UK Green Finance Strategy 2023: highlights for the investment funds and asset management industry

This morning the UK government published its UK Green Finance Strategy, entitled "Mobilising green investment: 2023 green finance strategy". The strategy sets out how the UK government will ensure that necessary finance flows to the UK's net zero, energy security and environmental industries. In achieving this, the government will work closely with (among others) the UK financial services regulators who today have announced their support for the updated strategy.

Running at 130 pages, there is a lot of information for the financial services industry to digest. In this Insight, we highlight the key elements of the government's strategy that investment fund and asset managers should be aware of.

Sustainability Disclosure Requirements

The government's plan for Sustainability Disclosure Requirements (SDR), a streamlined disclosure framework for sustainability information, is critical to ensuring investors and consumers are able to access the sustainability information they need and protect against consumer harms such as "greenwashing".

The UK is currently in the first full year of the Task Force on Climate-related Financial Disclosures (TCFD)-aligned climate-related disclosure requirements cycle. TCFD requirements will be a central part of the SDR framework as well as the foundation for the IFRS Sustainability Disclosure Standards.

The government intends to take the following steps to implement components of the SDR regime and will set out further detail on the SDR implementation timeline to reflect the rapid development of international standards in Q3 2023:

Disclosure of transition plans

The Transition Plan Taskforce (TPT) is expected to publish its Disclosure Framework and Implementation Guidance for transition plans in the summer 2023. The Financial Conduct Authority (FCA) has now introduced and updated rules for asset managers/owners and listed companies with comply or explain requirements to publish transition plans. To ensure alignment, the TPT plans to consult on similar rules for listed companies once it has completed its work in autumn/winter 2023.

IFRS Sustainability Disclosure Standards

At COP26, the International Financial Reporting Standards (IFRS) Foundation announced the creation of the International Sustainability Standards Board (ISSB) to develop IFRS Sustainability Disclosure Standards, with the objective to set a global baseline for sustainability reporting.

The final version of the first two standards – a general requirement standard and a climate-related standard – is expected to be published in June 2023.

The government will set up a framework to assess standards set by the ISSB for their suitability for adoption in the UK as soon as the final standards are published. These standards will provide the basis for future obligations within company law and FCA requirements for listed companies, ensuring a single set of standards is applied across the UK regulatory framework.

The government’s aim is for an endorsement decision to be made within 12 months of the final standards being published, but a decision will be made sooner if possible.

Fund labels and FCA approach to SDR

On 29 March 2023, the FCA announced that it intends to delay the publication of its Policy Statement on at its sustainability disclosure requirements and investment labels until Q3 this year. Accordingly, the general "anti-greenwashing rule" which was expected to come into force on 30 June 2023, will now be pushed back together with the various other disclosure milestones set out in the FCA's consultation paper.

There is broad support from industry for the proposed regime and this additional time will enable the regulator to consider the constructive feedback it received on the detail of the proposals.

UK Green Taxonomy

This will provide investors with definitions of which economic activities should be labelled as green. The government expects to consult on the taxonomy in autumn 2023 and proposes that nuclear will be included within it, subject to consultation. Within the FCA's proposals on SDR and investment labels (see above), the FCA noted that the UK Green Taxonomy, once developed, could be one way of demonstrating that assets meet a credible standard of sustainability.

After the taxonomy has been finalised, the government will initially expect companies to report voluntarily against it for a period of at least two reporting years, after which it will explore mandating disclosures.

While developing an effective framework that is tailored to the UK market, the government will continue to work with international partners to maximise interoperability and harmonisation.

ESG ratings providers

Alongside this strategy paper, the government has published a consultation: "Future financial services regulatory regime for Environmental Social and Governance ‘ESG’ ratings providers" which seeks views on whether ESG ratings providers should be brought into the FCA’s regulatory perimeter and on how this could be done. The deadline for responses is 30 June 2023.

The government will continue to act as observers, alongside the FCA, to the industry-led working group that is developing an ESG Data and Ratings Code of Conduct to promote best practice in the market.

Financial advice

The FCA is exploring how to introduce rules for financial advisers aimed at confirming that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable.

Access to liquidity and effective investor stewardship

The government will work closely with industry and the regulator to implement Solvency UK, creating the potential for over £100 billion of productive investments from insurers in the next ten years.

The government will work with the FCA, Financial Reporting Council and the Pensions Regulator to review the regulatory framework for the effective stewardship that is crucial to climate and environmental oversight, including the operation of the UK Stewardship Code.

Mobilising private investment

The government will support local authorities to develop their ability to attract private investment through the work of the Local Net Zero Hubs and the UK Infrastructure Bank (UKIB), as well as through promotion of programmes such as the Local Investment in Natural Capital programme and Investment Zones.  

Both the UKIB and the British Business Bank (BBB) play a key role in supporting sectors and technologies across to commercial maturity and scale: the UKIB supports first-of-a-kind commercial deployment, and later stage scaling-up and growth stages for businesses and technologies and the BBB supports smaller businesses vital to commercialisation of green technologies. For example, the BBB is exploring the potential use of its existing products including guarantees to catalyse lending and investment into critical transition themes such as retrofit and energy efficiency, and electric vehicle adoption. Between 2014 and end of August 2022, the BBB supported £505 million of equity investment in clean technology companies.

Transition finance market review

Transition finance comprises financial products and services that support higher emitting companies and activities to become green. These instruments are generally used by companies seeking to reduce greenhouse gas emissions.

New instruments such as sustainability-linked loans and bonds and transition bonds have grown rapidly. The government is commissioning a review into how the UK can become the best place in the world for raising transition capital.  The Transition Finance Market Review will consider what the UK financial and professional services ecosystem needs to do to become a leading provider of transition financial services and innovative instruments on the pathway to 2050.

Voluntary Carbon Markets

The UK government has confirmed its intention to position the UK as a global hub for trading in voluntary carbon markets (VCMs).

The Voluntary Carbon Markets Initiative (VCMI) and the Integrity Council on Voluntary Carbon Markets (IC-VCM) provide, among other things, greater clarity on the definition of high-integrity VCMs.

Both initiatives will publish their guidance this year; the government will consider the potential for their outputs to serve as a basis for international best practice on market integrity, and the extent to which they could be incorporated within relevant UK regulatory regimes, including through the consultation it intends to publish later this year.

Osborne Clarke comment

Investment fund and asset managers should keep a watching brief on the initiatives highlighted in this Insight, including the release by the FCA of a policy statement on SDR and investment labels and a follow-up to a discussion paper on sustainability-related governance, incentives and competence in regulated firms.

One of the key FCA deliverables identified by the strategy paper is "analysing intelligence to identify/address greenwashing". This continues to be a top priority for the regulator and an area where the investment funds industry can expect to be heavily scrutinised, notwithstanding the deferral by the FCA of its policy statement on SDR and investment labels.