April 20, 2023

UK Government Publishes 2023 Green Finance Strategy

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Shearman & Sterling LLP

The U.K. Government has published the 2023 Green Finance Strategy, its latest plan for mobilizing finance to support the shift to a greener financial system. The U.K. has committed to becoming a net zero economy by 2050.

The action points in the Strategy are based on two pillars: ‘Align’, which focuses on aligning financial markets with U.K. and global climate targets; and ‘Invest’, which encourages green investment. The proposals will have significant implications for corporates, financial institutions and investment firms, asset managers and financial market infrastructure providers.

Align

Various measures are proposed, aimed at enhancing transparency on sustainability information relating to companies and financial market participants.

The U.K. Financial Conduct Authority has already introduced a series of environmental disclosure rulebook provisions, including climate-related disclosure rules for listed issuers, similar rules for standard listed companies and FCA-regulated firms and a consultation paper on sustainability disclosure requirements for sustainability-linked investment products. On April 6, 2022, the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 entered into force (applying to financial years commencing on or after that date), which require companies with over 500 employees and which also either have securities admitted to trading on a U.K. regulated market, a turnover of more than £500 million or are banking companies, insurance companies or listed companies, to make disclosures on their governance, strategy, risk management and targets regarding climate risk and opportunities.

The U.K. Government plans to set out further details on implementing Sustainability Disclosure Requirements in summer 2023. This will involve disclosure of transition plans (i.e., targets, interim milestones and steps for organizations to mitigate climate risks), implementation of the Sustainability Disclosure Standards published by the standard-setting board of the International Financial Reporting Standards Foundation and the FCA’s final Policy Statement on its consultation on sustainability disclosure requirements (expected to be published in June 2023).

It is proposed that the U.K. will develop tools to aid companies’ green transformation programs, including: a U.K. Green Taxonomy, to be consulted on in autumn 2023; proposals to regulate environmental, social and governance ratings providers (discussed in HM Treasury’s separately published consultation paper) ; consideration of whether further reforms are required for the benchmarks regulatory regime; and the potential for new FCA rules requiring financial advisers to confirm they have taken account of sustainability matters in their investment advice and understand investors’ sustainability preferences.
Other measures to improve the transmission channels between projects that support the climate transition and the scale of finance available. This will include a review of the U.K. Stewardship Code in Q4 2023 to determine whether any further regulation is required in this area. The fiduciary duty of pension scheme trustees will also be evaluated to determine the extent to which non-financial factors, such as climate mitigation, can be taken into account in investment decisions.

Invest

A review will take place into how the U.K. can become the global center for raising “transition capital” (funding to support higher emitting companies and activities to become green). Possible actions include scaling up transition-focused capital raising, including via instruments such as sustainability-linked debt and transition bonds and promoting U.K.-based financial and other professional services providers to develop and support transition finance. This will take account of the recommendations in the UK Listing Review to encourage high-quality equity listings in the U.K. The U.K. Government has separately published its Powering Up Britain strategy, which describes the policy and regulatory actions the Government will take to encourage investment in net zero sectors and technologies.
Plans are being drawn up to introduce legislation to continue the U.K. Emissions Trading Scheme until at least 2050, and to extend it to other sectors of the economy. The U.K. Government aims to make the U.K. ETS the world’s first net zero consistent cap and trade market.
Guidance will be developed by the Voluntary Carbon Markets Initiative and the Integrity Council on Voluntary Carbon Markets, providing clarity on the definition of high-integrity VCMs. The U.K. Government plans to consult on the steps needed to mobilize additional finance through high-integrity voluntary markets and protect against greenwashing.
A range of Government funding schemes and “blended finance” (funding structures that combine different funding sources) have been developed in recent years to channel investment towards green projects. These include the Big Nature Impact Fund, a blended finance impact investment fund in which the Government is investing £30m, and the Environmental Land Management schemes, which dovetail with private investment to support environmental land management projects. The U.K. government plans to look into the design of its funding schemes ahead of the next Spending Review to ensure they have maximum impact.

The government has also set out its commitments for 2023, which include engaging with industry and other stakeholders on various strands of the updated Strategy, such as consulting on the U.K. Green Taxonomy, developing further clarity of the fiduciary duty and formally assessing the first two IFRS Sustainability Disclosure Standards (expected to be published in June 2023).

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