The UK’s roadmap to net zero: Green Finance Strategy

As we approach International Earth Day, it’s important to raise awareness about climate change and what can be done to protect our planet. On the 22^nd of April every year, Earth Day promotes the need for environmental protection and features various initiatives to support sustainability. This year the theme is ‘Invest in Our Planet.’

 Nations worldwide are playing a key part in advocating for a greener future through sustainable investments to achieve net zero targets, recognising the threat of climate change and biodiversity decline. There have been several advancements in the fight against global warming, from reporting obligations such as the Sustainable Finance Disclosure Regulation (SFDR) to greener economical strategies.

The Environmental, Social and Governance (ESG) movement has become more defined this past year, as greenwashing and sustainability regulations are gaining popularity in financial services. CUBE’s recent report on the Evolution of ESG explored 52,920 ESG-related regulatory content to uncover that nearly 16,000 references were made to ‘sustainability’ alone globally, drastically increasing from 2021 to 2022. This emphasises global regulators’ efforts in advocating for ESG, despite the slowdown in progress due to inflation and the effects of Russia’s war on the economy.

Our report also found that UK regulators such as the Financial Conduct Authority (FCA) were among the top issuing bodies to publish the most ESG regulatory content globally. To transition to a greener economy, UK regulators have recognised that changes need to be implemented to meet its net-zero target by 2050. As such, the UK was the first major country to execute a Green Finance Strategy back in 2019. Additionally, in 2022, £23 billion of new low-carbon investment was delivered in the UK, including from renewable sources, hydrogen, nuclear, and electrified transport to clean heat.

As efforts to combat climate change risks progress, so does the green strategy. In March 2023, the HM government released an update to the 2019 strategy, known as the ‘Mobilising Green Investment, 2023 Green Finance Strategy.’

What is the UK’s 2023 Green Finance Strategy?

Climate change not only causes detrimental physical effects but also poses many risks to financial systems, such as damage to infrastructure and supply chains. The Green Finance Strategy is the “latest policy blueprint” to address these risks and position the UK as a world leader in green finance.

The “right support structure” is required to propel green products and services to “commercial success,” this is why the strategy is important. Incorporating both nature and climate adaptation, the Strategy covers the transition from a fossil-fuel-driven economy to one that is decarbonised.

Key objectives

The Strategy focuses on five key objectives to establish robust green financial markets.

1. Growth and competitiveness

The UK economy has been hit with high inflation and interest rates, the government’s economic missteps, numerous strike actions affecting productivity and the aftermath of Brexit. The UK is even on course for the worst economic performance out of all countries in G7. The government has pledged that it will “do more to support our financial services sector to prosper.” As the UK economy transitions to a greener one, the government will be supporting climate tech solutions, banks leading renewable projects and asset managers that are supporting ESG-friendly companies.  

2. Investment in a greener economy

To achieve the net zero target, the government predicts that from the late 2020s and 2030s, an extra £50-60 billion of capital investment will be required to build “climate resilience” and support “nature’s recovery.” This investment is expected to support the sectors and technologies of the future to “level up the UK.”

3. Financial stability

Climate change poses a real economic risk. Up until 2050, the BoE has estimated £110 billion in losses for UK banks and 50-70% of higher losses for insurers in the highest climate risk scenario. Additionally, more than half of the world’s GDP is created in areas that utilise the goods and services provided by nature. The Green Finance Strategy aims to ensure the financial services sector is given the information and help required to manage these risks.

4. Incorporation of nature and adaptation

The strategy will include both nature and climate adaptation into the government’s green finance policy framework to ensure resilience.

5. Market alignment with climate goals

The government seeks to become the world’s first Net Zero-aligned Financial Centre. The Strategy will provide transparency and support to the financial sector to help reach net zero, by equipping the market with the information and tools required.

How the UK will support the transition to a greener global economy

• The government will collaborate with public financing bodies to afford the green technologies needed to deliver cheaper and cleaner energy sources. This will be done through ‘Powering up Britain’ and will create many new green jobs and business opportunities.

• At the moment, the FCA required listed firms, large asset owners and managers to disclose green transition plans on a ‘comply or explain’ basis. However, the government seeks to introduce a regulation that requires all large firms to disclose plans if they have them.

• The UK will continue to support the International Financial Reporting Standards (IFRS) and the International Sustainability Standards Board (ISSB). It will investigate the standards of IFRS and ISSB to see if they can be adopted in the UK.

• A UK Green Taxonomy will be delivered, with a consultation taking place in Autumn 2023. This will include details such as which activities can be labelled as green to uphold standards and transparency of green activity.

The FCA, BoE and TPR on the Green Finance Strategy

The UK’s FCA, Bank of England (BoE) and The Pensions Regulator (TPR) have welcomed the updated strategy with open arms and endorsement of the ISSB. To ensure credible standards, the regulators will ensure coordination when delivering green finance goals.

Nikhil Rathi, Chief Executive Officer of the FCA, commented that the strategy “represents an important milestone, building on collective efforts to date and setting out a clear plan for the future. We are working hard to ensure that the UK market is well-positioned to support the transition to net zero. We’re playing our part in delivering a world-leading framework for transition plan disclosures through our collaboration with the UK Transition Plan Taskforce.”

The FCA is also working closely with the ISSB, helping consumers through proper product labelling and will work closely with the government to deliver the strategy.

CUBE comment

The rise in ESG-related regulatory content has proven that ESG remains a critical objective for regulators. The UK government deserves credit for its efforts in introducing a blueprint to facilitate a seamless shift towards a more environmentally friendly and sustainable economy.

Whilst the UK has set out ambitious climate targets and there has been £198 billion of investment into low-carbon energy, it will be interesting to see if the Strategy will lead to enforcement action against firms that do not abide by ESG obligations. Our ESG report uncovers that the United States takes the lead in terms of enforcement actions against ESG wrongdoings, with little activity from UK regulators.

The UK’s Green Finance Strategy will come with increased regulatory scrutiny and better supervision of greenwashing and other false claims. Firms must begin incorporating greener strategies within their policies to ensure compliance and avoid reputational damage for not aligning with the government’s plans for a greener economy.

To build a comprehensive, regulatory change management system that features all relevant environmental, sustainable, and green regulations, contact CUBE.  

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