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UK Government Releases Green Finance Strategy

The UK government recently released the new Green Finance Strategy (GFS) with three main intentions:

Greening finance: Restructuring our financial systems to ensure environmental factors a fully integrated into mainstream financial decision making.

Financing Greening: Increased investment in green and low carbon technology through new policy frameworks and £3billion between 2015-2021.

Capturing Opportunity: Government to support the private sector tap in to the global market for low carbon financial services and ensure the UK is a hub for the global green finance market.

Click the image for a visual summary.

Green Finance Strategy Infographic

 

As a sustainability company offering Environmental Social Governance (ESG) consultancy, monitoring and auditing, Mainer Associates are particularly interested in point 1. Investors increasingly integrate ESG factors into their financial risk screening. The move from the Government to restructure our financial systems to make this mainstream, is a bold and positive move.

Why?

The UK is the first country in the world to set legally binding emission reduction targets. The big target that makes the headlines is net-zero carbon emissions by 2050.The government believes the GFS is one way to make sure the UK achieves this.

The argument is that meeting these objectives will require unprecedented levels of investment in green and low carbon technologies, services and infrastructure which will require sustainability performance to become central to investment decisions.

WHAT does this mean?

What we are seeing is a two-pronged approach – ‘greening’ the global financial system to ensure companies with reputable and verifiable sustainability credentials are favoured for investment, and, catalysing investment in technologies.

The transformation of the financial system must go beyond just funding green projects 

It will require fundamental changes in the way investment decisions are made across the economy. All finance will need to incorporate the financial risk of climate change.

But HOW will the Government do this?

The strategy focuses on 4 elements: establish shared understanding, clarify roles, foster transparency and develop a long-term approach, and build robust consistent green financial market frameworks.

The government intend to achieve this is by making the private sector companies implement the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).

The purpose of the TCFD is to develop consistent information on climate related financial risk disclosures for the use of companies in providing information to investors, lenders, insurers and other private or public stakeholders (TCFD).

There are a variety of ESG standards and frameworks to choose from. Due to ESG’s subjectivity from company to company, businesses can essentially select the areas of sustainability and climate change they excel in and address. The Task Force intends to provide clarity for businesses on what financial markets and investors want from disclosure of ESG performance in order to measure and respond to climate change risks, but also educate firms on how to align their disclosures with investors’ needs.

Actions

  • Government will expect all listed comps and large asset owners to disclose sustainability and climate change performance in accordance with the TCFD recommendations by 2022.
  • Work with regulators to implement requirements on mandatory reporting.
  • Develop a set of sustainable finance standards.
  • Increase market led action on enhancing nature-related financial disclosures.

The UK’s financial market and private sector need a shared understanding on environmental risks from both a sustainability, and now financial (investment) perspective.

One method is to price risk appropriately to inform efficient allocations of investment. This is only achieved with transparency, which requires standardised climate related data.

 

TCFD Recommendations

 

The government will be creating a task force with UK regulators to examine the most effective approach on disclosure, including exploring how appropriate it is to make reporting mandatory. Disclosure will only be useful if educates and clarifies financial decision making.

Companies must know what financial markets require from disclosure in order to respond to financial risks related to sustainability. This will also support financial institutions and policy makers to differentiate between companies and projects. This creates a cycle whereby the better performers are regularly preferred, thus raising standards for other companies to achieve if they want to gain investment.

We make decisions like this in our everyday lives on a small scale. From where to do our food shops, what make-up to buy, or even who to bank with. One supermarket might facilitate re-forestation projects, pay employees a living wage or have strong equal opportunity policies, whereas another may not. But how do we ACTUALLY know?