Addressing the climate and nature crisis in the UK
The changing climate serves as a constant reminder of the urgent need for the world to transition to a more sustainable and resilient future. Action must be taken to progress towards net zero, build greater resilience to current and future climate impacts, and halt and reverse biodiversity loss. The climate and nature crisis was identified by the Labour party in their manifesto as the greatest long-term global challenge that we face. However, addressing the twin challenges of climate change and nature loss comes with opportunities: it has the potential to generate economic growth, deliver energy security, and create jobs across the country.
The government’s second mission is to “make Britain a clean energy superpower”.[1] To successfully deliver this mission and accelerate Britain to clean energy by 2030, genuine partnership between the public and private sector is required. Drawing on the expertise of the financial and related professional services industry will be crucial to effectively deliver key initiatives under this mission, such as the National Wealth Fund and GB Energy. The government has also committed to improve access to nature, promote biodiversity and protect the UK’s landscape and wildlife. Our industry recognises the opportunities that the transition to a net zero and nature positive future presents, has significant experience to support the government in delivering this agenda, and stands ready to play its part.
What is 'green finance'?
Green finance is increasingly important to business, consumers and the planet, but people have often struggled to define exactly what is meant by 'green finance'. While many definitions have been put forward over the past decade, market participants have not yet settled on a single interpretation.
The 2019 Green Finance Strategy set out two pillars of green finance:
- Greening finance: improving the integration of environmental risks and opportunities into the financial decision-making system.
- Financing green: funding environmentally friendly activities, including accelerating flows of private finance into key clean growth and environmental sectors.[2]
TheCityUK set out its own definition of green finance in 2017 that focused on what the government subsequently termed “financing green”: finance which “matches sources of funding to new capital and operating expenditures that generate measurable progress towards the achievement of a well-recognised environmental goal.”[3]
There are many types of green finance products:
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Green loans |
Loans for capital and operating expenditures that generate measurable progress towards the achievement of a well-recognised environmental goal. |
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Green bonds |
Any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or full, green projects.[4] |
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Listed green equity |
Shares of a company, traded on a stock exchange, whose business activities generate measurable progress towards well-recognised environmental goals. |
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Green private equity & venture capital |
Investment in firms whose business activities generate measurable progress towards well-recognised environmental goals. |
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Carbon markets |
Although not sources of capital per se, carbon markets are systems where units of greenhouse gas emissions can be bought and sold, thus allowing emitters to compensate for their emissions with the aim of limiting global carbon emissions.[5] |
The role of UK-based financial and related professional services
The UK’s financial and related professional services ecosystem makes a significant contribution to the green and sustainable finance agenda. Financial and professional services firms touch businesses and consumers, advise government and regulators, and implement policy and regulation. They have a unique enabling role through mobilising private capital to finance the net zero transition, build greater climate resilience, and halt and reverse biodiversity loss.
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Investment management |
Investment managers can agree mandates with their clients (asset owners) to invest in net zero-aligned assets and provide climate-aligned products for investors. They can use stewardship to encourage investee companies to disclose and manage climate-related risks and set net zero goals. Asset managers can invest in companies that provide low-carbon infrastructure and educate beneficiaries to invest sustainably. |
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Insurance |
Insurers have deep expertise in understanding, modelling and preventing climate risks and strong commercial incentives to help tackle climate change. They can extend cover to enable low carbon technologies to be scaled and deployed, support climate adaptation and boost resilience. |
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Retail banks |
Retail banks provide capital to help businesses in green technologies to start up and scale up. Banks often have a significant convening power in certain industries (e.g. agriculture) where they can help these industries to decarbonise and promote biodiversity. |
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Wholesale banks |
Wholesale banks can raise capital for companies or projects which are enabling the transition to net zero and companies who decarbonising their business. Lenders can use their influence when refinancing to reset climate related expectations in loan covenants. |
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Private equity |
PE can use their influence to encourage rapid improvement of climate-related risk management and disclosures. They can gain understanding of sectoral decarbonisation levers. This can be replicated at scale to drive portfolio wide decarbonisation. |
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Venture capital |
VC can help scale up and deploy new low carbon technologies that may be deemed too risky for other investors. They can influence parts of the economy where public markets cannot. VC remains core to the growth of climate tech. |
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Accounting |
Climate risk has become a critical area of audit focus for accountancy firms. They also have an important role in bringing greater transparency and trust to climate-related disclosures, including through external assurance. |
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Management consulting |
Consultancies help clients understand climate risks and opportunities, develop net zero strategies and transform business models. They also play an important role in product creation and helping clients navigate the net zero transition. |
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Legal services |
Firms advise clients on climate change law and developments. They help clients understand and comply with regulatory, technology and legal requirements related to net zero and assist clients in balancing the risks and opportunities of climate change. |
Unlocking the potential of our industry
Private investment will be crucial to meeting the UK’s 2050 net zero target and halting and reversing biodiversity loss. Our industry stands ready to play its part and recognises the opportunity that investing in nature and the net zero transition presents. However, genuine partnership between government and our industry is needed. Neither government nor industry can deliver the net zero transition alone. Key enablers to further harness the potential of our industry to drive forward the net zero transition and tackle biodiversity loss in the UK include:
- A clear and coherent overarching strategy for the net zero transition. The UK is lacking a clear and coherent overarching strategy for the net zero transition. An economy wide national delivery plan is needed to provide a clear signal to the market and reduce uncertainty. This must be accompanied by sector-specific strategies and policy instruments to support delivery of the UK’s net zero transition. Systemic issues such as grid capacity, planning delays and supply chain issues must also be addressed to support the net zero transition.
- Policy measures and incentives to share investment risks and attract private investment at scale. A stronger dialogue between the government and our industry is needed. Public-private collaboration is crucial to boost investment into low carbon technologies such as green hydrogen, carbon capture and sustainable aviation fuels. Government support through innovative funding models can play a key role in increasing investor appetite.
- Global convergence on sustainability disclosure and reporting standards. There is a plethora of reporting standards, taxonomies and frameworks. This creates fragmentation and increases reporting costs and operational burdens. Clear, coherent and interoperable financial regulation is essential for the UK to capitalise on its strengths and deliver green investments. The UK must show leadership through adopting the International Sustainability Standards Board (ISSB) standards and providing commitment on transition plan requirements to support delivery of the UK’s net zero strategy.
- Support development of high-integrity carbon and nature markets in the UK. There is a need for policy and regulatory action to support the growth of carbon and nature markets in the UK and foster greater market confidence. The UK’s leading financial and related professional services industry has significant capacity and expertise to support the development of high integrity carbon and nature markets.
