Green is the New Finance
Whilst there is not a single agreed definition of what constitutes Green Finance, it generally refers to the transitioning to a sustainable financial system and mobilising investments in clean and resilient growth.
The focus on this transition to Green Finance has escalated around the globe in recent times in the wake of, amongst other factors, the continuing effects of climate change and the coronavirus pandemic. In the UK, the Government set out its strategy for a Green Finance transition back in July 2019 by focusing on three core areas;
- greening finance – ensuring current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making, and that markets for green financial products are robust in nature;
- financing green – accelerating finance to support the delivery of the UK’s carbon targets and clean growth, resilience and environmental ambitions, as well as international objectives; and
- capturing the opportunity – ensuring UK financial services capture the domestic and international commercial opportunities arising from the ‘greening of finance’ and ‘financing green’.
Ahead of the UN’s 26th climate change Conference of the Parties summit, rescheduled to November 2021, the Green Horizon Summit took place virtually between 09–11 November 2020. With more than 100 global businesses and climate leaders in participation, the event aimed to close the financing gap between net zero ambitions and reality with the objective of mobilising capital by converting momentum into action.
Speaking at the Green Horizon Summit, Chancellor of the Exchequer Rishi Sunak announced three new steps that the UK Government intends to take in the movement towards Green Finance:
- Mandate climate disclosures by 2025;
- Implement a new robust green taxonomy; and
- Issue the UK’s first ever sovereign green bond.
Climate-Related Financial Disclosures
The UK Joint Government and Regulator TCFD Taskforce have produced an implementation roadmap towards mandatory TCFD-aligned disclosures presenting a co-ordinated strategy for seven categories of organisation: listed commercial companies; UK registered companies; banks and building societies; insurance companies; asset managers; life insurers and FCA regulated pension schemes; and occupational pension schemes, over the next five years. In addition, the FCA confirmed at the Green Horizon Summit that in the first half of next year it will release proposed TCFD implementation measures for asset managers, life insurers, and pension providers that the FCA regulates.
The new robust green taxonomy (a common framework for determining which activities can be defined as environmentally sustainable) will help firms and investors understand the impact of their investments and activities on the environment. The UK taxonomy will take the scientific metrics established by the EU taxonomy as its basis, whilst a new UK Green Technical Advisory Group will be established to review these metrics to ensure they are fit for purpose and right for the UK market. In order to support and benefit from the development of common international standards on taxonomies, the UK also intends to join the International Platform on Sustainable Finance.
Sovereign Green Bond
Analysts expect to see the UK issuing its first Sovereign Green Bond in the first half of 2021. With its success rate predictions being high, the UK aims to cement its position on the sustainable landscape whilst carving out an area of potential growth in the post-Brexit financial services’ sector. With funds being used to finance projects with an environmental benefit (for example, renewable energy, green buildings, sustainable land use and water conservation), this new bond aims to create green jobs and catalyse the sterling green bond market.
Impact on Business
Banks in the UK are generally working towards their ambition to be net zero by 2050. Many are focusing on directing flows of private finance into projects, products and businesses that are accelerating the transition to a low-carbon future. Banks are also building products to help their customers enjoy greener banking and investing in innovations that are helping to accelerate the transition.
"Accordingly, the proportion of green financing in Banks’ portfolios is increasing which is only expected to grow further in the wake of the Green Finance revolution."
Those involved in the green loan market in the UK should take into account the Loan Market Association’s recent guidelines when looking to provide or receive sustainable finance:
- the utilisation of loan proceeds should be appropriately described in the finance documents;
- borrowers should clearly communicate to its lender its environmental sustainability objectives, the process by which the borrower determines how its projects fit within the eligible categories and the related eligibility criteria;
- the proceeds of a green loan should be credited to a dedicated account or tracked by the borrower in an appropriate manner to maintain transparency; and
- borrowers should make and keep readily available up to date information on the use of proceeds to be renewed annually until fully drawn.
With access to the green loan market increasing, businesses wishing to access such finance must position their environmental sustainability objectives within the context of their overarching objectives, strategy, policy and/ or processes, at the heart of the company’s DNA.
With the Brexit deadline looming, the UK’s drive to crown London as the global Green Finance leader is accelerating at great speed. On furthering the UK’s commitment to Green Finance, a wave of new issuances is expected as the Government looks to fund projects to tackle climate change, finance much-needed infrastructure investment and create green jobs across the country.
From small businesses to corporate giants, the consensus is that we all have a role to play in promoting Green Finance. We must keep up with what is coming, or ultimately run the risk of getting left behind.
Get in touch
If you have any questions or issues relating to this article please do not hesitate to contact Sean Halliwell.
This article was prepared by Zehra Buyukdeniz.