The UK government’s new Green Finance Strategy has big ambitions – but does the policy detail match them?
The UK government recently published its Green Finance Strategy, a document intended to act as a roadmap for sustainable investment and allow the UK to become the world’s ‘first net-zero aligned financial centre’.
The 2023 Green Finance Strategy updates the previous 2019 version.
It was developed by multiple government departments, including:
- HM Treasury
- the new Department for Energy Security and Net Zero (DESNZ)
- the Department for Environment, Food and Rural Affairs (Defra)
The strategy was published alongside multiple documents focused on the net zero transition including the response to Chris Skidmore’s Net Zero Review.
Net zero’s role in the UK economy
Net zero is a huge opportunity for growth.
Supplying the goods and services necessary to reach global net zero ambitions is estimated to be worth up to £1 trillion to UK businesses by 2030.
Low carbon and renewable energy exports are growing significantly faster than others across the rest of the economy.
The net zero transition can therefore play a key role in supporting the UK’s economy and ensure critical infrastructure can be financed in the future.
This updated Green Finance Strategy examines how the UK can mobilise investment to meet vital climate and nature objectives.
Learning from international best practice
The strategy mentions an upcoming review into raising capital to help the UK transition to net zero.
It states an ambition for the UK to become the “best place in the world for raising transition capital”, while acknowledging that other nations are already making movements in this space.
The review will be led by an “external expert” and focus on international best practice and collaboration.
The ICE’s Enabling Better Infrastructure (EBI) programme supports assessing the national characteristics of countries before setting up infrastructure plans. It highlights the crucial role of infrastructure in achieving sustainable development.
EBI focuses on sharing international best practice to allow policymakers to overcome challenges affecting every stage of the infrastructure lifecycle.
It’s promising that the strategy indicates the government’s intention to do the same when it comes to green finance, considering the interconnectivity of international financial systems.
More clarity needed around adaptation funding
The strategy highlights the need to align finance flows with a climate resilient economy and increase investment in adaptation.
Working with the Climate Change Committee following its recent report, the government will research adaptation investment needs, metrics and guidance.
However, adaptation metrics, finance deliverables and an action plan won’t be released until the end of 2024.
This is too far down the line when adaptation should be a policy area prioritised for direct action.
Moreover, the analysis on adaptation investment needs won’t be published until the fourth Climate Change Risk Assessment (CCRA4), due in 2027.
In the ICE’s recently published resilience paper, it’s clear that to incentivise investment in infrastructure climate resilience and adaptation, we must first understand the value it provides.
This requires an economic review of resilience and adaptation, led by HM Treasury. This can then feed into developing resilience standards and allow investment to be targeted to where it will have the greatest impact.
What is the role of the UK Green Taxonomy?
The UK Green Taxonomy is intended to act as a tool to provide investors with definitions of which economic activities should be labelled as ‘green’.
While there’s a commitment to deliver the taxonomy with a consultation due out in Autumn 2023, the strategy indicates that it’s still very much under development. This comes after previous delays to the taxonomy.
Key “building blocks” such as environmental objectives and similar relevant criteria haven’t yet been fleshed out enough.
Nuclear power’s inclusion within the taxonomy, trailed in the Budget last month, is also subject to the upcoming consultation.
It’s unclear how the taxonomy would work with other countries, including those within the EU.
To prevent the UK falling behind, more clarity is needed to provide certainty to businesses and asset owners that will need to report on how ‘green’ their investments are.
Lack of detail on moving away from fossil fuels
The strategy also omits mention of how financial institutions can move away from supporting fossil fuels financially.
There’s a focus on Just Energy Transition Partnerships that deliver investment away from fossil fuels in partner countries (the UK supports implementing partnerships in countries where they’re already taking place).
However, there’s a lack of attention on more direct initiatives taking place within the UK.
This includes how the government can support organisations to shift capital out of fossil fuels and into renewable energy and adaptation.
Lack of alignment between levelling up and net zero agendas
The ICE has previously recommended the Green Finance Strategy be used as a vehicle to deliver on levelling up and net zero through formally aligning the two policy agendas.
However, levelling up isn’t explicitly mentioned within the strategy, with only one reference to how investment in low carbon sectors across all regions of the UK can support levelling up.
Otherwise, the strategy seems to exist very much in isolation and misses out on opportunities to use green finance to support and enhance existing levelling up initiatives.
The ICE’s view
The update to the Green Finance Strategy has been long anticipated. It clearly sets out the intentions and ambition from the government to ensure the UK becomes a world leader in financing net zero.
However, as highlighted in the ICE’s briefing paper on financing and funding net zero, there’s still not enough detail around how net zero investments are being defined.
Progress must be made in the short-term to ensure success in the longer-term when it comes to financing the net zero transition.
There’s little margin for error in delivering net zero – at the moment, the promises of going further, faster are yet to be reflected by urgent action to ramp up the transition.
In case you missed it
- The ICE’s 5 key takeaways from the UK government’s response to net zero progress reviews.
- The UK’s National Infrastructure Commission (NIC) joined parliamentarians to discuss its latest Infrastructure Progress Review.
- Costain’s managing director for transportation, Sue Kershaw, shares her insights on how an English transport strategy should look and how it can work in practice.