12. February 2024

Green finance in the United Kingdom – Part III

A new strategy

When it comes to green finance, the United Kingdom often sticks to the EU agenda, but also comes up with refreshingly different approaches. What can we learn from the country that claims global leadership in green finance? An approach in three parts.

In March 2023, the UK government published a new, updated strategy on green finance. It is entitled Green Finance Strategy – Mobilising Green Investment and builds on the roadmap from 2021 and its counterpart from 2019. Over 100 responses from a consultation in May 2022 have been incorporated into the government paper, which sets out the following five objectives:

  1. Support the UK financial sector to benefit from the transformation of the global economy
  2. Ensure that sufficient (private) capital is available for investment in the green economy
  3. Ensure financial stability by providing the financial sector with all relevant information to manage risks arising from climate change and the destruction of nature
  4. Incorporate adaptation to climate change and nature
  5. Align global financial flows with climate and nature conservation goals

All five of these objectives should help to further strengthen and expand the global leadership role claimed by the UK in this area.

The United Kingdom is focussing on transition finance

The country is particularly keen to promote financing concepts for the transition, known as transition finance. The EU also published recommendations on this on 13 June 2023. In the UK, however, the topic has been on the agenda for some time and the measures that have already been taken and further plans appear to be more far-reaching.

A Transition Plan Taskforce was launched there in April 2022, the establishment of which was announced at COP26 in Glasgow, Scotland. It has since developed a centralised, sector-neutral disclosure framework for transition plans and additional sectoral guidelines. There was a consultation on the latter in autumn 2023. The final guidelines for individual sectors are expected in spring 2024.

Transition plans are a basic prerequisite for transition finance. They involve providing companies that have high emissions but want to decarbonise with the necessary funding. Such investments are often considered to have a much higher potential impact than investments in companies that are already low-emission or green. In principle, transition plans can also include social aspects and measures for environmental challenges beyond climate change.

The British green taxonomy

With a view to a green taxonomy, a consultation was supposed to be launched by the British political leaders in the third quarter of 2023. Instead of information on this, however, there are only calls to the government, for example from the Sustainable Investment and Finance Association UKSIF, to actually launch such a consultation.

The content of the consultation would be the recommendations presented by the responsible expert group, the Green Technical Advisory Group (GTAG), in September 2023, which are based on several sub-reports. Transition activities are also envisaged, analogous to the EU taxonomy. However, the tone and focus on transition issues in the UK suggest that there may be more far-reaching plans here than in continental Europe, where there was a proposal for an extended green taxonomy, which, however, does not appear to be being pursued.

In addition, the UK government had already indicated that it would see nuclear power as a green economic activity in a taxonomy, should one be introduced. This is not surprising After all, the UK Green Finance Strategy already includes the plan to set up an independent body called Great British Nuclear (GBN) to oversee the implementation of new nuclear power projects. In January 2024, the UK government announced its intention to quadruple nuclear power generation capacity by 2050.

The drafts available to date include nuclear power, similar to the EU taxonomy. This is not surprising as the British green finance strategy includes the plan to set up an independent body called Great British Nuclear (GBN), which will be responsible for the implementation of new nuclear power projects.

Gas and nuclear power also an issue in the UK

However, there were also critical contributions to the debate on nuclear power in the UK taxonomy. According to a report, the GTAG referred to legal risks with regard to the classification of nuclear technologies and natural gas as green economic activities. Legal action has indeed been announced or is pending in the EU in this regard. In addition, there are critical voices that categorise natural gas per se as harmful to the climate and consider nuclear power to be risky, for example with regard to possible effects on water.

Similar to the plans of the EU, which published the proposal for a regulation on sustainability rating agencies on 13 June 2023 and reached a provisional agreement on this between the Council and Parliament on 5 February 2024, the UK is planning measures to regulate ESG rating providers. At the same time as publishing its green finance strategy, it launched a consultation on this, which closed at the end of June. According to the website of the local Ministry of Finance, the evaluation of the results is still ongoing.

The UK sets different priorities than the EU

If you take a bird’s eye view and compare the strategies and measures in the UK and the EU, you will certainly notice differences. Among other things, the wording is striking: While the European group of states consistently refers to sustainable finance, the UK consistently refers to green finance. Although terms such as just transition are used from time to time in the papers, the social component is given much less consideration than in the EU, where, for example, a social taxonomy has been developed as a proposal and discussed more widely, if not implemented.

If the strategies are viewed from the perspective of priorities, it also becomes clear that although British lines of argument are very similar to those of the EU, the priorities differ. Aspects such as competitiveness and economic growth are more strongly emphasised there. For example, aligning financial flows with climate and nature goals is only in fifth place there. In contrast, the EU Sustainable Finance Strategy of 2018 ranks this goal first.

20 billion for carbon capture and storage

Despite all the strategies, roadmaps and discussion papers, news from the UK last summer casts doubt on the country’s climate policy. Not only were emission allowances for domestic industry reduced some time ago, but the government also promised new licences for oil and gas drilling. At the same time, British Prime Minister Rishi Sunak announced further projects to store previously collected and captured carbon dioxide underground and under the North Sea. The UK has earmarked 20 billion GBP in funding for such technologies, some of which are viewed very sceptically and seen as contributing to a delay in real emissions reductions.

Technologies that can help in the fight against climate change are highly relevant in the context of transition finance and therefore transition plans. The UK government is reportedly planning to make the preparation and disclosure of such plans mandatory for large public and private companies based on the TPT disclosure framework. According to media reports, companies are expected to regularly report on their transition plans from the previous year, starting in 2026.

Further developments on the transition to a climate- and nature-friendly economy and the corresponding financing, whether in the UK or in the EU, remain to be seen. With regard to corporate sustainability efforts and ESG ratings, the services of imug rating by EthiFinance help in any case, covering all areas from management to products and services to potential controversies.

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Gesa Vögele

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