How can the next UK Government unlock a wave of finance for the net-zero transition?

The industry has laid out five major policy demands for the Government to ensure the nation achieves its net-zero by 2050 goal.

Today (21 May), the Institutional Investors Group on Climate Change (IIGCC), representing more than $65tn in assets worldwide, has published a ten-point policy wishlist for the UK Government, in a bid to unlock a long-term strategy that puts the UK ahead in the global race to net-zero.

Concurrently, the UK Sustainable Investment and Finance Association (UKSIF), with around 300 members representing more than £19tn in global assets under management, has announced its demands for the Government, aimed at strengthening the nation’s sustainable finance sector and attracting private investment at large.

The UK Government is committed to a legally binding net-zero emissions by 2050 target. However, in recent times, the Government has not only been taken to the High Court over its insufficient climate action and adaptation plans, but it has also been warned that a lack of long-term policy certainty is leading investors to choose other markets for green projects.

Investors have laid out five major policy demands for the Government to ensure the nation achieves its net-zero by 2050 goal. These include the introduction of a centralised long-term net-zero policy plan, a green industrial strategy, a supportive financial regulatory environment, a nature-positive transition and a strategy to enhance national climate adaptation and resilience.

Here, we examine the main policy demands and assess how the Government is tracking in relation to them.

A centralised net-zero strategy

The IIGCC has called on the Government to develop a net-zero strategy, in line with the UK’s Nationally Determined Contribution (NDC) which commits the nation to reducing at least 68% of its greenhouse gas (GHG) emissions by 2030 compared to pre-industrial levels.

Last year, the Climate Change Committee (CCC) warned that the projections for the UK to meet its 2030 goals have “worsened” since 2022 due to insufficient ‘credible’ decarbonisation plans.

The Government first published its Net-Zero Strategy in the run-up to COP26 in Glasgow in 2021. However, a year later, the plan was ruled as inadequate and unlawful by the High Court.

In the spring of 2023, the Government published its revised plan, dubbed as Carbon Budget Delivery Plan. Nevertheless, yet again this year, the High Court deemed the strategy unlawful for more of the same previous reasons such as overreliance on ‘controversial’ technologies and vague targets.

Financiers are urging the Government to develop and implement an economy-wide transition plan which is based on credible sectoral decarbonisation pathways, providing clarity and guidance on the timing and methods of sector-wide transitions.

Additionally, the industry wants the Government to change its current approach to achieving net-zero as it is currently decentralised, leading to inconsistency and delays. The IIGCC recommends integrating climate change policy across government departments using a centralised government unit that establishes long-term policy clarity.

Insurance giant Phoenix Group has also called on the Government to expand HM Treasury’s mandate to include net-zero, while requiring the Office for Budget to measure and track progress against net-zero goals and hold the Government accountable.

A green industrial strategy

Next on the industry’s wishlist is the introduction of an industrial strategy that focuses on delivering a just transition to a low-carbon economy, while facilitating a supportive policy environment that helps strengthen investor confidence.

Last year, the Institute for Public Policy Research (IPPR) cautioned that the UK is missing out on economic opportunities arising from the global transition to a net-zero carbon future, primarily due to the absence of a well-defined green industrial strategy.

A new survey from UKSIF of 100 financial services organisations, representing more than £200bn in green investments in the UK, found that two in three finance firms either plan to move investments out of the UK to a market with more supportive policies, or have already done so.

UKSIF’s chief executive James Alexander said: “The UK is facing a crucial inflection point that could see it either close the remaining gaps and benefit from the great strides we have taken in our global leadership on sustainable finance to date; or lose its hard-won position as a leader.”

Studies indicate that overlooking the reinforcement of the industrial sector and addressing international competition may expose the UK to a potential loss of £224bn by 2050.

The industry is calling for the implementation of an industrial strategy that provides response to the US’s Inflation Reduction Act (IRA) and the EU’s Green Deal — policy plans aimed at attracting sustainable investment while strengthening the local low-carbon economy.

A Green Taxonomy and disclosure frameworks

Another key industry demand is the delivery of crucial commitments outlined in the Green Finance Strategy, such as transition plan disclosures and the UK Green Taxonomy.

In 2022, the Treasury launched the Transition Plan Taskforce, to ensure large businesses in high-emission sectors start disclosing the necessary data regarding their net-zero transition plans from 2023.

Last year, The Taskforce published its recommendations aimed at guiding corporate climate disclosure in alignment with globally recognised standards and frameworks. While the reporting against the Taskforce’s standards currently follows a ‘comply or explain’ regime, Financiers want mandatory disclosures to access more comparable data.

Moreover, the industry is advocating for the adoption of the International Sustainability Standards Board (ISSB) standards to ensure interoperability of UK policies and regulation with international frameworks. The Government has confirmed that it will support ISSB alignment.

The Government has also been urged to deliver the Green Taxonomy consultation, building on the final recommendations of the Green Technical Advisory Group (GTAG) published last year. The Taxonomy will help deliver a standardised approach to classifying investments as sustainable or not.

Concurrently, the financial sector is calling for clarification of fiduciary duties of pension schemes to factor in financially material ESG issues as recent research revealed that the majority of major UK pension providers have inadequate climate plans in place, risking billions of pounds by failing to tackle deforestation or to phase-out financial support for fossil fuels.

Lastly, the wishlist for sustainable finance policies emphasises the need for policymakers and regulators to focus on nature while looking beyond climate change risks.

The Green Finance Institute (GFI) recently revealed that unchecked degradation of natural ecosystems could lead to a 12% loss to the UK’s GDP in the coming years.

As per the Environment Act 2021, the Government has a legal duty to stop the decline of species abundance and protect 30% of the land and sea for nature. However, recent research found that the nation currently lacks policies to achieve this goal.

UKSIF has urged the Government to incorporate the Taskforce on Nature-related Financial Disclosures (TNFD) framework through the creation of a new ISSB standard for biodiversity and nature. While the reporting using the TNFD framework is currently voluntarily, some of the private sector is asking for a mandatory TNFD disclosure requirement.

Climate adaptation and resilience

Finally, on the industry policy agenda lies the urgent need for the Government to formulate and implement a comprehensive strategy for climate adaptation and resilience.

Earlier this month, the CCC and the National Infrastructure Commission cautioned MPs that the UK is “absolutely lacking” in climate adaptation measures, placing agriculture, supply chains, power systems and public health at security risks.

A study conducted last year by the Energy and Climate Intelligence Unit (ECIU) unveiled that around £8bn worth of food imported into the UK is currently exposed to climate-related risks.

Moreover,  recent research found that weather-related incidents have incurred a £3bn cost to UK network operators over the last 15 years due to delays, cancellations and insurance claims.

The Government is currently facing a judicial review of its national climate adaptation plan mandated by the High Court.

The industry is calling on the Government to create a detailed roadmap for climate adaptation in the UK, which requires climate risk assessments for critical publicly funded infrastructure projects, such as rail, energy and water.

Additionally, the Government has been urged to collaborate with the private sector and international partners to develop industry-specific adaptation metrics, while removing barriers to adaptation finance.

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