Six months ago, at COP26, then Chancellor of the Exchequer, Rishi Sunak, vowed that the UK would become the “world’s first net-zero financial centre”. This ambition is seen as a key step for the UK in its climate leadership journey. However, there is still a perception amongst some that there is not enough guidance from the government on how private finance will shift towards net-zero at the scale needed to meet its objective. The UK Sustainable Investment and Finance Association (UKSIF) has recently published a report containing detailed recommendations for government, regulators and the finance industry on how the UK can drive the systematic change needed to move the financial system towards a net-zero future.
The report can be accessed here and the critical actions which the report identifies can help move the UK’s financial sector towards net-zero are summarised below.
1. Transforming the real economy and promoting net-zero investment opportunities
The report recommends that the government prioritises specific UK sectors which lack clarity on achieving net-zero goals, such as heat and buildings or food and agriculture, and to drive forward their decarbonisation at a faster pace and promote greater private investment. The government will also need to integrate carbon pricing into the tax system and adopt a comprehensive carbon pricing system. Moreover, the government should ask an independent body to publicly track progress towards funding identified investment needs for economic sectors to achieve decarbonisation.
2. Creating a world-leading “green taxonomy” and sustainability disclosures framework
Rather than following the EU’s lead in green taxonomy by incorporating certain natural gas activities within its taxonomy (which could conflict with ambitions for decarbonisation), the report recommends that the UK should follow the Sustainability Disclosure Requirements that were announced in July 2021. All companies will need to take relevant steps to identify their environmental impact and take greater responsibility for where their investments are made.
3. Strengthening investors’ stewardship role in the economy
The UK is encouraged to build on the success of its Stewardship Code (principles that investors are expected to follow and which we have some experience ourselves of companies looking to adopt within their wider corporate governance codes) which has been a positive driver in integrating stewardship within the financial sector.
The report recommends that the government’s independent "Transition Plans Taskforce" should consider the following areas:
- Companies’ policies on carbon offsets with appropriate restrictions in place on their use, ideally within short-term targets
- Details on 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
4. Supporting communities, clients, and savers on the journey to net-zero
UKSIF continues to promote the creation of a UK-wide "Just Transition Commission", based on Scotland’s experience, to identify areas for long-term policy action on the "Just Transition". There is 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.
5. Shifting the whole financial sector and economy towards net-zero
UKSIF strongly supports the Financial Conduct Authority’s work exploring new measures for ESG data and ratings providers and believes this group should be brought within the UK’s regulatory perimeter. This is particularly important as ESG data becomes more embedded in firms’ investment and lending decisions and the demand for reliable data grows. To improve the quality of data provided by ESG data providers, policymakers should continue to strengthen corporate disclosures among both listed and unlisted companies.
Comment
Many will say that now is the time to set out a full-scale roadmap leading to the creation of the world’s very first net-zero financial centre. UKSIF will be reviewing the steps taken by the government and the policymakers and is expected to supplement its report with more recommendations in due course. We will continue to monitor this space and report on any key developments when they occur.
Matthew Padian