Securing the UK's role as a green financial hub

Executive summary

In the Ten Point Plan for a Green Industrial Revolution (November 2020), the Prime Minister Boris Johnson announced his ambition to make the UK the global centre of green finance. This followed the UK’s commitment in 2019 to achieving net zero carbon emissions by 2050.

The Green Financing Framework was developed in June 2021 and the government reaffirmed its commitment to “much needed” infrastructure investment through the mainstreaming of green finance products, most notably the UK’s first sovereign green gilt expected to be issued in 2021. However, much more is needed to accelerate the growth of green finance and achieve net zero. Ahead of COP26 in Glasgow in November, Cornwall Insight and TLT sought to analyse stakeholder views on the UK’s prospects of securing its role as a green finance hub, and the associated policy and regulation.

We asked what more is needed – from the government and other key stakeholders – and how the UK can drive environmentally-friendly financial decision making and the growth of green finance options. We also discussed how the UK can channel more private capital into renewables projects and technologies by making these assets more bankable.

Coordination

Given its traditional position as the world’s most prominent international financial centre and its increasing leadership in the fight against climate change, the UK government needs to coordinate policy and stakeholders across sectors and regulators.

Leadership and policy

The UK government needs to show leadership in what it is championing domestically and through its support for international progress towards net zero.
To bridge the gap between rhetoric and action, the government must design and implement ambitious policies and regulatory frameworks that can tackle the myriad of challenges accompanying net zero, especially in hard-to-abate sectors such as transport and heat.

Credibility

In an environment where trust in green regulation will be paramount, the UK’s reputation for regulatory integrity and sound legal principles has to be preserved.
The government must appoint credible teams that can engage with and understand markets and draw the right conclusions to design practicable solutions.

Data

Businesses will require immediate access to both retrospective data and forward-looking information about the strategies of other organisations.
It is essential that the UK can enable effective opportunity management as well as risk management

Climate-related disclosures

Mandating disclosures across the entire UK economy by 2025 will play a key role in effectively tackling greenwashing, which is key to the UK maintaining its credibility.
While this is certainly a positive step, all companies – especially small and medium sized enterprises – must be equipped with the proper tools to produce meaningful reports.
The government must ensure that investors can access and understand mandatory disclosures and appoint experts to monitor the quality of data as time progresses.

Outlook

The UK’s net zero targets, as well as the major policy documents published at the end of 2020, have provided investors, developers and lenders with a degree of reassurance about its direction of travel.

However, while the UK’s ambitions are clear and the rhetoric is loud, it is universally acknowledged that the journey to net zero and green finance becoming mainstream will be long and challenging. Other markets are competing just as fiercely as the UK to be recognised globally as a leading green finance hub and to attract the world’s green investment capital, and are reporting impressive results.

At the same time, numerous obstacles stand in the way of generating sufficient supply and demand for green finance options. While many of these are not unique to the UK, they do demand bold solutions to ensure the UK can capitalise on its favourable starting position and compete with other markets.

The government’s rhetoric has raised industry’s expectations ahead of COP26. Many will have high hopes that their optimism will be matched by practicable solutions that force or incentivise progress.
The coronavirus pandemic has negatively impacted many sectors, potentially making those businesses and consumers more price-sensitive, which could threaten the growth of green finance. Yet, it has also highlighted the need for a green recovery, and created an opportunity to make relatively bold decisions to deliver against the UK’s ambitious targets. The government must ensure it creates a fair and inclusive market in which everybody can participate.
The drive for green finance will come from in-market as well as external pressures, but the policy and regulatory framework is key – in particular mandatory reporting and the UK taxonomy. Environmental principles have risen up the boardroom agenda; now, the data that will drive the UK forward and inform major financial decisions needs to come in behind this head of steam. The credibility of that data now and on an ongoing basis will be essential.
Green finance will eventually become finance, and all finance will be green. So it follows that today’s outliers will find it increasingly difficult to stand out, which may drive an increase in awareness campaigns and greater innovation in new green financial products.
Overall, there are few doubts that the UK market remains one of the best energy infrastructure investment propositions globally, thanks to a highly developed and competitive market, a stable and investment-friendly regulatory framework and a thriving investor and advisor community. Hence, it is imperative that the country retains its position as one the leading global hubs for capital markets and investment, by ensuring the stability and reliability of its legal and regulatory frameworks.
The Subsidy Control Bill is an encouraging development, which could accelerate deployment of newer technologies that have a viability gap – such as CCUS
and hydrogen. However, more clarity as to how it will impact business models and revenue streams is needed, particularly as we may be about to enter a macroeconomic environment characterised by rising interest rates and inflation.
The UK must keep on attracting global investors, including institutional investors, looking to remain competitive in a rapidly evolving market. Developing innovative funding mechanisms and products that allow open market access will be key in the coming months.