‘Greening Finance’ and ‘Financing Green’: UK Government unveil strategy to make finance fit for a net-zero future

United Kingdom

On 2 July 2019, HM Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) published the Green Finance Strategy, which establishes Government’s direction on financial markets intervention against the backdrop of the UK’s statutory commitment to reduce greenhouse gas emissions to net-zero by 2050, which passed into law on 27 June 2019.

The strategy builds on the momentum around climate change initiatives as well as other government measures such as the Treasury Committee’s inquiry into the economic opportunities that decarbonisation presents for the UK (inquiry open at time of writing). The strategy focusses on the private sector and aims to transform the financial landscape via three strategic pillars: ‘Greening Finance’, ‘Financing Green’ and ‘Capturing the Opportunity’.

Greening Finance and Financing Green

The Greening Finance pillar makes explicit the link between climate-related activity and financial risks for organisations and seeks to improve the managements of such risks[1] through shared understanding, clarifying roles and responsibilities and fostering transparency over the long term.

The Financing Green strand of the strategy seeks to mobilise and accelerate private capital flows into clean growth and environmental sectors to support the delivery of the UK’s carbon targets and international objectives by establishing appropriate long-term policy frameworks, improving access to finance for green investment, addressing market barriers and developing innovative approaches. The actions Government are proposing to take to achieve this, a selected sample of which are set out below, are expected to provide the long-term certainty that investors and lenders will need in order to provide the required financing to meet the net-zero emissions reduction target by 2050.

The strategy includes a number recommendations and actions the Government proposes to achieve their Greening Finance and Financing Green goals including the following:

 

Greening Finance

Financing Green

UK action

By 2022, Government expects all listed companies and large asset owners to disclose in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, which requires climate-risk-exposure disclosures across the following key areas of an organisation: Governance, Strategy, Risk Management and Metrics & Targets.

 

Government will expand its portfolio of blended, innovative funds, including: a new clean growth venture capital fund which will invest in UK companies seeking to commercialise promising technologies, which will be launched with an initial £20m investment from BEIS; a potential Natural Environment Impact Fund aimed at kick-starting a pipeline of revenue-generative projects; a Charging Infrastructure Investment Fund providing access to finance for companies that deliver public charging points, with the Government investing up to £200m, to be matched by private investors; an Industrial Energy Transformation Fund, with up to £315m investment to support businesses’ transition to a low carbon future and to increase energy efficiency (further details under consultation); and potentially increasing the Public Sector Energy Efficiency Loan Scheme.

 

To ensure organisations adopt TCFD disclosures in line with expectations, Government will work with financial regulators to issue guidance and establish a joint taskforce to review progress. Government has not ruled out making disclosing in line with the TCFD mandatory.

 

Government will introduce the Environment Bill.

Government will require the Prudential Regulation Authority, Financial Conduct Authority and the Financial Policy Committee to take Paris Agreement commitments into account when performing their duties.

 

Establishing policy frameworks to improve energy efficiency in buildings, including working with landlords on disclosing operational energy use, and updating the openly available EPC data at least every six months to support lenders in driving energy efficiency by assessing the EPC performance of their lending.

 

Government commits to match (or exceed) the ambition of the three key objectives in the EU’s Sustainable Finance Action Plan: (1) re-orient capital flows towards sustainable investment; (2) consider environmental goals (net-zero by 2050) in financial decision-making to manage financial risks posed by climate change; and (3) increase transparency in financial products.

 

Commission the National Infrastructure Commission study into current and future resilience of UK infrastructure. This will develop a framework for assessing resilience and make recommendations to Government that can be used in the next National Infrastructure Assessment.

 

 

Reduce transaction costs to address the novelty and uncertainty factors and to attract funding. The Government launched the Boosting Access for SMEs to Energy Efficiency competition in March 2019 which will provide £6m for new innovative scalable business models or solutions that encourage the take up of energy efficiency by SMEs at scale.

International action

To play an active role in the Coalition of Finance Ministers for Climate Action, which is committed to taking collective action to meet the Paris Agreement objectives by assisting countries in mobilising and aligning the finance needed to implement their climate action plans, establishing best practices and experiences and factoring climate risks and vulnerabilities into members’ economic planning.

 

The Government recognises that public sector funding alone is insufficient to meet the investment required to meet the global transition to environmentally sustainable growth and they must focus on mobilising private finance and removing market barriers to such investment. The UK has committed to spend at least £5.8 billion of International Climate Finance between 2016 and 2020.

