Six months on from COP26, at which the UK chancellor committed the country to becoming the “world’s first net-zero financial centre”, and the investment industry has little to go on from the government as to how this will be achieved, according to the UK Sustainable Investment and Finance Association (UKSIF).
“There remains a lack of clarity on the steps we need to take to achieve this objective and rapidly shift financial flows and investments towards net-zero at the scale that is required,” said James Alexander, CEO of the membership association and ESG Clarity Committee member.
The government will need to provide a clear roadmap for specific sectors to transition, firm up the UK’s green taxonomy, create a just transition commission and bring data providers under the regulator’s remit, UKSIF said in a report, Delivering a net-zero financial centre: Recommendations from UKSIF’s ‘net-zero inquiry’.
The report, which brings together the views of more than 200 of UKSIF’s 290+ members, recommends the government do the following:
Transform the real economy
UKSIF said the government should rapidly prioritise action on a specific set of sectors of the economy to drive forward their decarbonisation at a faster pace and promote greater private investment, integrate carbon pricing more explicitly into the tax system, and publicly track progress towards funding the identified investment needs for economic sectors to achieve decarbonisation.
“A key missing piece from the UK’s ‘Net-Zero Strategy’ is how the substantial public and private investment required to reach our emissions targets will be met,” the report said.
The association also wants to see a commitment to boost energy efficiency in all homes to help tackle the cost of living and energy crises.
Create a green taxonomy and sustainable disclosure framework
The UK’s version of a green taxonomy should not follow the EU by including natural gas, the UKSIF report said, and should be closely linked with the Sustainability Disclosure Requirements (SDR). “Creating a credible taxonomy based purely on science will present a strong leadership opportunity for the UK.”
A social taxonomy should also be mapped out in the upcoming Green Finance Strategy.
UKSIF added net-zero targets should be mandatory because this will “likely lead firms to adopt wholesale divestment in the short term to meet a government-mandated target, not contributing to meaningful decarbonisation of the economy, and potentially fuel ‘green asset bubbles’.” It said a ‘comply or explain’ approach is better suited.
Strengthen investors’ stewardship role
“In the coming years, the UK should build on the success of its Stewardship Code, which has been a positive driver in integrating stewardship within the sector,” the report said.
It added more standardised transition plans would help investors, which should include: companies’ policies on carbon offsets, details on the governance structures to deliver the transition plan, capital allocation plans to finance the transition, the strategy to maximise opportunities afforded by the transition, consideration of real world impacts, how financial statements reflect transition plan commitments, the approach to policy advocacy and lobbying, how biodiversity risks are being managed, how the transition plan is ‘just’, and how executive remuneration is linked to net-zero targets.
Create a just transition commission
Taking lead from Scotland, UKSIF would like to see a UK-wide just transition commission, which will also help investors realise a just transition is a “core component of their commitments on net-zero and a material ESG concern”.
The report said: “We continue to see a common lack of understanding within financial services on the extent to which ESG factors form part of investors’ fiduciary duties. This area needs urgent clarification for finance to reach net zero.”
Bring data providers under the regulator’s remit
“We strongly believe ESG data providers should now be brought within the UK’s regulatory perimeter, as ESG data provided by this industry becomes ever more crucial to firms’ decision-making,” UKSIF said.
“More robust corporate disclosures will improve the quality of ESG data, and we would like to see unlisted companies start to disclose to the same extent as listed companies including in relation to their climate transition plans.”