Building a UK Net Zero-aligned Financial Centre: What Next?

Policy Briefing
Aldersgate Group | June 2022

Summary

Following extensive engagement with major businesses, financial institutions and NGOs, the Aldersgate Group together with CUSP launches its latest green finance report, Building a UK Net Zero-Aligned Financial Centre: What Next?

In order to reach the UK Chancellor’s welcome goal of making the UK the “world’s first net zero financial centre”, the Government and financial regulators must deliver greater guidance and regulatory reform to support companies in taking up new disclosure and reporting requirements, the new briefing says, and maximise the effectiveness of the UK’s evolving green finance regime.

At COP26, the Chancellor announced important plans to make the UK the world’s first net zero-aligned financial centre. As part of this, large businesses and financial institutions in the UK will, over the next few years, be required to publish new information to help investors assess their exposure to climate-related risks, as well as their plans to reduce emissions.

This will be done in two key ways. First, the implementation of the new Sustainability Disclosure Requirements regime (SDR) will govern how large businesses and financial institutions should disclose their exposure to climate related risks, and how they should report their revenues against a set of sustainable investment definitions to be developed as part of a UK Green Taxonomy. Second, financial institutions and listed companies will be required to publish net zero transition plans from 2023.

Following extensive engagement with the financial, business, NGO and academic community, the new report calls on the UK Government, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to take several new measures to facilitate the take-up of new disclosure and reporting requirements and maximise the effectiveness of the UK’s green finance regime.

Key recommendations include:

• Providing stronger and clearer guidance to businesses and financial institutions: the Government should set out clear next steps for the private sector on when they will be expected to comply with elements of the new UK Sustainability Disclosure Requirements (SDR)—such as reporting in line with the new UK Green Taxonomy – in addition to producing net zero transition plans. This clarification must include publishing compliance guidance for business. The PRA should also produce a scenario analysis standard and financial regulators should produce sectoral guidance for calculating scope 3 emissions.
• Designing a future-proof, streamlined SDR framework: the Government should look to merge existing reporting and disclosure requirements together under the new SDR framework to make reporting more comprehensive and simpler for companies, including merging the Taskforce for Climate-related Financial Disclosures (TCFD) and the Streamlined Energy and Carbon Reporting (SECR) frameworks, and making it mandatory to publish material scope 3 emissions from 2025. The Government should also design the SDR in a way which allows the disclosure of other environmental impacts to be integrated into the framework over time.
• Ensuring compatibility with other global frameworks: Working closely with businesses, financial institutions, academics and NGOs, the Government should work to ensure that the UK’s reporting and disclosures regime is first and foremost ambitious and science-based, but also sufficiently aligned with other key international frameworks – including the EU’s – to minimise inconsistencies and reporting burden for global companies. This will be important in areas such as the development of the UK’s new Green Taxonomy.
• Building a green finance regime that engages with systemic risk: It is essential that the UK’s new regime incentivises investors to work with businesses to cut emissions in the real economy, rather than just divest from high carbon assets. This could be facilitated by the FCA producing guidance to investors on the best way to act as responsible stewards of capital and the circumstances under which divestment may be appropriate as a last resort. The PRA should also consult on potential changes to capital requirements to incentivise more investment in low carbon infrastructure.
• Accelerating the implementation of the UK’s Net Zero Strategy: Whilst important, better reporting and disclosure will not by itself deliver climate targets. To drive investment in low carbon infrastructure across the economy at the necessary pace and scale, the UK’s evolving green finance regime must work hand in hand with the rapid implementation of the Government’s Net Zero Strategy [4]. Key policy gaps need to be urgently tackled in areas such as power, buildings, transport, heavy industry and agriculture. Other priorities include the need to reform the Emissions Trading Scheme and provide a carbon price trajectory that is more aligned with the net zero target.

Further Reading