The UK’s transition to net zero needs an estimated GBP50 billion every year between 2030 and 2050, according to the Climate Change Committee; amounts that mean the economy to transform on an unprecedented scale.
This October’s Transition Finance Market Review (TFMR) aims to ensure the billions of pounds secured to support the green transition is put to work effectively and efficiently, or risk missing out on what McKinsey predicts could be worth GBP1 trillion annually for UK companies by 2030.
Vanessa Havard-Williams, Chair of the TFMR, says:“The industrial revolution needed to deliver the energy transition is a one in two-hundred-year event, and it presents significant opportunities, socially, environmentally and economically. The UK has the infrastructure, market and ambition to succeed, leveraging its capability as a commercial, financial and civil society leader.”
Havard-Williams identifies numerous obstacles standing in the way of effective investment, adding that the government must “act now to seize these opportunities and to unlock change not just for the UK, but also other nations working to meet the goals of the Paris Agreement”.
Havard-Williams warns that the UK will lose out in the “global race to provide the transition finance and technologies that the world needs”, unless it matches other markets in demonstrating that it is “serious, proactive and will stay the course”.
The TFMR identifies key barriers to scaling transition finance including a lack of long-term regulatory and policy certainty. Specifically, there is an absence of clear sectoral decarbonisation pathways and whole-of-economy national transition planning in the UK to support investment.
Second, and crucially for potential investors, TFMR says there is mismatch in the risk-return profile required by capital providers and the investible opportunities, particularly in the emerging technologies needed to secure the transition.
The TFMR notes challenges with assessing whether financing a particular activity or entity will have a credible decarbonisation impact.
There is also limited provision for transition activities and strategies in the UK’s sustainable finance regulatory regimes.
Finally, the risk of greenwashing and allegations of such continue to be a problem when financing activities or entities aimed at decarbonising high-emitting sectors.
The TMFR offers five key recommendations it says “provide a blueprint” for unlocking transition finance.
First, the UK needs national sectoral transition planning and policy certainty which will come from a renewed commitment to the Net Zero Council. Havard-Williams says the council will provide the necessary granularity in sectoral transition pathways, greater collaboration with industry, and a greater level of coordination across government.
Second is the establishment of a Transition Finance Lab to develop and test targeted financial solutions that will deliver the “effective policy, catalytic public capital, and public-private innovation”.
The TFMR also says relevant entities must align transition plans with the Transition Plan Taskforce. The Review says this is necessary if “widespread, credible and comparable transition planning is to achieve scale”.
Fourth, the Review adopts a Transition Finance Classification System and proposes Guidelines for Credible Transition Finance.
Havard-Williams says: “A principles-based approach to transition finance aids coalescence around core elements whilst enabling sufficient flexibility in other markets including emerging markets and for SMEs.”
Finally, the review calls for a Transition Finance Council to ensure delivery of the Review’s recommendations, as well as supporting capacity building, collaboration, and coordination.
Rosalind Fergusson, Senior Manager in Deloitte’s EMEA Centre for Regulatory Strategy, says: “The TFMR is an important report, but what matters now is how its recommendations are taken forward by the Government and other actors.”
She notes that the Financial Conduct Authority has already welcomed the report and will look at how best to embed the TFMR’s findings on ESG ratings, ISSB standards and its review of the sustainability-linked loans market.
She adds: “As firms look to 2030 and beyond, it’s important that they position themselves competitively and assess the opportunities the transition provides.”
