Chancellor unveils raft of green finance plans, including green taxonomy proposals and mandatory climate risk disclosure rules for listed companies.
The government plans to cement the UK’s position as a global centre for green finance received a significant boost today, with the Chancellor Rishi Sunak unveiling proposals to issue the country’s first sovereign green bond next year and make climate risk disclosure mandatory for major companies from 2025.
In a statement to Parliament today, Sunak said the government would issue the UK’s first Sovereign Green Bond in 2021, subject to market conditions. He also promised that the initial bond would be followed by a series of further issuances designed to meet growing investor demand for green bond instruments.
“This will be the first in a series of new issuances as we look to build out a green curve over the coming years, helping to fund projects to help tackle climate change, finance much needed infrastructure and investment and create green jobs across this country,” said Sunak.
The global green bonds market has surged in recent years, with analyst Moody’s recently projecting total issuance worldwide could grow to between $175bn and $225bn by the end of 2020. But while a growing number of countries, including the likes of Germany and Sweden have issued sovereign green bonds, the UK has yet to do so. Meanwhile, the fast-growing sector has been dogged by concerns that a lack of clarity over what constitutes a green or climate bond could result in some nominally green funding being channelled to support polluting infrastructure.
However, Sunak this afternoon said the UK would, in addition to issuing its first green gilts, seek to implement a green taxonomy that he hoped would provide a common framework for determining which activities can be defined as environmentally sustainable, building on EU’s on-going efforts to develop its own green taxonomy.
The UK taxonomy would take the scientific metrics established by the EU taxonomy as its basis, with a new UK Green Technical Advisory Group established to ensure the approach is fit for purpose for the UK market, according to the Treasury. Sunak said the efforts were aimed at “robustly classifying what we mean by green to help firms and investors”.
Moreover, the Chancellor confirmed plans set out earlier today by the Financial Conduct Authority (FCA) to introduce stricter rules on climate risk disclosure for large companies and investors, in line with the guidelines developed by the global Taskforce on Climate-related Financial Disclosures (TCFDs).
First outlined by the FCA earlier this year, the new rules require all large UK companies with a premium listing – currently representing a market capitalisation of around £1.9tr – to publicly disclose the risks they face from climate change and the net zero transition, or explain why not, by the end of 2023.
Sunak said that from 2025 the rules would be tightened further to make the TCFD guidelines fully mandatory, going beyond the ‘comply or explain’ approach, and making the UK the first country in the world to make climate risk disclosures obligatory.
The upcoming rules will capture a significant portion of the economy, including listed commercial companies, UK registered large private companies, banks, building societies, insurance companies, UK-authorised asset managers, life insurers, FCA-regulated pension schemes, and occupational pension schemes, according to the Treasury.
Sunak said the green finance measures announced today would help position the UK as a “world leader in green finance”.
“As we leave the EU we have an opportunity to set out a new vision for this sector – a vision based not on a race to the bottom, but on a financial services industry that is open, innovative and leads the world in the use of green finance,” he told MPs. “This new chapter means putting the full weight of private sector expertise, innovation and capital behind the critical global effort to tackle climate change and protect the environment.”
Reacting to the Sunak’s statement in Parliament this afternoon, Labour’s Shadow Chancellor Anneliese Dodds said action to ramp up green finance “can’t come soon enough”, but called on the Treasury to go further and not wait until 2025 to bring in mandatory TCFD reporting rules.
She also urged the government to ban overseas fossil fuel financing and loans through UK Export Finance, and criticised the UK’s £5bn green recovery commitments, which she argued paled in comparison with the green stimulus plans from France and Germany that have assigned £27bn and £36bn respectively to climate-related projects.
“Where is this government’s ambition for a green recovery from the coronavirus crisis?” she asked. “And where is the replacement for the Green Investment Bank that the Conservatives sold off?”
Reaction elsewhere to Sunak’s green finance announcements today tended towards cautious optimism. Greenpeace UK’s policy director Doug Parr broadly welcomed moves to make climate risk disclosure mandatory, but warned the new rules must be “compulsory and thorough”.
“The real win would be to make all financial institutions put in place plans to meet the Paris Agreement by the end of next year, steadily choking off the supply of cash to planet wrecking activities,” he said. “Disclosure is a route to making that happen, but not an end in itself.”
Similarly, former Bank of England senior economist Carsten Jung, who now works for the IPPR think tank, said Sunak’s announcements today were “really just a bare minimum of what would be needed to make finance support the climate transition” and labelled green bonds as “largely a cosmetic move”.
He argued the climate risk disclosure rules should also include Scope 3 emissions disclosures for company supply chains and products sold, but that that disclosure in itself would “not do much to advance the climate transition”. Firms should additionally be forced to set binding targets for emissions reductions, he said.
But Stephanie Pfeiffer at the Institutional Investors Group on Climate Change offered a more effusive welcome to the new proposals. “Investors applaud the measures on green finance announced by the Chancellor today,” she said. “The financial impacts of climate change are colossal and pose an unprecedented systemic risk to the UK economy as a whole. Plans for UK green gilts will help to unlock investment in the net zero economy while also supporting the country’s recovery from the pandemic. Mandatory TCFD reporting will help to ensure robust governance and reporting on climate-related risks.
“The UK was one of the first countries to enshrine a commitment to achieve net zero emissions in law. Investors now have greater clarity that the UK is serious about delivering a net zero economy and secure its future as a global leader in sustainable finance. They can count on the support of the investment sector in getting there.”
The moves came as Bank of England Governor Andrew Bailey today confirmed plans to carry out a climate risk ‘stress test’ for financial institutions in June next year, having been forced to delay the move by a year as a result of the coronavirus crisis.
“Our goal is to build a UK financial system resilient to the risks from climate change and supportive of the transition to a net-zero economy,” he said. “Compared to the financial crisis and the pandemic, the risks from climate change are even bigger and more complex to manage. And acting now gives us the best opportunity to manage those risks.”
Meanwhile, Business Secretary and COP26 President Alok Sharma today said global climate action had reached an “important inflection point”, with the torrent of net zero pledges announced by state and private actors in recent months providing evidence of a growing consensus in support of a zero carbon future.
Speaking at the launch of the ‘Race to Zero Dialogues’ today – a series of virtual events being hosted by UN climate change secretariat UNFCCC over the next fortnight – Sharma urged more organisations to commit to achieving net zero emissions and called on countries to boost their short-term climate ambition.
“We know, that to achieve the Paris goals we must halve global emissions over the next decade, and rapidly adapt to our warming climate,” he said. “To do this we must all move faster. Now whilst I recognise that time is short, and that the world is facing an immense challenge with Covid-19 we urgently need to raise our ambition.”
The UK alongside the UN and several other major economies are set to host a Climate Ambition Summit next month aimed at encouraging countries to come forward with more ambitions climate action commitments in support of the Paris Agreement.
Sharma urged regions, cities, businesses and universities to join the UNFCCC-backed Race to Zero coalition, a global alliance of organisations committed to reaching net zero by mid-century at the latest, and called on governments to submit enhanced 2030 climate targets that would put nations on track to reaching net zero.
“The shift to a zero-carbon economy is underway,” Sharma said. “Only by continuing to come together can we build the zero carbon, climate resilient future that is essential for our people and our planet.”
The UK government is expected to publish its own 10 point green recovery plan ahead of the December event, while hopes are also building that Joe Biden’s election victory and his promise to return the US to the Paris Agreement with immediate effect next January will help encourage more countries to announce their own net zero strategies in the coming weeks and months.