One year on, is the UK any closer to being the world’s first net-zero financial centre?

Today (9 November) is finance day at COP27. Last year, the UK COP26 Presidency also chose finance as a theme, with then-Chancellor Sunak arriving on-site in Glasgow with a green version of the famous red Budget box. Inside the box were details of several measures designed to contribute to the UK’s status as a ‘net-zero financial centre’.

As many world leaders have noted during the first two days in Sharm El-Sheikh, the world is undeniably facing new crises that were not on the radar 12 months ago.

There are certainly opportunities to deliver responses to these present crises in ways that also build the low-carbon, climate-resilient systems of the future. But, against this backdrop, making policy progress to time has been challenging. So, we spoke with experts at the Green Finance Institute (GFI) and the UK Sustainable Investment and Finance Association (UKSIF) to explore whether any meaningful progress has been made towards the lofty ambition unveiled by the UK this time last year.

Transition plan mandate

UKSIF’s chief executive James Alexander tells edie that it was “a big surprise” to hear Sunak’s overall announcement, “because it was so bold”. For him, one of the major measures included in the green box were plans to mandate the production of net-zero transition plans from large businesses in high-emission sectors.

“We think there’s a huge, long-term economic benefit to companies having transition plans… these are your plans to remain competitive in a world that’s moving faster and faster towards net-zero,” Alexander says.

The first round of guidance on what a credible net-zero transition plan should contain was published this week by the Transition Plan Taskforce – a body commissioned by the UK Government to help ensure that plans are credible, ambitious and comparable. There will now be a consultation on the proposals before a final ‘gold standard’ is agreed. We are also still awaiting exact timelines for the implementation of the mandate and details on which companies will be impacted. Crucially, it will apply to finance sector firms as well as large businesses in high-emission industries and should be predicated on a “whole economy” transition.

The GFI’s chief executive Rhian-Mari Thomas tells edie that the UK’s confirmation of the forthcoming mandate has contributed to “a huge transformation” in the conversations being had about finance’s role in the net-zero transition.

She explains: “Talk about transition is now common parlance. Prior to the past 18 months, the idea of transition finance, of helping high emitters through decarbonisation, was really viewed as beyond the pale.”

In Thomas’s opinion, now is the time for “more sophisticated conversations” about what the mandate entails and about how transition finance is defined. This ties in with the need for taxonomies, which we’ll come on to now.

“These are nuanced decisions and we need far more clarity,” Thomas adds.

Green finance taxonomy

Also in Sunak’s green box was confirmation that the UK is working to develop a green finance taxonomy. Such a tool can be used by investors, corporates and others to define which activities are ‘green’ and can be supported and reported as such. The EU finalised its own taxonomy earlier this year but is facing a lawsuit over the fact that gas-fired power plants and some gas extraction and storage activities are classified as ‘transition’ activities.

UKSIF’s Alexander tells edie that the UK was originally meant to put forward its own initial taxonomy proposals (they will diverge from the EU’s due to Brexit) by the end of 2022 but he has been informed by civil servants that “there’s now absolutely no chance of meeting that deadline”.

Beyond clarity on the timelines, UKSIF has been pushing hard for the UK to diverge from the EU and to exclude gas and nuclear from any label under its own taxonomy. It released a call to action on this issue in May, on behalf of more than 270 financial organisations collectively managing more than £10trn of assets. Since then, Green Technical Advisory Group has published its recommendations on the development of the UK’s taxonomy – which Alexander believes provides some hope on the categorization of energy activities.

Alexander explains: “I think a good chunk of the EU’s taxonomy will be aligned with the one we will have. We continue to push to make sure that the taxonomy remains science-based, however. In our very strong view, having gas in the taxonomy would undermine this. Gas may well be, in certain and limited circumstances, a transition fuel. But we don’t think it is a blanket transition fuel across the economy. Moreover, it is not a transition taxonomy – it is a green taxonomy. It should only have things in it that align entirely with our net-zero target.”

Both Alexander and Thomas believe that there is “a need for connectivity” (Thomas’s words) on the taxonomy and the transition plan mandate. The former elaborates: “It’s valuable to have a taxonomy as a list of activities. It’s even more valuable when you have a corporate reporting framework and mandatory reporting standards which encourage big companies to report against the taxonomy.”

He adds that he would like to see the taxonomy and transition plan mandate supported by “strategic” targets to decarbonise hard-to-abate sectors, including sector-specific emissions targets and, where necessary, mandates on clean technologies. An example Alexander gives is the UK’s 2030 ban on new petrol and diesel car and van sales, which builds the investment case for activities such as battery manufacturing and building out charging infrastructure.

Green gilts

One Sunak special which has already been delivered in full was the UK’s first green gilt package. Green gilts are sovereign green bonds and, prior to the UK’s issuance, had already been issued by several other major economies including France.

The UK’s first gilts weren’t new news at COP26. Sunak had already confirmed plans to issue £15bn of gilts four months prior to the summit. An inaugural package of £10bn was launched in September 2021 and a further £6bn raised in October 2021. The fact that there was an early, pre-COP26 start for this move doubtless contributed to its smooth delivery.

GFANZ

Aside from measures overseen specifically by the Government, Sunak made a fanfare at COP26 over the role of voluntary collaboration in the private sector on green finance. COP26 notably saw the formal launch of the Glasgow Financial Alliance on Net-Zero (GFANZ). Spearheaded by Mark Carney, the Alliance includes members from all parts of the financial sector. It initially covered $130trn and now covers $150trn, making it the largest initiative of its kind.

Both Alexander and Thomas acknowledge the unprecedented scale of the initiative. But they also acknowledged recent criticisms of the Alliance. A recurring discussion topic has been whether it is setting strong enough requirements for members to align credibly with the net-zero pathway. Late last month, GFANZ cut its ties with the UN-backed Race to Zero Campaign, meaning that members will not need to meet the campaign’s requirements on setting credible and meaningful targets.

For Thomas, this criticism can be overcome. “We definitely need the top-down, big tent initiatives to set targets, standards, direction and ambition,” Thomas says. “We are seeing this translate into the need for, also, a bottom-up approach.”

In Thomas’s opinion, just as COP27 has been described as the implementation COP, now is the time for “far more clarity” and “more nuanced decisions” about turning the top-level commitments of collaborations like GFANZ into action. She does believe that there is “an increasing focus on the need for real economy outcomes” at GFANZ already.

Alexander goes on to recognise that, at present, there are “not enough net-zero-aligned investment propositions” for GFANZ members to claim that their portfolios have a Paris-aligned temperature pathway to net-zero by mid-century. He also argues that, when you have a ‘big tent’ initiative, it is “a fine balancing act” to keep the coalition together in that organisers must “ratchet up ambition at the speed that people are comfortable with, but that is also in line with the pace and scale of the challenge that we have”.

One other way GFANZ could claim net-zero leadership, Alexander adds, is by using its policy influence. Events like COPs, he argues, are good opportunities for finance coalitions to ask policymakers to create an enabling environment for net-zero-aligned investment opportunities.

A mountain to climb

Of course, the four measures enough are not enough, in and of themselves, to ensure that the UK is truly a net-zero financial centre. Both UKSIF and the GFI have made this clear in previous publications – as have other key organisations in the UK’s green finance and green policy spheres.

But, as has been noted by our two experts, the top-level commitment has been set and the direction of travel is clear. The question now is whether the new Government is ready to push for systematic change in finance with all available levers, and to provide new information and clarity on how it will do so despite the need to respond to present, short-term crises.