Green Finance Strategy builds on the Green Finance Taskforce report, highlighting the City of London’s role in delivering a green economy.
On July 2, 2019, the UK government published its Green Finance Strategy (Strategy), subtitled “Transforming Finance for a Greener Future.” The document outlines how the finance sector, and better climate disclosure from corporate actors, can drive progress in relation to climate change and help the UK achieve its net-zero emissions target.
The Strategy aims to: position climate and environmental factors as financial and strategic imperatives; establish a shared understanding of “greening”; clarify UK governmental and private sector roles and responsibilities; transition to a long-term approach; and build robust, transparent, and consistent green financial market frameworks.
This blog will explore the background to the Strategy, as well as the Strategy’s main themes and aims.
Green Finance Taskforce Report
In March 2018, the Green Finance Taskforce (GFT) — composed of leading experts in academia, finance, and civil society — published its Accelerating Green Finance report to encourage capital to move towards greener and cleaner sectors. The report outlined key themes, including:
- Relaunching UK green finance activities through a new unified brand
- Improving climate risk management with advanced data and analytics
- Implementing the recommendations of the Task Force on Climate-related Disclosures (TCFD)
- Driving demand and supply for green lending products
- Boosting investment into innovative clean technologies
The Accelerating Green Finance report acknowledged that meeting a low-carbon future will require unprecedented levels of investment, and that this investment is central to the future of the UK and global economies.
Green Finance Strategy
The Strategy builds on the Accelerating Green Finance report, and details measures intended to mobilize investment in green projects and to solidify London’s role in the transition to a low-carbon economy.
The Strategy outlines two objectives:
- To align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by UK government action
- To strengthen the competitiveness of the UK financial sector
These objectives are supported by three strategic pillars:
- Greening Finance
- Financing Green
- Capturing the Opportunity
Greening Finance seeks to ensure current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making. The Strategy recognizes that the transition to a green financial system will require fundamental changes to the economy and to decision-making processes, noting that all of the finance sector will need to incorporate these financial risks and opportunities. The Greening Finance pillar outlines robust actions, including:
- Ensuring that all listed companies and large asset owners disclose environmental and climate change information in line with the TCFD Recommendations by 2022
- Establishing a disclosure taskforce to support quality disclosure and work with the British Standards Institution to develop Sustainable Finance Standards
- Clarifying responsibilities for the Prudential Regulation Authority, the Financial Conduct Authority, the Financial Policy Committee, and the Pensions Regulator (including having regard to the Paris Agreement when carrying out their duties)
Longer-term actions include partnering with the private sector to develop sustainable supply chains, and exploring further initiatives to accelerate the alignment of finance with Paris Agreement objectives. The Strategy calls for an interim report to be produced by the UK government by year-end 2020 in order to examine the progress of implementing TCFD. For more detail on the TCFD Recommendations, see this prior Latham blog post.
Financing Green aims to accelerate finance to support the delivery of the UK’s carbon targets and clean growth, resilience, environmental ambitions, and international objectives. The Strategy recognizes that specific actions are required to redirect private finance flows into clean growth and environmental sectors. Financing Green has four primary elements:
- Establishing robust, long-term policy frameworks
- Improving access to finance for green investment
- Addressing market barriers and building capacity
- Developing innovative approaches and new ways of working
These elements encompass and delineate broad UK governmental action to foster engagement across the country. The UK government will announce a package of measures to mobilize green finance for home energy efficiency and place the UK government’s 25-Year Environment Plan on a statutory footing through the forthcoming Environment Bill.
Landlords and businesses will be advised of necessary steps to understand and potentially disclose operational energy use, while engagement with local actors will be strengthened to accelerate green finance across the country. The National Infrastructure Commission will examine future proofing against climate change risks to consider further action.
The Financing Green approach also has an international element, with the UK government working in partnership with the Chinese, Brazilian, and Mexican governments to develop green finance markets through the UK Partnering for Accelerated Climate Transitions (UK PACT) program and the Prosperity Fund.
Capturing the Opportunity
Capturing the Opportunity intends to ensure UK financial services leverage the domestic and international commercial opportunities arising from Greening Finance and Financing Green. These opportunities include climate-related data and analytics, and new green financial products and services. The UK government aims to consolidate the UK’s position as a global hub for green finance and to position the UK at the forefront of green financial innovation, data, and analytics through the following actions:
- Establishing the Green Finance Institute to strengthen public and private sector collaboration
- Enhancing climate-related and environmental data and analytics
- Promoting the adoption and mainstreaming of green finance products and services
- Launching a Green Home Finance Fund, providing £5 million of funding for private sector pilot projects, including green mortgages
- Driving green finance competencies through initiatives such as the Green Finance Education Charter to place green finance and climate information on future finance curricula
Next Steps and Review
The UK government is seeking transition to a clean, low-carbon economy, which will improve air quality and living conditions across the country. As part of this shift, the UK government intends to review the costs of decarbonization in order to deliver a transition that benefits households, businesses, and public finances. In the coming months, the UK government intends to publish an Energy White Paper that aims to reduce energy bills, and part of the transition will involve leveraging the North Sea’s oil and gas experience into the offshore wind supply chain.
The UK government will review progress against these actions — particularly on greening the financial system — including whether the TCFD Recommendations have been implemented, by the end of 2020. A formal review of progress against the Strategy plans will be conducted in 2022.
The Strategy is an important document, signaling the UK government’s commitment to transition to a green economy through green financing. Relevant initiatives include the TCFD Recommendations, the Accelerating Green Finance document, the UK government’s recent commitment to net-zero emissions by 2050 (see this prior Latham blog post), and the recent growth in green finance across the financial world.
The UK government is looking to harness the City of London to drive progress in greening the economy.
Latham & Watkins will continue to monitor developments in this area.
This post was prepared with the assistance of Martin Cassidy in the London office of Latham & Watkins.