UK plan for net zero financial centre depends on development of a “nature-positive” economy, according to new report.
The UK’s proposed regime for mandatory transition plans should require firms to explain their approach to managing biodiversity as well as climate risks, according to the country’s leading sustainable finance organisation.
The UK Sustainable Investment and Finance Association (UKSIF) included the recommendation in a report on the steps needed for the UK to become a net zero financial centre, following consultation with its 290+ members with a collective £10 trillion AUM.
The Transition Plan Taskforce (TPT), charged by the UK government with developing a “gold standard” for climate transition plans, should consider firms’ use of carbon offsets, governance structures, capital allocation plans, alignment with financial statements, and lobbying activity, said UKSIF.
“We would also like to see transition plans outline how companies intend to manage biodiversity risks,” the report added, saying the plans should explain firms’ approach to disclosing against the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD), which recently issued the beta version of its proposed disclosure framework.
In April, the UK government published a two-year remit for the TPT, including the creation of a disclosure framework which can be incorporated into the UK’s regulatory regime through the planned Sustainability Disclosure Requirements (SDR). Chancellor Rishi Sunak unveiled the government’s ambition to become the world’s first net zero financial centre at COP26 last November, where he also announced the intention to mandate transition plans as the first step.
Tackling twin crises
UKSIF CEO James Alexander said UK disclosure requirements and related sustainable finance policies should take greater account of nature-based risks and impacts.
“We have a nature crisis, but we’re not focusing on it. We’re losing species and rainforests at a dramatic rate. It’s imperative that organisations like ours raise awareness of nature-related issues and the potential to use some of the mechanisms that have been effective for financiers in addressing climate-related issues,” Alexander told ESG Investor.
“We’ve got to think about the nature crisis in tandem with the climate crisis. There are a lot of activities that can address both.”
In its new report, UKSIF further argued that the UK will not be able to achieve its objective of becoming a net zero financial centre without the development of a “nature-positive” economy.
“More meaningful disclosure of nature risks is an important initial step, and clarity on how these disclosures will be integrated in the UK’s upcoming SDR regime is needed,” said the report, which called for the government and regulators to consider incorporating the TNFD framework into SDR proposals.
UKSIF members were “very disappointed”, the report said, with the lack of a wide-ranging response to the Dasgupta Review on biodiversity, published last year and commissioned by then-Chancellor George Osborne. It recommended convening investors, regulators, civil society and other groups to consider how the review’s findings could be implemented into policymaking.
New regulatory phase
The UK has been one of the first countries to adopt mandatory climate reporting in line with the recommendations of the Task Force for Climate-related Financial Disclosures. But the next phase of its legislative programme for sustainable finance is expected to widen its scope beyond climate to other environmental and social risks.
HM Treasury is widely expected to shortly unveil proposals for a UK-specific ‘green taxonomy’ to categorise environmentally sustainable activities, while the Financial Conduct Authority (FCA) is due to consult on its proposals for ‘green’ fund labelling and extended disclosures on environmental risks and impacts under SDR.
According to Alexander, the SDR regime has the potential to take bold steps against greenwashing. “It’s crucial to encourage fund managers to think about what it means to be sustainable. Key objectives and criteria need to be embedded into how you run pick your stocks and run your fund,” he said.
The Department for Business, Energy and Industrial Strategy is also scheduled to announce its financial services roadmap, which will provide more details on the government’s vision for the UK as a net zero financial centre, ahead of a formal launch in November, 12 months on from COP26.
The UKSIF paper said the UK should “learn the right lessons” from the EU’s experience by taking a science-based approach which would rule out the inclusion of gas, nor should the green taxonomy be used “a political instrument driving the UK’s energy policy and energy security considerations”.
Further, it supported the development of a separate ‘transitional’ environmental taxonomy, to encourage those parts of the economy falling outside the green taxonomy to move towards more sustainable practices, using clear ‘phase-out dates’ to guide investors.
“One of the challenges that the EU taxonomy faced was that it was a tool being used for too many purposes,” said Alexander. “We need to retain a laser focus on creating a tool that’s useful for investors to determine what is and what isn’t green.”
Support for investors
To support the ability of institutional investors to drive the transition to a net zero economy, the UKSIF report proposed regulation of ESG data providers in recognition of their role in sustainable investment decisions, as well as the inclusion of large unlisted firms in sustainability reporting requirements, including climate transition plans.
To ensure transition is effected across the whole of the UK economy, it said the government should develop a series of ‘clean investment roadmaps’ for priority sectors and a comprehensive carbon pricing system, partly through the extension of the UK’s Emissions Trading System (ETS). The government should address the social impacts of the transition, both by making new commitments to energy efficiency in homes and by establishing a UK-wide Just Transition Commission, the report said.
The renewed energy strategy announced by the government in response to Russia’s invasion of Ukraine has been criticised for lacking new proposals to manage energy demand, but more details could be provided in today’s Queen’s Speech, which will map out its legislative agenda for the next 12 months.
The government has not issued clear plans to implement carbon pricing or extend the UK’s ETS since it separated from the EU’s scheme post-Brexit. But a recent speech by Lucy Frazer MP, Financial Secretary to HM Treasury, suggested the government is willing to use taxation to address climate change.
“Carbon pricing – or in other words applying a cost to carbon emissions to encourage polluters to reduce the amount of greenhouse emissions they produce – is ‘fair’ because it makes sure that polluters pay,” she said.
UKSIF is a member of the Green Technical Advisory Group, advising HM Treasury on the UK’s taxonomy, and the Disclosures and Labels Advisory Group, which advises the FCA on the design of the SDR regime and investment labelling system.