UK expected to be the world's first net-zero financial centre

19th Nov 2021
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The global figurehead in tackling climate change

As part of his COP26 speech earlier this month, Chancellor Rishi Sunak unveiled his plan to put the UK on the map by becoming the world’s first net-zero aligned financial centre. It will be achieved thanks to historic climate commitments made by private companies totalling around $130 trillion of financial assets.

The plan is that the commitments made will bring about a sizeable pool of cash that UK enterprise can use in moving away from fossil fuels, planting new forests and developing improved electric vehicle technology.

Essentially, Sunak has made it clear he expects the UK to be the global figurehead in tackling climate change, with this new financial centre concept paving the way.

What’s being put forward?

The UK government has already committed to a net-zero UK economy by 2050. In his speech, the Chancellor highlighted that the UK as a net-zero financial centre will be underpinned by improved transparency, with British financial institutions and listed companies required to publish their own net-zero transition plans. These plans will be expected to include certain specific details, including exactly how they will adapt and decarbonise. Companies will have no option but to comply, with those falling short expected to explain why.

Clearly different firms will have different targets, and it will be down to companies and their shareholders to decide how their business will adapt to the net-zero transition. Ideally, the decisions that are made within each company will be made publicly, with actionable steps and realistic goals.

Avoiding the greenwash

Greenwashing does rather sound like some of kind interesting gardening term. But actually it’s something the Chancellor is keen to avoid.

Basically, greenwashing is where a company devises a marketing and communications strategy based on sustainability, green practices etc. purely to make their public image look good. However there’s no real substance behind their actions. Tackling greenwash (ie. making sure UK companies actually walk the walk, not just talk the talk) is the only way to really make sure firms are meeting their net-zero commitments.

This again is why mandatory net zero transition reports are so important. The transition framework will be very specific, drawn up by the Transition Plan Taskforce as a ‘gold standard’ benchmark. The timeline for this will work along the same lines as the Sustainability Disclosure Requirements, with net-zero transition plans starting to be reported in 2023.

Continuing with his COP address speech, the Chancellor made it clear that this is a process of “fully rewiring” the world’s financial system for net-zero. In fact, more than $130 trillion – nearly half of the world’s financial assets - is now being aligned with the 1.5C global warming limit and other climate goals in the Paris Agreement.

A global partnership

Delivered through the Glasgow Financial Alliance for Net Zero (GFANZ), net-zero commitments come from 450 firms across 45 countries and 6 continents and every corner of the financial industry.

The UK has also partnered with other G20 countries in its capacity as chair of the G7, cracking the whip in ensuring climate change mitigation is front and centre. The country has also been collaborating with more than 30 advanced and developing countries spanning 6 continents in building support for new global climate reporting standards by the IFRS Foundation in order to give investors the information required in funding net-zero.

The Chancellor also responded to the notion that net-zero is the preserve of richer nations who can more easily afford the measures required. He reiterated that it will only be achieved if all nations work together, highlighting the importance of targeting financial support to areas that need it most.

The UK will work in addressing financial barriers faced by developing countries with a series of new green initiatives funded from its international climate finance (ICF) commitment. It includes £100 million to respond to recommendations from the UK co-chaired Taskforce on Access to Climate Finance. This means accessing finance plans to put developing economy climate plans in motion will be more quickly and readily accessible.

Then there’s the MOBILIST programme

Additionally, it was revealed that £66 million will be set aside to fund the UK MOBILIST programme, designed to help in the development of new investment products ready for listing on public markets to draw in new types of investors. This forms part of a total UK spend of £576 million on further initiatives to bolster developing economies and emerging markets.

The Climate Investment Funds’ Capital Markets Mechanism

It is a bit of a mouthful. But the Climate Investment Funds’ Capital Markets Mechanism (CCMM) is a new funding mechanism designed to offer another financial boost for developing countries to invest in clean energy like wind and solar power. Again it’s something the Chancellor was keen to highlight.

Having contributed £2.5 billion pounds to the multilateral Climate Investment Funds, the UK is already a huge donor towards global change reduction. However, returns from UK investments - known as reflows - will now be filtered into the CCMM as a brand new fund. These reflows will then be used in issuing green bonds in the City of London (as the world’s major green financial centre) worth billions of pounds. It’s also potentially a way to leverage an additional $30-70 billion from other sources to finance further specific clean energy projects.

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