UK government's turbocharged Green Finance Strategy

A seemingly bold and broad-sweeping update to the UK government's Green Finance Strategy (the Strategy) has been jointly published by HM Treasury, the Department for Energy Security and Net Zero, and the Department for Environment, Food and Rural Affairs. The update is part of a wider set of climate-related proposals announced by the UK government last week, which we cover in more detail here. The Strategy, first published in 2019, is a revised policy blueprint setting out the government's ambitions and initiatives for the UK to become the "world's first Net-Zero-aligned Financial Centre".

To this end, the government's initiatives include:

• Development of investment roadmaps that:
  • identify opportunities in areas such as offshore wind, hydrogen, heat pumps, and carbon capture, utilisation and storage; and
  • support nature-positive transition pathways for sectors such as agriculture, forestry, water, resources and waste (expected in 2024).
• Consultations on:
  • the UK Green Taxonomy (expected in August 2023);
  • mandatory net-zero transition plans for large companies (expected in Q4 2023); and
  • the regulation of ESG ratings providers (see below).
• A call for evidence on Scope 3 GHG emissions reporting, to allow for a cost-benefit analysis of producing and using this information (expected in Q3 2023).
• Publication of a Nature Markets Framework, which outlines the government's:
  • principles and priorities for the development of high-integrity markets to support farmers and land managers to attract investment in nature capital; and
  • plans to develop a suite of nature investment standards.

Within the updated Strategy, the government also re-affirms the commitments it made in its Roadmap to Sustainable Investment. In this October 2021 report, the government proposed a package of measures to clamp down on greenwashing, namely, with the introduction of Sustainability Disclosure Requirements, investment product labels and the UK Green Taxonomy (see our note here).

Should there be regulatory oversight of esg ratings providers?

In conjunction with the Strategy, the government published a consultation on regulating ESG ratings providers, to seek views on whether and to what extent oversight of the industry are deemed necessary. This initiative comes in the wake of an earlier FCA consultation on climate-related disclosures and ESG in capital markets, to which respondents raised concerns about the provision of ESG ratings and ratings-like products. These concerns ranged from lack of transparency in methodologies and objectives, poor governance, systems and controls, poor management of conflicts of interests, to engagement challenges with the rated entity.

Given the rise in consumer demand for sustainable financial products and services, and the influence of ESG ratings on investment decisions, the government recognises there is a need to address the current, unregulated status quo of the industry. The consultation closes on 30 June 2023.

HSF commentary on the strategy

At first glance, the government's revised Strategy appears bigger and bolder than its predecessor, but it soon becomes clear that the Strategy broadly re-states existing commitments, albeit these now come together in one neat location.

What is glaringly absent from the Strategy is how the government intends to address the investment disparities between the UK and US/EU with the recent introduction of the Inflation Reduction Act (US) and Net Zero Industry Act (EU), both of which seek to incentivise the growth of clean tech with significant public subsidies (grants, loans and tax credits to public and private entities). There have been growing calls in the UK for similar government support for clean tech and innovation, in the absence of which we may continue to see the loss of UK investment to US and EU markets.