UK Government puts green finance at heart of future of UK financial services

The Chancellor recently confirmed plans to issue the UK’s first ever sovereign green bond in 2021 and become the first country in the world to make it mandatory for companies, banks, asset managers and institutional investors to publish disclosures aligned with the recommendations of the Taskforce Climate-related Financial Disclosures (TCFD) by 2025. On 18 November 2020, the Government also set out its ten point plan for what it is calling the “green industrial revolution”, following the UK’s departure from the EU.

Together, these announcements confirm the Government’s intention to launch a green recovery from the economic impact of the Covid-19 pandemic. It also reflects the Government’s ambition to position the UK at the forefront of green finance globally.

Launch of green gilts

The launch of the first sovereign green bond in 2021 will form part of the UK’s blueprint to meet the legally-binding target to produce net zero carbon emissions by 2050. Subject to market conditions, the Chancellor indicated that the Government intends to follow with a series of further issuances to meet growing investor demand, including from pension funds, who have already shown an interest in green gilts.

The Government clearly sees asset owners (including pension funds) as having a vital role to play in the energy transition and the fight against climate change and the issuance of green gilts will support funds in fulfilling their environmental, social and governance goals.

Mandatory TCFD disclosures

Alongside this announcement, the Treasury published an interim report with a roadmap outlining its intention to make TCFD-aligned disclosures mandatory by 2025 for the following entities:

• listed commercial companies,
• UK-registered large private companies,
• banks and building societies,
• insurance companies,
• asset managers,
• life insurers and FCA-regulated pension schemes, and
• occupational pension schemes.

The mandatory disclosures will therefore go beyond the ‘comply or explain’ approach, and a significant proportion of mandatory requirements will be in place by 2023. The roadmap includes the DWP’s proposed timetable for the introduction of enhanced reporting duties for large occupational pension schemes, master trusts and CDC schemes, which will be phased in (based on a scheme’s size) from 2021 onwards.

The Pensions Regulator welcomed the roadmap as it will help to ensure that pension schemes have access to the information they need to effectively manage and disclose climate risk, recognising that a coordinated approach is essential in the fight against climate change.

The Government’s ten point plan

The Government’s ten strategic aims for tackling climate change are:

1. Offshore wind – Increasing power generation by offshore wind to 40GW by 2030 (which the Government says is enough to power every home in the UK).
2. Hydrogen –Aiming to generate 5GW of low carbon hydrogen production capacity by the end of the decade by investing £500 million (of which £240 million is for new hydrogen production facilities). The Government is looking to trial the use of hydrogen for home heating and cooking, with a Hydrogen Neighbourhood in 2023, a Hydrogen Village by 2025 with the aim of having the first town heated entirely by hydrogen by 2030.
3. Nuclear – Advancing nuclear as a clean energy source with an allocation of £525 million to develop nuclear plants and research and to develop new advanced modular reactors.
4. Electric vehicles –Accelerating the transition to electric vehicles by banning the sale of new petrol and diesel cars and vans at the end of the decade. Hybrid cars and vans that can drive a significant distance with no carbon emitted by the vehicle can continue to be sold until 2035.
5. Public transport, cycling and walking – Encouraging cycling and walking by making these modes of transport more attractive and investing in zero-emission public transport.
6. Jet Zero and greener maritime – Supporting research projects for zero-emission planes and ships, with £20 million of funding for a competition to develop clean maritime technology.
7. Homes and public buildings – Making new and existing homes, schools and hospitals greener and more energy efficient by spending £1 billion on this in 2021. The Government has a target to install 600,000 heat pumps annually by 2028. The Green Homes Grant voucher scheme will be extended by one year.
8. Carbon capture – Targeting the removal of 10MT of carbon dioxide by 2030. The Government has pledged £200 million of new funding to create two carbon capture clusters by the middle of the decade and a further two by 2030.
9. Nature – Planting 30,000 hectares of trees per year.
10. Innovation and finance – Developing the new technologies required to implement these plans and making the City of London the global centre for green finance.

According to the Government, its ten point plan will create and support up to 250,000 jobs in the UK. Of the £12 billion the Government says it will spend on the plan, £4 billion is new money that has not previously been announced.

Comment

The Treasury’s announcements and the publication of its ten point plan confirms the UK Government’s intentions to launch a green recovery and to be at the forefront of tackling climate change and servicing green finance globally. Rishi Sunak described the plan as ‘a new chapter in the history of financial services and renewing the UK’s position as the world’s pre-eminent financial centre’.

The plan to issue green bonds will be welcomed by pension schemes and insurers which are now required to focus much more closely on their climate related risks and credentials. The Government’s ten point plan also demonstrates how Government spending and the wider economy is being tilted towards a green agenda. This illustrates the need for trustees and insurers to consider the impact of this transition on their investment strategies and on the short and long-term value of the underlying assets that they are invested in.