Greening the UK finance system: Can we disclose our way to net zero?

This month the Government announced the launch of the Transition Plan Taskforce, the latest in a series of announcements on green finance in the UK. Here Seahorse reviews the UK’s new rules to green the finance sector through disclosure and how effective they are likely to be.

The problem with sustainable finance:

The core problem with sustainable finance is that there is not enough of it, and what there is sometimes isn’t as sustainable as it first seems. While ESG-related assets are estimated to account for one in three dollars managed globally, the exact meaning of “ESG-related” can be unclear. Last year we discovered that the world’s largest ESG rating company does not actually measure the impact of companies on the environment. Financial institutions and other businesses are also increasingly the target of criticisms that they are not doing enough to tackle their impact and address environmental risks, including accusations of greenwashing where their sustainability claims are not transparent and don’t seem to stack up.

The Climate Change Committee has recommended that to get the UK to net zero, additional infrastructure investment from public and private sources will need to scale up from £10bn per year in 2020 to £50bn annually by 2030 through to 2050. Over the past year the Government has made a series of new announcements aimed at greening the finance sector, but will they get us to where we need to be?

What are the UK’s new rules on disclosure?

The UK has a claim to be leading in green finance, having announced a series of measures including becoming  the first G20 country to put mandatory climate disclosures into law. 1,300 businesses will publish their first disclosures in 2023 for the financial year starting 6th April 2022, covering the UK’s largest traded companies, banks, insurers, and private companies with over 500 employees or £500m in turnover.

While a small number of companies are already doing this (including Tesco, Aviva, and Unilever), for the vast majority this is new territory. The new UK requirement is based on guidance from the Taskforce for Climate-Related Financial Disclosures, but in practice many of the rules, metrics, and best practices are being worked out and will adapt over the coming years.

In the simplest terms, companies will have to disclose the answer to these questions on the risks and opportunities of climate change:

1.       How much greenhouse gas does your business produce? And your wider supply chain? How are you measuring this?

2.       How will the physical reality of climate change impact your value chain? (E.g. Will your real estate be flooded every year by 2030?)

3.       How will the transition to deal with climate change impact your value chain? (E.g. Will your coal mines become defunct?)

4.       What business opportunities will there be throughout this? (E.g. Will you be able to sell lots of electric vehicles?)

5.       How much will this cost you? (E.g. What happens if a carbon tax is implemented?)

Using this information, they will then have to set targets on tackling climate change. Companies are often criticised for setting targets that are too general or are too far away. The TCFD guidelines call for targets that:

1.       Are easily measurable and linked to established metrics that align with climate science;

2.       Indicate the baseline scenario and set intermediate deadlines to reflect the urgency of decarbonisation and the timescales businesses usually operate on;

3.       Account for the various levels of responsibility a company has over its value chain.

In many ways the strongest change is the move towards making it mandatory for firms to publish transition plans on how they will act on the financial information above to achieve their targets, mitigate climate risk, and adapt to a low carbon economy in line with the UK’s net zero target. The Government has said it plans to legislate for this, becoming a requirement for large firms by 2023.

Even more so than with disclosures, what good looks like for a transition plan is not commonly agreed. This will be the role of the Transition Plan Taskforce announced earlier this month, headed by Minister John Glen and Aviva CEO Amanda Blanc, with the Secretariat provided by the UK Centre for Greening Finance and Investment and E3G. The TPT will spend the next two years working on the “gold standard” with industry, academia, and regulators like the Financial Conduct Authority. What is clear is that the transition plans will need to be based on specific actions with quantifiable impacts aligned with climate science, as well as being part of and informing broader company strategy rather than simply standing alone.

Will they work?

These measures will provide a huge boost to accountability in the UK’s finance system, and have the potential to shift capital allocation to sustainable ventures. The question remains whether investors will respond to this pressure or prioritise easy, established, short-term gains over the longer-term risk profiles and climate ambition of the companies they support. We have seen in the past few months that even with rocketing demand for renewable energy many major wind energy companies have struggled to turn that momentum into profit, while fossil fuel companies have seen record returns.

We may also see a growing divergence in institutions that are open to public pressure and those that are not. If major financial institutions are pushed to sell dirty assets, the question remains who is buying them. Last year saw a spate of hedge funds buying up oil and gas assets because of this. This year we have heard warnings that passive funds, such as exchange traded funds, may hang onto fossil fuel assets. What we do not want to see is high-carbon assets being offloaded onto less scrupulous or accountable investors. 

Limiting fossil fuels’ access to capital can bring big benefits both to UK decarbonisation and to our economy. Climate disclosures and transition plans will underpin these efforts. But the slow progress of sustainable finance shows that this needs to be matched with demand-led measures across the board to decarbonise our economy.

If you’d like to know more about Seahorse and how we can support your work, get in touch at clong@seahorseenvironmental.co.uk