COP27 deadline for Green Finance Strategy likely to be missed, as investors await details on sustainable investment framework.
Investors are expecting details this week on the new UK government’s strategy on energy and inflation, but time is running out for updates on key climate and green finance policies ahead of COP27.
On Friday, incoming Chancellor Kwasi Kwarteng is due to outline further policy responses to high energy costs, including tax changes to pay for energy caps and boost economic growth. There remains, however, much uncertainty about the new administration’s plans to bolster green investment flows and support the development of low-carbon power sources and energy efficiency initiatives.
“The risk with the pause in the Energy Bill and the announcements on domestic oil and gas is that they will start to make investors doubt about the government’s overall commitment to the green finance strategy and related sustainability initiatives,” said Richard Folland, Senior Policy and Government Affairs Adviser at independent think tank Carbon Tracker.
Delays are partly due to changes in personnel and priorities in the new cabinet, including appointment of Jacob Rees-Mogg as Secretary of State at the Department for Business, Energy and Industrial Strategy (BEIS), which is responsible for both initiatives, as well as disruptions to legislative timetables caused by the change of government and death of Queen Elizabeth II.
These factors could further slow the introduction of key elements of the Roadmap to Sustainable Investment, unveiled last year by HM Treasury to help direct capital to low-carbon and green investments, building on the 2019 Green Finance Strategy, which committed the UK to reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD).
The roadmap outlined a raft of measures including the introduction of the UK’s environmental taxonomy, Sustainable Disclosure Requirements (SDRs) and the recommendations of the Transition Plan Taskforce.
“The UK risks falling further behind the EU, both in terms of the taxonomy and leadership on green finance more broadly,” said Oscar Warwick Thompson, Head of Policy and Communications at UK Sustainable Investment and Finance Association (UKSIF).
The CEOs of UKSIF, the Principles for Responsible and Investment and the Institutional Investors Group on Climate Change today sent a letter to new Prime Minister Liz Truss calling for “a clear policy vision” for the UK’s net zero transition, including near-term actions and milestones “so that investors can deliver investment at scale and the shift in capital allocation required to make net zero a reality”.
The letter was co-signed by investors including Aviva, Brunel Pensions Partnership, BT Pension Scheme Management, Impax Asset Management, and Phoenix Group. A separate letter was submitted by the CEOs of more than 100 global corporates with a UK presence, calling on Truss to tie her growth plans to a net zero and nature positive investment agenda.
Structural reforms to energy market
Friday’s ‘fiscal event’ is expected to explain how the government will pay for its pledges to protect users and utilities from sharply higher energy prices. However, it is unclear whether the statement will include longer-term policy measures, such as the decoupling of domestic electricity prices from the wholesale gas markets.
“It’s important to have the energy price guarantee in place, but if we want to avoid being in the same situation in 2024, we need to see longer-term supply-side reforms, as well as a comprehensive package of measures on energy efficiency,” said Warwick Thompson.
Such measures could include incentives for homeowners to improve energy efficiency, potentially involving mortgage providers and local authorities, as well as an acceleration of planned regulatory requirements, such higher energy performance certificates for properties.
“We also need to see if the government will push ahead with its review of electricity market arrangements announced in July,” said Folland. “We note the government is not putting out an economic forecast with the Friday statement, leaving us to use prior forecasts. There have to be question marks about gas demand as countries revert to renewables and coal to squeeze gas out depending on their domestic circumstances.”
There is uncertainty too over where the new government stands on the adoption of renewable energy sources. Unveiled in April, the UK’s Energy Security Strategy promised expanded capacity across a range of low-carbon technologies including, nuclear, solar and wind, carbon capture and storage (CCUS) and green hydrogen. But all or some of this may be shelved to concentrate government efforts on rapidly reducing consumers’ energy bills.
“You have to give the government credit for its Net Zero Strategy, which set out decarbonisation pathways for many key sectors of the economy. But there’s still a lack of clarity on the long-term policy and financing frameworks that will give investors the confidence to invest more of their clients’ capital towards a clean energy transition,” said Warwick Thompson.
At Carbon Tracker, Folland said investors would not welcome the “policy vacuum” caused by delays to the Energy Security Strategy, noting that recent announcements suggest a weakening commitment to net zero and renewables.
“Greater dependence on fossil fuels makes no sense from an economic or climate perspective. The UK government ought to be accelerating the low-carbon transition with more wind and solar deployment. Policy signals in this direction would help channel investment where it needs to go, into climate-positive investments,” he said.
