On 30 March the UK government released a deluge of documents on net zero and energy security totalling more than 2,800 pages. These included the Net Zero Growth Plan, the government’s revised Net Zero Strategy, an Energy Security Plan, and updated Green Finance Strategy.
Originally titled ‘Green Day’, the announcements came as the EU and US have launched initiatives designed to attract billions in investment in green technologies, putting the UK in what some have labelled an international ‘subsidies race’.
The costs of delaying net zero action are high, with serious implications for the UK’s global competitiveness and its ambition to become a net zero financial centre.
Investors have long stressed that with a supportive policy environment in place, the net zero transition could become a major driver of the economy. McKinsey estimated that supplying the goods and services to enable the global net zero transition could be worth £1 trillion to UK businesses by 2030.
The government clearly recognises that private finance flows are necessary for the UK to achieve its climate goals, and claims its policies are “tailored to secure private investment”. But does it go far enough?
UK Green Taxonomy remains uncertain
While the latest releases did confirm that a consultation on the UK Green Taxonomy will be launched in Autumn, the UK is already lagging behind on this cornerstone of sustainable finance policy. Originally due in December 2022, there is a clear investor need for such a taxonomy, and the EU’s own regulation is already filling the gap.
The EU taxonomy itself is complex and costly, but the vacuum created by a lack of a UK equivalent means investors will have to rely on using it – of the UK’s two thousand listed companies, almost 80% are in scope for EU taxonomy reporting under the Corporate Sustainability Reporting Directive (CSRD), according to the Green Finance Institute.
If the UK wants to shape the conversation on green investment it needs to release its own green taxonomy by the end of 2023 which is science-based, usable by businesses, and mandatory. Otherwise, there is a risk that the UK will fall behind the EU on green investment, and will be forced to remain reactive, rather than shaping the rapidly evolving global sustainable finance agenda.
Investors need mandatory transition plans
The investment community, and MP Chris Skidmore’s recent net zero review, called on the UK government to develop high-quality and comparable transition plan disclosures, for both listed and private companies. Commitments to roll out these disclosures, building on the work of the UK’s Transition Plan Taskforce, are welcome.
However, there is a limit to the usefulness of these disclosures if they are not mandatory for all large companies. Currently, it seems likely that disclosures will only apply on a “comply or explain” basis.
Detailed sector pathways
Company-level transition plans need to be anchored by sector pathways that provide clarity on how the UK economy as a whole will transition to net zero. Though there was some progress towards the UK’s stated ambition of becoming the world’s first net zero-aligned financial centre, these latest releases lack the detail investors require to help make that happen.
For instance, in 2021 the UK government promised to publish “a transition pathway for the financial sector” in 2022, but this is still missing.
Furthermore, the government has committed to developing and publishing detailed decarbonisation pathways for key sectors of the UK economy later this year. These pathways are eagerly awaited by the investment community and must be robust.
Investors require clear, coherent policy frameworks to unlock investment opportunities that address the climate crisis and help close the finance gap.
To fulfil UK potential as a magnet for green finance these sector pathways should provide the policy clarity needed to reorient capital towards key sectors of the economy. This means showing what a realistic decarbonisation pathway looks like on a sector-by-sector basis.
Progress on the real economy
The fundamental goal of transition finance is to reduce greenhouse gas emissions. Recent government announcements on the real economy were thin on the ground and easy wins were missed. The excessive bureaucracy which delays onshore wind remains, and the expansion of insulation measures must go much further to hit the government’s own targets.
However, the announcement of £20bn in support for hydrogen and carbon capture and storage (CCS) technologies is welcome as it will be critical for decarbonising harder to abate sectors. The longer-term plans announced for heat pump expansion and a solar roadmap to 2035 (to be developed) should also be welcomed.
How can the UK government walk beside investors to transform the UK into a magnet for green investment?
Regrettably, the UK government has been slow to deliver the policy clarity investors need to invest in net zero, which is eroding its competitive advantage as a hub for green finance.
Despite the slew of releases, ‘Green Day’ alone did not provide the right policy environment or ambition to support and catalyse investment in the UK’s net zero transition. The documents committed to further consultations and further details but no further funding was attached to make the UK’s climate goals a reality.
What the investment community needs now are detailed sector pathways, and mandatory climate disclosures and transition plans. Until the government provides this guidance, private investment will struggle to reach its full potential.
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