The UK’s Green Finance Strategy (2023 revision): A guide for companies and asset managers

UK Flag plus greenery reflecting on high rises

In its run-up to hosting COP26 in Glasgow, the UK government released its overarching Net Zero Strategy, meant to solidify the UK’s status as the first major economy to legislate reaching net zero emissions by 2050. But a coalition of environmentalists subsequently sued the government, arguing that the strategy was unlawfully vague and insufficient. The High Court ultimately agreed, and gave the government until 31 March 2023 to offer corrective planning.

This led to the UK’s “Green Day” on 30 March, during which the government released more than a thousand pages of updates to simultaneously satisfy the court, address related planning credibility concerns, and reaffirm their overall commitment to reaching net zero on schedule.

Our focus here is one crucial piece of this package—the revised Green Finance Strategy—and what it means for companies and asset managers. The strategy represents a broad mandate that will be executed by various executive agencies and departments in the form of specific programs.

The Green Finance Strategy—first released in 2019, then reinforced by a Green Finance Roadmap in 2021—has been the legal basis for most of the UK’s post-Brexit climate disclosure programmes. It set a minimum requirement of pushing TCFD reporting through the British economy by 2025, and outlined broad measures on how organisations would need to provide sustainability data and incorporate climate thinking into their decision-making.

The upshot of this latest revision: net zero is still the goal, heightened disclosure requirements are still on their way, and large organisations need to begin preparing to report their emissions and reduction plans with greatly increased rigour.

Scope 3 requirements may be coming for SECR reporting

Scope 3 emissions—which cover supply chains for companies and portfolio companies for asset managers—typically account for 80-95% of an organisation's footprint. Including Scope 3 is essential for carbon reporting, as it both ensures that everything is counted and that a requirement to fully measure emissions is extended throughout the entire economy. Without this data, investors only have a narrow view of real emissions.

The strategy update included a Call for Evidence, scheduled for Q3 2023, on whether and how companies desire government assistance in providing this data, particularly in reference to SECR reporting. It’s expected that these findings will be applied across UK programmes.

Transition plan disclosures for private companies are one step closer

To help organisations develop and execute credible net zero transition plans, the UK entrusted the Transition Plan Taskforce (TPT) with creating a planning gold standard—as well as with laying the groundwork for support mechanisms like an ecosystem of professional services and sustainability-linked financial instruments. While the TPT is still developing its final framework, UK listed companies and asset owners currently have a requirement to disclose their initial transition plans on a “comply or explain” basis.

The update calls for a Q4 2023 consultation that will take up extending this requirement to larger private companies, likely with a view of bringing the UK in line with EU’s CSRD programme. It’s expected that existing requirements may also be revisited thereafter.

The UK aims to establish itself as the home for carbon and nature markets

While the government has yet to announce plans for handling carbon credits for mandatory or legally-binding emissions reductions, they announced a to-be-scheduled 2023 consultation on proposals for “high-integrity voluntary carbon and nature markets.” Their aim is unlocking global capital for investment in voluntary credits, and making the UK the main market hub.

For nature markets specifically, the UK announced their intent to adapt some core principles from the work of the Integrity Council for the Voluntary Carbon Market in the form of a new Nature Markets Framework that will focus on nature recovery and sustainable farming.

Regulatory consolidation continues as ISSB standards emerge

The International Sustainability Standards Board (ISSB)—tasked by the UN and IFRS to create a new global baseline for sustainability disclosures—is expected to publish final versions of its first two sets of standards in June 2023 (see our commentary on draft versions here). Once finalised, these standards will be widely incorporated globally as the foundation for both voluntary and mandatory disclosure programmes.

As part of Green Day, the UK government announced two advisory committees. The first will focus on aligning ISSB with public policy, and the second on aligning reporting for in-scope UK companies. The government aims to decide on their recommendations by June 2024.

SDR proposals delayed by the FCA

The Sustainable Disclosure Requirement (SDR) regime is the UK’s in-development master disclosure programme for all organisations. While the government hasn’t yet announced when SDR will take over existing company-facing programmes, its first set of proposed rules for asset managers were published in late 2022. As these proposals drew extensive feedback, the Financial Conduct Authority announced in parallel to Green Day that further detail will now be provided in Summer 2023, largely on balancing transparency with disclosure burdens.

The revised strategy itself made clear that SDR is still moving forward, and that the expectation is for rapid implementation once rules are finalised this year.

Work on a UK green taxonomy has been revived

Green taxonomies (our explainer here) are formal rulebooks for establishing which economic activities can be officially labelled green. Each activity—e.g. power production, manufacturing methods, or a building’s energy profile—will have a carbon intensity maximum, above which it won’t qualify as fully green for labelling purposes. Many of the UK’s announced climate programmes depend on the existence of this taxonomy. In particular, SDR will mandate the use of sustainability labels on financial products, with the taxonomy supplying a standard by which investors will be able to easily understand the underlying climate exposures.

The UK’s long-delayed taxonomy is now in motion again, with a consultation scheduled for Autumn 2023.  Once final rules have been implemented, companies will have two years before disclosure and compliance becomes mandatory—likely through expanded SDR obligations.

What's next for UK's Green Finance Strategy?

While Green Day 2023 was heavier on the big picture than specifics, it did establish a packed calendar of consultations and reviews. More details are coming, and the direction of travel has been affirmed. To stay abreast of new developments, our customers receive a monthly climate policy newsletter.

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