Zeroing in on plans to decarbonise the UK 

by Amy Harris, Sustainability Policy at Innovate Finance

In the run up to COP26, the UK government released a series of papers detailing their strategy to decarbonise the UK economy by 2050. These publications include:

• Net Zero Strategy: Build Back Greener
• HM Treasury’s Net Zero Review: Analysis exploring the key issues 
• Greening Finance: A roadmap to sustainable finance 

Amongst these hundreds of pages, what were the key points and what do they mean for UK FinTech? 

Here’s my summary of how changing regulations affect your business, your customers and the new opportunities available.

The UK Roadmap

Building on the UK 10 point plan for the green industrial revolution, the Net Zero Strategy sets out plans to decarbonise the UK economy. This includes current progress, possible pathways to 2050, economic opportunities, and policy and proposals for the following sectors:

• Power
• Fuel supply and Hydrogen
• Industry
• Heat and Buildings
• Transport
• Nature Resources
• Greenhouse Gas Removals 

Additionally, the paper lays out:

• how decarbonisation facilitates “levelling up” ambitions by supporting green jobs across the country, creating 2 million green jobs by 2030,
• green investment pathways,  with capital investment growth of approximately £50-60 billion per year through to the 2030s. The majority is expected from the private sector but public finance will provide early investment, intervention and signalling to create conditions for an acceleration of Net Zero investment.

The headline is: the green industrial revolution is coming. There are many possible pathways to net zero by 2050 but infrastructure shifts are crucial. 

The economic and fiscal picture

The Treasury Net Zero Review explores key issues and trade-offs as the UK decarbonises. This assesses uncertainty around technology and costs, looking at macroeconomic effects:  economic opportunities and risks, policy levers to support the transition and likely fiscal implications. 

The main takeaways are:

• Current economic analysis may be understating the costs of climate change
• UK climate action could provide a boost to the economy and high levels of investment may contribute to future growth
• Costs of inaction greatly outweighs costs of action

Policies over the next 30 years will determine scale, distribution and balance of opportunities and challenges of transition. A combination of tax, regulation, spending and other levers is required. 

Transformation of finance 

The government’s long-term plan to green the UK’s financial services is framed in three phases:

1. Informing: ensuring decision-useful information on sustainability is available to financial market decision-makers
2. Acting: mainstreaming this information into business and financial decisions
3. Shifting: financial flows across the economy shifting to align with a net-zero and nature-positive economy

The paper on ‘Greening Finance’, focuses on the first of these, outlining four pathways to green investment:

1. Implementing Sustainability Disclosure Requirements (SDR) across the economy incrementally
2. Delivering a UK Green Taxonomy; ensuring it has been road-tested in the market
3. Lowering barriers to investors acting as effective and responsible stewards of capital
4. Leading international efforts to bring about global and systemic change in the financial system

The SDRs apply existing pillars of disclosure recommended by the TCFD (Task Force on Climate-Related Financial Disclosures): strategy, governance, risk management, and metrics and targets) across three kinds of disclosure:

1. Large companies: corporate disclosure
2. Financial sector: asset manager and asset owner disclosure
3. Products:  financial and investment products

This marks a ramping up of regulation on financial institutions and companies as businesses are required to make sustainability disclosures, asset managers and owners must disclose how they consider sustainability and creators of investment products to report sustainability impact of investment products. This extends current requirements to report on climate risk  - and now requires reporting on environmental impact.  The aim is to increase transparency so that consumers can spend and invest in ways that align with their sustainability preferences. This will start to shift capital towards low and no carbon activities – a vital change for the Net Zero transition. 

This is relevant to all FinTechs. Even if you are not directly caught by the requirements for large corporates, asset managers and product creators, you will most likely come into scope indirectly as a supplier to one of these or as a recipient of investment. FinTechs will need to measure their own emissions and sustainability profiles through lending, investment portfolios and supply chains as the regulation extends beyond financial institutions and large corporations to all businesses. There is also great opportunity for FinTechs to provide tools for other businesses to measure and share data.

The UK Green Taxonomy brings in clear criteria to measure sustainability of specific economic activities to address problems of inconsistency that risk greenwashing and limiting flow of capital into sustainable investments. The taxonomy will focus on six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems. There are three technical screening criteria to see if an activity is taxonomically-aligned. 

1. Make a substantial contribution to one of six environmental objectives
2. Do no significant harm to the other objectives
3. Meet a set of minimum safeguards

Further information on taxonomy and SDR regulation will be available in November 2021 as discussion and consultation papers are published. 

Having responsible stewardship of capital enables investors to improve return by encouraging and supporting behaviours and practices to ensure long-term value. Stewards should seek to integrate ESG considerations into:

• Investment decision-making
• Monitoring and engagement strategies
• Escalation and collaboration
• Voting practices

Whilst these are UK policies, similar measures are being taken around the world. The UK government and regulators are working with international partners to drive global action as G7, G20 and COP26 summits happen this year.

In summary:

• Government will be driving a massive change across the entire economy - affecting all businesses, communities and citizens
• Government will be using tax, spend and regulation levers to achieve change.
• Financial services and publicly listed companies are at the forefront of this, with new regulatory requirements to report on action across portfolios. Net zero will become a dominant force in capital markets.
• Data will play a critical role, and the Government is implementing measures like the taxonomy that will support data solutions.

FinTech has a crucial role to play in this transition both in terms of its own transition and how to help businesses and consumers navigate regulation and make impactful investments. For more, read our white paper on the role of FinTech in Net Zero or get in touch at policy@innovatefinance.com.