THERE is no one set definition for ‘greening finance’. But, when the Government launched its Green Finance Strategy on July 2, 2019, it stated that ‘greening finance’ meant ‘ensuring current future and 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’.
Its strategy, which brings together work from the government, regulators and the private sector, has three core elements – Greening Finance, Financing Green and Capturing the Opportunity.
We have explained above what they mean by ‘Greening Finance’. The second core element, ‘Financing Green’, refers to ‘the acceleration of finance to support the delivery of the UK’s carbon targets and clean growth, resilience and environmental ambitions as well as international objectives’.
The third core element, ‘Capturing The Opportunity’, is about ‘ensuring UK financial services capture the domestic and international commercial opportunities arising from the greening of finance such as climate related data and analytics and from ‘financing green’, such as new green financial products and services’.
On October 18, 2021, HM Treasury published a document called ‘Greening Finance: A Roadmap To Sustainable Investing’.
It’s described as “an ambitious plan by the Government to make the UK the best place in the world for green and sustainable investing”.
The document published is Phase One and it outlines the Government’s long term goal to green the financial system and align it with the UK’s world leading net-zero commitment.
This is a long term plan which will happen in three different phases – informing, acting and shifting.
The first phase, ‘informing’, means ensuring decision useful information regarding sustainability is available to financial market decision makers. Phase two, ‘acting’ refers to mainstreaming the information into business and financial decisions and phase three, ‘shifting’ refers to financial flows across the economy shifting to align with a net zero and nature positive economy.
You can see how powerful this will be as the government will be ensuring that the information exists to enable every financial decision to factor in climate change and the environment.
Greening Finance
This HM Treasury document focuses on the first phase, which will be delivered through new economy-wide Sustainability Disclosure Requirements. It sets out the routes on how it will be implemented for different sectors of the economy and provides details on those requirements.
The document refers to those pathways as;
- Integrated – investment products, financial services firms, and real economy corporates will be required to report consistent information on sustainability.
- Streamlined – the regime will streamline existing disclosure requirements such as the UK’s commitment to make reporting aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) mandatory – with new requirements, including on reporting environmental impact.
- Consumer-focused – investment products will need to set out consumer-focused disclosures showing the impact, risks and opportunities of the activities they finance on sustainability. This will be accompanied by a consumer-facing label developed by the Financial Conduct Authority (FCA) so that consumers can make informed investment decisions that take sustainability into account.
- Credible – asset managers, asset owners and investment products will be required to substantiate sustainability claims they make.
- Robust – disclosure requirements will include reporting under the UK Green Taxonomy, which will provide a robust list of economic activities that count as environmentally sustainable.
- In line with international standards – the document states that the UK is a strong advocate for international standards for sustainability reporting, and is preparing the ground to adopt international standards in this area (subject to consultation).
The Phase One document also states that the information will only be impactful if investors use it. It also calls the pensions and investment sectors to action, outlining the government’s expectations that they will use the information generated to help shift their financial flows to align with a net-zero, nature-positive economy. It also highlights how the UK is leading international efforts to bring about global and systemic change in the financial system.
You can see where this is going. Greening Finance is the future.