In contrast, US investors have been given more certainty by the recently-passed Inflation Reduction Act, which included measures to incentivise private investment, such as long-term clean energy tax credits, across solar and wind energy generation, CCUS technologies, green hydrogen and electric vehicles.
“This would be another example of the UK government not helping its ‘financing green’ agenda by not giving clear policy signals,” added Warwick Thompson.
Failing to follow through
Investors also face uncertainty over when the government will release its updated Green Finance Strategy, following a consultation which opened in May.
The original 2019 strategy had three key objectives: ‘greening finance’ through the support of the financial services sector to help alignment with the UK’s net zero commitment; ‘financing green’ by mobilising private investment at scale to support clean and resilient growth; and supporting financial services to ‘capture the opportunity’ presented by the transition to a net zero and nature-positive economy.
The consultation asked for feedback on how the financial services sector can support UK energy security while also meeting environmental and climate objectives. The comment period closed in June, but it is not known if the updated strategy will be released before COP27 opens on 6 November.
In its response, independent think tank E3G called for integration of climate change into UK economic management and public finance in order to deliver “strategic public investment” to sectors of the economy to support low carbon transition. It also proposed embedding adaptation and biodiversity goals into corporate, finance sector and government transition planning.
Isabella Salkeld, Senior Policy Officer at responsible investment NGO ShareAction, said there was a need for a more holistic policy approach, including the development of regulatory frameworks that redirect capital flows away from fossil fuels towards low-carbon solutions, introducing higher capital requirements on carbon-intensive assets, and making climate a statutory objective in the Financial Services and Markets Bill to align the finance sector with net zero.
“Treasury ministers working on Solvency II regulation governing the insurance industry have an opportunity to reform rules to help deliver vital green infrastructure, for example by introducing climate capital requirements and other sustainability measures to ensure a majority threshold of freed-up capital is invested in green taxonomy-aligned companies,” she said.
There is no greater clarity around the Roadmap to Sustainable Investment, which was released last October to build on the Green Finance Strategy by “ensuring a flow of decision-useful information on environmental sustainability from corporates to financial market participants”.
All key elements of the roadmap are subject to delay. The government was expected to take the first step toward establishing a green taxonomy in Q1 2022, with the publication of the technical screening criteria for two of its six environmental objectives, climate mitigation and adaptation.
“It is an under-statement to say this is long-awaited. Our members want to see the consultation paper as soon as possible as it would give some clarity on the future direction of the UK taxonomy,” said Warwick Thompson.
The UK green taxonomy interacts with SDRs, also part of the roadmap, which set new reporting requirements for corporates, asset managers and owners, and investment products, including funds.
Responsibility for the legislation needed to introduce the taxonomy and the SDRs cuts across departments, requiring agreement between former BEIS chief Kwarteng and his successor, Rees-Mogg. The SDRs must also incorporate the recommendations of the Transition Plan Taskforce, which launched its call for evidence in May into mandatory requirements for corporates’ plans to transition their business models in line with net zero objectives.
The Financial Conduct Authority is due to release a paper outlining its plans for SDRs during the autumn. But the regulator may decide to wait for government-level agreement on the taxonomy and related issues before doing so.
“We are concerned that the final SDR regime won’t be as effective and robust, and won’t give investors as much clarity, if components are missing,” said Warwick Thompson.
The challenges presented by domestic political events to the UK government’s efforts to advance its climate and green finance policies could have wider consequences. According to some experts, the UK’s COP26 presidency, which ends in November, risks losing momentum if the UK is no longer seen as a global leader on measures to mitigate climate change.
“COP 27 is not long away, but it’s probably a good milestone for us to hold the government to account in terms of progress on all of these sustainable finance initiatives. If there is still no clarity, our concerns will be even higher than they are the at the moment,” said Warwick Thompson.
The summit, to be held over two weeks in Sharm El-Sheikh, could also serve as an incentive for the new UK government to increase its focus on climate-related policies, he said.
“Ahead of COP27, we’d like to see clarity on sustainable finance initiatives such as the green taxonomy, SDRs, including fund labelling, and transition plans as well. Moving ahead with those and the Green Finance Strategy could allow the UK government to make a big impact at COP27. [New UK PM] Liz Truss wants to be seen as a credible, serious leader on the world stage and she could use these climate and sustainable finance policies to show the UK leading the way.”