Partnering with the private sector through the Powering Past Coal Alliance Finance Principles, by which financial institutions can commit to support the phase out of unabated coal power within Paris Agreement timeframes.

Government is partnering with countries including China, Mexico and Colombia, to deliver technical support. For example, the £60 million UK PACT programme, which is set to expand into new areas (geographical and sectoral).

UK and Egypt will co-chair the global effort to promote resilience and adaptation to climate change at the UN’s Climate Action Summit in September 2019.

 

Align the UK’s Official Development Assistance (ODA) expenditure with the Paris Agreement goals.

 

Capturing the Opportunity

In addition to Greening Finance and Financing Green, the Government sets out its aim for the UK financial sector to seize the economic opportunities from the anticipated growth in demand the transition to a clean economy will present, including opportunities for green financial innovation and data analytics and the aim to consolidate the UK’s position as a global hub for green finance.

One example envisaged by the Green Finance Strategy, is the development of fintech and data analytics solutions to support organisations with their disclosure and review exercises. This goes hand in hand with the expected TCFD disclosure, which is one of the core tenets of the Greening Finance strategic pillar.

The Green Finance Strategy sets out actions for the Government in this regard, which include:

  • The launch of the Green Finance Institute, which will focus on accelerating the transition to green finance, supporting financial market participants, collating resources and propounding the green finance agenda both domestically and internationally;
  • The launch of a Green Home Finance Fund, making £5m of funding available to the private sector to pilot green finance products such as green mortgages to test how attractive these are to consumers and whether they can be self-sustaining; and
  • The BEIS Whole House Retrofit competition, which makes £10m of grant funding available to projects that can demonstrate cost reductions by carrying out deep retrofit at scale on a large number of similar properties.

Comment

This strategy comes at a time of heightened public and commercial awareness of climate change risks and fits into the policy direction of decarbonising the UK’s heat, transport and electricity sectors. It comes also at a time when other parts of the world, particularly the EUare also introducing or considering measures designed to increase flows of private sector capital into sustainable activities.

As set out in our comment with respect to the ‘net zero’ commitment, decarbonising heating needs to be a priority given the dependency of UK housing stock on gas for its heating. For this, significant upgrades and ‘home-improvement’ schemes will be needed. Government estimated the total cost of upgrading homes to meet EPC levels in line with its Clean Growth Strategy at between £35bn and £65bn. To achieve net-zero by 2050, this figure is likely to be even greater. This will necessarily require mobilising significant private investment from new funding sources and will likely require the implementation of appropriate incentives to address any uncertainty from investors and lenders in order to attract the required funding.

The Green Finance Strategy is not the first time Government has sought to address green financing of homes and buildings. The Green Deal (which stopped receiving funding in 2015) came under criticism for, amongst other things, lack of uptake by suppliers, not addressing fuel poverty and carrying interest rates that appeared out of proportion with prevailing home mortgage rates. The Financing Green approach (for example the Green Home Finance Fund) appears to take a more market-led approach, which could overcome some of the challenges faced by the Green Deal. Lenders who are already offering green financing products to the market will be encouraged by the approach taken by Government whilst those that have been circling the topic may well be prompted into action by the Government support and strategy. However, Government must be alive to the need for any products to stand up to the market, as current interest rates offer little headroom for discounted financial products that incentivise energy-saving retrofitting or other measures.

In addition, a framework to assess current and future resilience of UK infrastructure will be welcome across a number of sectors. This coupled with greater disclosure and transparency (including potentially via the TCFDs) will, if nothing else, add to the information mix of the challenges and opportunities that the energy transition is ushering in. Increased disclosure and transparency should assist investors and lenders in understanding the key challenges faced by private sector developers and corporates as a result of climate change, creating opportunities to develop appropriate financing products (whether in the context of EV infrastructure, carbon capture use and storage projects and/or financial support for better ways of building and managing the growing fleet of offshore wind farms that the offshore wind sector deal will bring about).

What’s next

The Environment Bill is expected to be brought in later this year. Pre-legislative scrutiny of the bill began in April 2019.

Government will continue to explore what can be done to “green” the UK financial system. It will publish an interim report by the end of 2020 that examines progress on the implementation of the TCFD recommendations. In 2022, Government will conduct a formal review of progress against the Green Finance Strategy.



[1]For example for example, the Prudential Regulation Authority’s 2018 review of the Banking sector found that although 70% of banks in the UK consider climate change a financial risk, only 10% are taking a comprehensive long-term strategic approach to managing the financial risks posed by climate change.