Nearly four years after the first release, the update to the government’s Green Finance Strategy (GFS), initially expected by the end of 2022, was finally issued as part of the torrent of climate and energy announcements on so called ‘Green Day’ in March. First published in July 2019, the strategy was part of the legacy of pledges made at COP26 to align finance and the economy with net zero targets.
The strategy lacks ambition and detail
Unfortunately, the strategy’s 2023 update isn’t anywhere near what was hoped for. While components like a green taxonomy and transition plans were mentioned, it lacks the ambition and detail needed for the UK to become the “net zero financial centre” Rishi Sunak claimed he wanted it to be when he was chancellor. To stay on track to meet the commitments he set out at COP26, a lot more needs to happen to move the needle.
The government missed its December 2022 legal deadline for implementing the green taxonomy which sets the bar for investments defined as ‘environmentally sustainable’. Although the update to the GFS still commits to it, detail is lacking. For instance, there was no mention of it being science-based or legally grounded, which leaves the door open to softer options.
The building blocks of a taxonomy are its environmental objectives (for instance, climate change mitigation and adaptation and the transition to a circular economy) and technical screening criteria, which outline what’s necessary to meet these objectives. The government previously promised to publish the technical screening criteria by the end of 2023 but there has been no mention of revised dates for this. As the next consultation on the taxonomy is set for autumn 2023, it is very unlikely this deadline will be met. There was also no mention of plans to make it compatible across borders, such as with the EU which holds 73 per cent of the UK’s investment abroad, as set out in the Green Technical Advisory Group’s recent analysis. The UK needs to go beyond just “learn(ing) the lessons from taxonomies introduced in other jurisdictions”, as the update states, and ensure its taxonomy can work with other jurisdictions.
In acknowledging the importance of transition plans to create new economic opportunities, the government has hit the nail on the head. But there’s little indication how these plans will be taken forward, even though they are vital for both the public and private sectors to be able to set out how they will achieve net zero. There’s no sign either that the plans will be put on a legislative footing so there’s a risk they might be permanently dropped. The lack of legal clout throughout the strategy is starting to make it look a lot like green window dressing.
Until now, transition plans applied to asset managers, regulated asset owners and UK-listed companies, but missed out UK unlisted companies. So, the update to include unlisted companies in the consultation is welcome. There’s no requirement for material financial risk disclosures though, which could make transition plans murkier.
There’s no new money
While the strategy acknowledged that public finance should be scaled up to stimulate markets, the update has reiterated previous announcements in relation to this; for example, the £505 million spent by the British Business Bank (2014-22) and the £1.9 billion of net zero-related UK Research and Innovation grants (2015-20). But what about the future? The UK Infrastructure Bank has £22 billion of financial capacity and UK Export Finance’s capacity was increased by £10 billion. But the government needs to identify how these institutions can work together better, cut red tape and avoid duplication, especially as there seems to be overlap between them. There is more potential opportunity to scale up funding such as through the Advanced Research and Invention Agency (ARIA), established in February 2021, to fund “high-risk, high-reward” scientific research and technology projects. As yet, there’s no mention or sign of any climate-related investments under this.
There were some positives in the updated strategy. For instance, the increased reference to nature and the introduction of a nature markets framework to protect against greenwashing is promising. The call for evidence on Scope 3 emissions, i.e., the upstream and downstream greenhouse gas emissions a business causes, was welcome too as it will close data gaps, improve reporting and address greenwashing risks. Elsewhere, the strategy highlights that climate change adaptation metrics and guidance will be developed and it reaffirmed the government’s commitment to supporting the Bridgetown Initiative, which relates to changing international economic architecture to scale up green financial reforms.
We learnt on ‘Green Day’ that the government will meet its climate commitments set for the five years from 2028 to 2032 (the fifth carbon budget), but that it will then miss them in the following five years to 2037 (the sixth carbon budget) if things stay as they are. This is a long game, unless the country is put properly on course long term, the ambition to reach net zero by 2050 will of course fail. Which means we won’t meet our national obligation to avert dangerous climate change. National finance policy is the starting point to change the trajectory.