Transition finance: UK to undertake six-month market review as foundation for growth

The Treasury and Department for Energy Security and Net-Zero (DESNZ) confirmed a six-month transition finance market review this week with the potential for a further three-month extension.

These Departments define transition finance as funding which supports higher-emitting companies, activities and sectors to decarbonise over time. Non-CO2 emissions should also be considered, as should national and global nature goals.

Transition finance can be provided to private and publicly listed companies.

The purpose of the review is to identify what needs to be done for the UK to become a leading global hub for transition finance services. It will recommend near-term interventions and also long-term, systemic changes to the development, structuring, provision and tracking of transition finance instruments.

Simply scaling transition-focused capital, the Government statement highlights, will not be enough. Integrity will need to be baked in to prevent greenwashing if the investment opportunities are to be attractive, and if the finance is to meaningfully support the delivery of binding carbon budgets and climate commitments.

Vanessa Havard-Williams, Interim Chair of the Export Guarantees Advisory Council, has been selected to lead the review. In this post, she works internationally on ESG issues including climate and human rights. She has a wealth of experience working in environmental law in the private sector.

Havard-Williams will be supported by a panel of advisors and a secretariat. Members will be announced shortly and should hail from across the financial services sector, academia, thought leadership and civil society.

Observers will also be selected from the Treasury, DESNZ, the Department for Business and Trade, the Financial Conduct Authority, the Bank of England and UK Export Finance.

Additionally, bodies including the Transition Plan Taskforce (TPT) should be involved. The TPT recently published a ‘gold standard’ disclosure framework for the production of corporate climate transition plans. It is currently consulting on sector-specific guidance for 13 high-emitting industries until 29 December.

Fund labelling on the horizon?

Guidelines on which financial products can be badged as ‘transition finance’ is likely to result from the DESNZ and Treasury review.

It has been widely reported that, in early 2024, the UK Government will finalise its Green Finance Taxonomy. This will clarify which activities can be labelled as ‘green’ or ‘transition’ finance.

The UK has long been under pressure to finalise the Taxonomy as it is now lagging behind the EU in this regard. A swathe of green finance announcements in March 2023 had the Taxonomy as a notable absence.

The Financial Conduct Authority has already confirmed new Sustainability Disclosure Requirements to take effect in 2024, coupled with four new fund labelling category.

In disclosing, asset managers must prove that at least 70% of the fund is allocated to support its label.