Green Finance Strategy: ‘A step forward but not enough’

UK government updates its plans alongside the release of reports to 'power up' Britain

The UK government has updated its Green Finance Strategy today, announcing a call for evidence on Scope 3 greenhouse gas emissions, a consultation on regulating ESG ratings providers and restating its commitment to publishing a green taxonomy, now in Autumn 2023.

The government first launched its Green Finance Strategy in 2019, with the aim of increasing investment in sustainable projects and infrastructure.

Today’s update is accompanied by a suite of reports, Powering up Britain, outlining how the government plans to leverage around £100bn of private investment over the period to 2030, and its response to the 129 recommendations in Chris Skidmore’s Net Zero Review published in January this year.

The decision to consult on regulating ESG ratings providers has been welcomed by the industry, with ShareAction’s policy director Lewis Johnson calling it a “positive step to guarantee standards in this somewhat ‘wild west’ area of the market”.  

Quilter Cheviot head of responsible investment, and ESG Clarity EU Committee member Gemma Woodward, added: “We are pleased the government has recognised that ESG ratings are increasingly influential, and there is a real need for regulation to improve the currently lacking level of consistency.

“At present, there is a growing dependency on data and metrics by these firms from asset managers and owners in order to meet regulatory reporting requirements such as Taskforce for Climate-related Financial Disclosures (TCFD), as well as using these within their responsible investment approaches, such as integrating ESG factors within the investment process. However, this is not yet a standardised process and if an investment manager uses one external data provider, often it will have inherent biases that will likely skew the outcome as the rating would be based solely on that provider’s data and does not take into account any other research.”

As well as consulting on Scope 3 emissions and ESG ratings providers, the UK government has committed to consulting on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them, and will publish a series of net-zero investment roadmaps by sector.

The consultation on the disclosure of transition plans will assume such requirements may reflect the existing ‘comply or explain’ basis used by the Financial Conduct Authority (FCA). “This is not enough,” said Johnson.

“We need robust, mandatory net-zero transition plans now so market participants can accurately assess performance and risk.” 

In addition, Ed Matthew, campaigns director for E3G, noted these sector roadmaps do not equate to a whole-of-economy Net Zero Investment Plan, which has been repeatedly called for by large financial institutions in the UK.

“The commitment to set out sectoral investment roadmaps is a step forward, but this is not the full UK-wide Net Zero Investment Plan, or commitment to independent financial flow tracking, that has been called for by leaders across the UK investment industry. If the government wants to compete internationally on net-zero investment, it needs to be bolder,” he said.  

The government also announced that in Q4 2023, the Financial Reporting Council, working with the FCA, Department for Work and Pensions and The Pensions Regulator, will review the regulatory framework for effective stewardship, including the operation of the Stewardship Code. The review will assess whether the Stewardship Code is creating a market for effective stewardship and the need for any further regulation in this area.

Also working with the FCA, the government will be releasing a policy statement on Sustainability Disclosure Requirements and investment labels, along with final rules/guidance; a follow-up to a discussion paper on sustainability-related governance, incentives and competence in regulated firms; an analysis of addressing greenwashing; and how to embed sustainability considerations across all of the FCA’s regulatory functions.

The Strategy also said: “We will also work with the Green Finance Institute to explore how blended-finance models might be used to more strategically mobilise private finance to support our green objectives.”

Dr Rhian-Mari Thomas, CEO of the Green Finance Institute, added: “Today’s announcement broadens our mandate to work with government and the market to accelerate the mobilisation of capital to restore and protect nature as well as to decarbonise critical sectors, alongside well-designed long-term policy. We will help develop innovative approaches to deploying government capital to crowd in private finance, maximising impact, and value for money.”

The government’s mention of its green taxonomy has also been welcomed by commentators, despite disappointment over its delay.

Legally, the climate element of the green taxonomy should have been put in place by the end of 2022. “Following a lack of clarity over the future direction of the UK’s taxonomy throughout this year, we are naturally hugely disappointed by … further delays to the taxonomy’s implementation,” commented James Alexander, CEO at UK Sustainable Investment and Finance Association and member of the ESG Clarity EU Committee, at the time.

However, Alexander said today’s Strategy update provided “much needed clarity” for investors.

“We hope to see further, crucial policy detail outlined as soon as possible in the upcoming consultations on many of these areas which we have worked closely on in recent months, and are committed to working constructively with government and wider stakeholders,” he said.

Powering up Britain

As well as the Green Finance Strategy, the UK government has also published a set of green policies in order to strengthen UK energy security and boost the UK clean tech sector.

“After decades of reliance on imported fossil fuels, the new [Energy Security and Net Zero] department’s mission is to replace them with cheaper, cleaner, domestic sources of energy,” the Powering Up Britain report said.

“We will be powered by renewables including wind and solar, hydrogen, power with carbon capture, usage and storage (CCUS) and new nuclear plants – while recognising the vital role that UK oil and gas will play in the transition.”

The majority of these policies have already been announced, for example, the £20bn of support for the early development of CCUS announced in the Spring Budget.

See also: – Will carbon capture increase oil production?

“Most of the policies are not bold enough to keep the UK competitive in the clean tech race or put us back on track to net zero. It is underwhelming,” Matthew said.

The policies form the government’s response to the Net Zero Review by the Conservative backbench MP Chris Skidmore.

The government said it has “partly or fully acting upon 23 recommendations from the Independent Review of Net Zero report’s 25 recommendations for 2025, to ensure that the UK’s journey to net zero by 2050 is pro-business and pro-growth”.

However, Steve Malkin, CEO of Planet Mark, said:there appears to be little substance on many of the recommendations proposed by the Net Zero Review, which will be necessary for unlocking net zero opportunity across the nation and all sectors.”

Avatar

Natasha Turner

Natasha was global editor at ESG Clarity, part of Mark Allen Financial, and a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the Year...