Green Finance Strategy

In a nutshell:

• Businesses will need to put a 'price' on climate adaptation and start reporting on what they are doing to address it
• The Green Finance Institute (GFI), established in July 2019, should help the public and private sectors to share ideas and come up with innovative new green finance products
• Following Brexit, the UK wants to be seen as 'the' place to come for green finance: the country that can help other countries set up their own green finance products.

The GFS has two objectives:

• To align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by Government action, and
• To strengthen the competitiveness of the UK financial services sector.

To achieve these objectives, the Government has set out its plans in three ‘strategic pillars’ which cover:

• Greening Finance: integrating climate and environmental risks into mainstream financial decision making
• Financing Green: mobilising and accelerating flows of private finance to support key clean growth and environmental sectors
• Capturing the Opportunity: ensuring that the UK continues to capture the commercial opportunities arising from the global and domestic shifts to clean growth (i.e. from the first two pillars).

The publication of the GFS has the potential to mark a pivotal point in the evolution of the UK 'green' finance market, in terms of how funders make their decisions to invest and develop new financial products, in each case to capitalise on the opportunities that the 'green' objectives the Government has set industry, business and financial institutions will give rise to.

In order to incorporate 'green' into decision making across the UK financial services industry the GFS places emphasis on:

• clear, uniform objectives that bring about a shared industry understanding through, amongst other initiatives, setting out its expectations for all listed companies and large asset owners and developing a set of Sustainable Finance Standards, together with the British Standards Institution, for industry participants to work towards;
• clarifying roles and responsibilities of agencies like the Financial Conduct Authority and Prudential Regulation Authority in carrying out their duties in respect of encouraging, promoting and supervising climate-related financial issues;
• fostering a culture of transparency by setting out clear disclosure requirements and supporting quality disclosure through the publication of data and guidance; and
• overall, building a robust and consistent green finance market framework.

The ultimate aim of these combined objectives is to make the financial risks and opportunities of 'green' factors an essential and 'normal' element of good business strategy.

The UK has committed to ambitious climate change targets. The UK Climate Change Act 2008 was recently amended by the Climate Change Act 2008 (2050 Target Amendment) Order 2019 to introduce the Government’s new target for the UK to reach net zero greenhouse gas emissions by 2050. There is also the Clean Growth Strategy, the 25 Year Environment Plan and the National Adaptation Programme. All these will require significant investment in resilient low carbon infrastructure and services – a huge opportunity for UK business and financial institutions.

To mobilise green investment, both domestically and internationally, the government's approach has four main elements:

Establish robust, long-term policy frameworks

Investors need long-term certainty, so they know they will get a return on their investment. The legally binding targets in the Climate Change Act 2008 (now made even tighter by the recent amendment order), with ongoing monitoring through five-yearly 'carbon budgets' mean the UK has to keep reducing emissions, so will continue to need investment in low-carbon infrastructure.

A key theme of the Green Finance Taskforce was the importance of driving supply and demand for green lending products. The GFS announces new proposals focused on driving action and investment in the commercial and non-domestic buildings and homes sectors, including an intention to consult on minimum energy efficiency standards (MEES) in the non-domestic private rented sector in summer 2019, as current and future rented sector policy is projected to be a key measure in driving energy efficiency improvements during the 2020s.

The government also wants to build the market for green finance products to support home energy efficiency, including a forthcoming consultation on whether to require lenders to help households improve the energy performance of their homes.

Improve access to finance for green investment

There is a need for additional government support to overcome investment hurdles in certain sectors.

The government has set up or is in the process of setting up various public funds to leverage private capital investment in clean energy and natural capital growth. These include the Heat Networks Investment Project (HNIP); the Charging Infrastructure Investment Fund (CIIF) for electric vehicle chargepoints; the Industrial Energy Transformation Fund to support businesses with high energy use to transition to low carbon and be more energy efficient; and expanding Salix, the very successful public sector energy efficiency loan scheme.

The GFS also seeks to unlock new revenue streams for green projects, rewarding them for the environmental benefits they deliver. These include introducing mandatory biodiversity net gain for developments; carbon offsets (see the recent Call for Evidence on this in the transport sector); and a 'polluter pays' principle in the Resources and Waste Strategy, where packaging producers will have to cover the full net cost of managing their packaging at end of life, increasing the incentives for supply chain innovation and the commercial rewards of investing in sustainable product design and more durable products.

Address market barriers and build capability

The GFS sets out the action that the government is already taking in this area, rather than announcing anything new. It mentions the ongoing Infrastructure Finance Review and the National Infrastructure Commission's study on the current and future resilience of UK infrastructure and how climate considerations need to be integrated into this. It also sets out how the government is supporting local green finance projects and sharing best practice.

