitled Mobilising Green Investment. Developed by HM Treasury, the new Department for Energy Security and Net Zero and the Department for Environment, Food and Rural Affairs, the strategy is an update to the previous green finance strategy published in 2019. The strategy builds on the 134 responses received by the government to its call for evidence in May 2022.

This article gives a short analysis of the strategy and key dates.

 

The strategy has five key objectives

1. Supporting the UK financial services sector “to prosper from a transitioning global economy”.
2. Ensuring there's sufficient capital, including private capital, to invest in the green economy.
3. Financial stability, by ensuring the finance sector has the information it needs to manage risks from climate change and nature loss.
4. Incorporating nature and climate adaptation into the strategy.
5. Aligning global financial flows with climate and nature objectives.

Together, these refinements are designed to reinforce and expand the UK’s position as a world leader on green finance and investment.

 

Transition finance

The government will “commission an industry-led market review” on encouraging “transition finance,” meaning finance to higher-emitting companies that are trying to decarbonise. The regulatory regime, at present, has the effect of favouring investments in low-emission companies over investments in companies that may currently have high emissions but that intend to reduce them. But supporting the latter may have a more direct effect on achieving emissions reductions.

 

UK green taxonomy

The government will consult on this in Q3 2023. This is a delay: the consultation was originally expected in summer 2022. The UK has proposed that nuclear energy will be included in the taxonomy. This would be consistent with the approach taken by the EU under the Complementary Climate Delegated Act – though treating nuclear energy as sustainable has proven controversial with certain EU Member States, including Austria and Germany.

 

ESG ratings providers

The regulation of ESG ratings providers is not new. The FCA’s June 2022 feedback statement on ESG integration in UK capital markets (FS22/4) said there was “a clear rationale for regulatory oversight of certain ESG data and rating providers.” Alongside the strategy, HM Treasury has opened a consultation, Future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers, which runs until 30 June 2023.

 

Sustainability disclosure requirements

Mandatory disclosure requirements are now in place for companies over a certain size, occupational pension schemes and other FCA regulated firms. The strategy reaffirms a commitment to implementing SDR. Due to rapidly evolving international standards, more detail on this will follow in the summer.

The strategy outlines plans to implement parts of the SDR regime. This includes next steps on:

• the disclosure of transition plans
• the IFRS Sustainability Disclosure Standards produced by the ISSB
• supporting companies in their understanding and reporting of GHG emissions and nature-related and physical climate risks
• fund labels

The industry would welcome an economy- and sector-wide framework, particularly data gathering exercises, availability of green finance products, and support for SMEs to increase awareness and understanding of the importance of the transition.

In this context, the strategy focuses on the British Business Bank’s (BBB) remit to support to small business under its new strategy for programmes to become “sustainable by default.” The BBB programme is a good example of the type of support already available for SMEs, however, one could argue more support is needed – particularly in the form of easy-to-digest guidance about, for example, Scope 3 GHGs (see below).

Data can be seen as a barrier to integrating environmental-related factors in financial decision making. Data gaps from incomplete disclosures mean the methodologies used by investors and the financial sector to allocate capital in line with sustainability targets often rely on diverging methodological choices and assumptions. This can cause confusion and hinder comparability.

The strategy recognises the data gap as a critical issue and promises to “ensure the right information and data flows from the real economy to financial firms, and from financial services to end investors, to inform stakeholders.”

As noted above, the strategy highlights initiatives including the government’s work on transition plans, the IFRS Sustainability Disclosure Standards and the FCA’s proposals on investments labels and sustainability disclosure requirements.

There is strong support for these programmes. But each was a key feature of the government’s 2021 Roadmap to Sustainable Investing. It may be hard to see how the position has changed in the last two years, despite the progress that has been made and lessons learned.

Regardless, the strategy pulls together efforts that have been made over the last four years which provides for a much-needed consolidation of the key updates in this area and should help to focus minds on the issues at hand. It sets out a plan with clear next steps and has been welcomed by industry and regulators.

 

Scope 3 emissions

We know market participants are concerned about how capable SMEs are to obtain and report on Scope 3 GHG emissions data effectively and efficiently – particularly given their role in the value chain of many larger corporates.

Smaller businesses would welcome specific guidance to help them with disclosing Scope 3 emissions. The strategy doesn't address this issue in full.

Instead, the government will publish a call for evidence in Q3 2023 so that it can better understand the costs and benefits of bringing Scope 3 greenhouse gas emissions within the ambit of what large companies must disclose.

The strategy notes, however, that banks may be able to support SMEs in respect of GHG emissions reporting. Bankers for Net Zero plan to launch a pilot programme of this support at COP28 in November 2023.

 

Duties of pension trustees

In 2014, the Law Commission published Fiduciary Duties of Investment Intermediaries. It concluded that trustees could take into account “non-financial” concerns (such as environmental) if they had “good reason to think the scheme members would share the concern” and their decisions did not involve a risk of “significant financial detriment” to their fund.

The government will now ask the Financial Markets Law Committee and the DWP to consider this further and will hold roundtables to promote greater clarity.

 

An opportunity for securitisation?

Pages 89-90 of the strategy refer to the government potentially promoting green investment through first loss tranches, performance wraps and subordinated debt. Participants in the securitisation market will be interested in the idea that we may see government-sponsored securitisations of green loans, with it taking the junior debt piece.

 

Key dates

In 2023

• Publication of net zero investment roadmaps and a nature investment roadmap.
• Consultation on the steps and interventions needed for more financial investment through voluntary markets while protecting against greenwashing.
• Collaboration and roundtables between UK financial institutions and government to tackle deforestation-linked finance.
• Hosting roundtables to engage stakeholders on how to continue clarifying the fiduciary duty.
• Consultation on the specifics around the UK’s Green Taxonomy.

Q2 2023

• Subject to parliamentary approval, bringing into force regulations that implement pensions reforms as early as 2023.
• First meeting of the Net Zero Business and Investment Group.

Q3 2023

• Around June 2023, launching the formal assessment mechanism after publication of the first two IFRS Sustainability Disclosure Standards.
• Provide further detail on the Sustainability Disclosure Standards implementation timeline to align with fast-moving international standards.
• Engage stakeholders on an update to the voluntary Environmental Reporting Guidelines.
• Call for evidence on Scope 3 emissions reporting.
• In September 2023, the first impact report on positive changes and benefits from expenditure under the Green Finance Programme.
• Hosting the Global Investment Summit 2023.

Q4 2023

• More clarity for pension trustees on their fiduciary duty in the context of the Net Zero transition by reviewing Stewardship Guidance. This will involve a review of the regulatory framework for effective stewardship by the Financial Reporting Council, Financial Conduct Authority, Pensions Regulator and other stakeholders in government.
• Consult on the introduction of transition plan disclosure requirements for the UK’s largest companies.
• Explore how the taskforce on nature-related financial disclosures framework can be incorporated into UK policy and legislation to align with Target 15 of the Global Biodiversity Framework.

In 2024

• Set out an action plan alongside adaptation finance deliverables.

 

Get in touch

For any advice or guidance on the strategy and issues discussed in this article, or on other ESG and sustainable finance matters, please contact one of our authors.