Develop innovative approaches and new ways of working

A key theme of the GFS is public-private sector collaboration. The Green Finance Institute is to lead on this.

Putting all of this framework in place to encourage a green thought process and develop green objectives and standards when providing and utilising financial services will inevitably lead to the growth of the green finance market, so the final limb of the Government's strategy is how to capture the opportunity that growth generates.

The establishment of the GFI is a key part of this thread of the strategy. It is jointly funded by the Government and the City of London and is mandated to:

• strengthen public and private sector collaboration on green finance through creating greater alignment between initiatives e.g. on innovation of green products, data and analytics
• create commercial opportunities for UK finance providers by striving to coordinate public and private activities behind a shared strategy;
• strengthen the competitiveness of the UK financial services sector by driving innovation, up-skilling financial professionals and government officials equally, and
• ultimately promoting all of that globally through a unified UK green finance brand.

At the moment HM Treasury is carrying out a review into the costs of decarbonisation and will be looking at green finance in this context. We are also still expecting the Energy White Paper to set out the government's energy policies for the next few years – this was due earlier this year but is still awaited. 

The Impact Investing Institute was established in June 2019. Impact investment is investment with the intention to generate a positive, measurable impact on society and the environment alongside a financial return. It is working with the GFI to develop joint initiatives.

The Government has promised an interim progress review of the GFS by the end of 2020 and a formal progress review in 2022. This shows it is taking this seriously and it should not be just another thing that is kicked into the long grass.

The GFS is another step towards pushing green and sustainable financing to the top of the agenda of all participants in the UK finance market. It is a market that has been developing for some time, driven by the Government's environmental agenda since the signing of the 2015 Paris Climate Change Agreement and the general public's increasing consciousness of social and environmental issues. However, thus far, this awareness had filtered down into different areas of the UK finance market at different rates and has manifested itself in different ways, for example:

• voluntary market guidelines such as the International Capital Market Association Green Bond Principles (GBPs) and the Loan Market Association Green Loan Principles (GLPs) focus on the 'use of proceeds' concept i.e. a requirement that the proceeds will be invested into projects, activities or assets that have a specified environmental benefit;
• the development of commercial concepts and documentary mechanisms, which, instead of specifying that the loan must be utilised for a green purpose, provide a financial incentive for the borrower to engage in environmentally responsible or 'green' behaviour (e.g. the inclusion of 'green' covenants that set out certain sustainability criteria that are tied to a reducing margin ratchet), which led to the LMA Sustainability Linked Loan Principles (SLLPs) that were just published in March 2019; and
• some banking institutions developing their own green objectives and standards for issuing loans e.g. finance providers Natixis introduced a Green Weighting Factor for all their financing deals to comply with the Paris Agreement goals. This weighting factor provides for a positive adjustment (i.e. cheaper finance) for deals creating affirmative climate and environmental action ('dark green') on a scale down to a negative adjustment for deals with an adverse environmental impact ('brown').

For more detailed analysis of the evolution of the UK green and sustainable financing market also see previous AG articles on this topic:

The Growth of Green Finance

The Evolving Scope of Sustainable Financing

Voluntary measures and organic growth is all very positive but inevitably leads to variations, across the market generally and between individual financial institutions, in the decision making processes applied to determine the types of projects that qualify as 'green', the nature and quality of the solutions and products provided and in the appetite to engage in 'green' activity. This leads to barriers to the delivery of green financing on the wider scale envisaged by the Government.

The Government envisages in the GFS solutions to help overcome the problems those barriers create. For example:

Defining 'green' and 'green-washing'

There is no formal universal standard applied to determine what qualifies as a green project. This can leave both funders and borrowers nervous about labelling a project or product as green for fear of the risk that it will be determined to be 'green-washing' (i.e. spinning the nature of a product to make it appear greener than it actually is in the drive to be seen to be green.) A green finance market framework with clear objectives and taxonomy has the potential to reduce such concerns and risks and move the market towards a standardisation that will ensure its integrity.

Lack of transparency

Transparency is also fundamental to ensuring the integrity of green finance products and a lack of it is a barrier to the development and wider availability of such products. That is why the Government's proposals in the GFS to enhance the production and access to data and analytics though more stringent disclosure requirements are a key policy to expanding the 'green' market. It should allow investors to make more informed decision and develop new products.

The wider market is listening to the 'green' message as the topic often takes the prime spot at industry conferences like the Loan Market Association Syndicated Loans Conference just last week where speakers noted that, as a result of pressure from governments, consumers, investors and corporates, we are now on a trajectory towards integrating 'green' into business and financial strategies as the norm.

Climate change and sustainability are no longer factors that can be ignored, but will play a key role in financing from now on.