Are you investing in the transition to green growth?
In case anyone was still in doubt, the UK’s recent growth figures confirmed the scale of the economic challenges facing the Labour government. GDP grew 0.1% in the third quarter, with activity actually falling in September. Clearly, this is not the ideal backdrop for a Budget that bet on big tax rises for business to secure the country’s financial future. While the figures made painful reading for an administration that came to power on a promise to deliver growth, green shoots are in evidence.
In a time of rising macro-economic uncertainty and geo-political turmoil, the figures were also a blow to the City, which has yet to carve out a clear role in a fragmented, post-Brexit world. There were just 23 IPOs in London last year, less than half the 2022 figure, and only two firms listed in Q3 2024, raising £65 million between them. Equity listings is not the only measure, but the UK’s shrinking global share is regarded as emblematic of a wider malaise. Many favour lighter touch regulation, reflected both in the Financial Conduct Authority’s recent listings review and the tweaks to the UK’s Corporate Governance and Stewardship Codes being implemented by the Financial Reporting Council.
The merits of deregulation are contested by institutional investors. But they are more supportive of another aspect of the previous government’s agenda that is being harnessed to Labour’s growth ambitions for the country and the City. There is growing momentum behind the idea of the UK’s finance sector positioning itself as a hub for green finance, channelling capital to the assets and technologies that will build a more environmentally sustainable future.
Many building blocks are already being put in place, but it is up to the firms in key sectors – from fund management to accounting to banking – to demonstrate their ability to play a leading role in the UK’s green finance transition. Asset and wealth managers will provide a key channel for the supply of transition finance – a point underlined at COP29 – but this means aligning their business models as well as their product range with the government’s net zero ambitions.
Green building blocks
Just ahead of the budget, the government-sponsored Transition Finance Market Review laid out recommendations for scaling a “high-integrity” market for transition finance that can support the move to a net zero economy in the UK and globally. The report called for considerable change, but it also pointed to an opportunity that runs into the trillions, noting that the UK is already “uniquely positioned to become a leading hub”. Importantly, Labour’s actions have suggested they are serious about grasping that opportunity, from instituting GB Energy and the National Wealth Fund (NWF), to plans to consolidate the pensions sector, to the sustainable finance actions flagged in the Chancellor’s recent Mansion House speech on the Green Taxonomy and sustainable reporting.
It’s been far from a linear path since then-Chancellor Rishi Sunak brandished his green credentials – and briefcase – at COP21, but it’s worth noting the elements of continuity UK policy toward driving and financing the green transition. The UK was quick to adopt first legally binding net zero commitments and then the reporting requirements outlined by the Task Force on Climate-related Financial Disclosures. It has also been alert to the need to reach beyond these, with HM Treasury instrumental in the creation of the UK Transition Planning Taskforce (TPT) to establish a ‘gold standard’ that will shape global norms for firms’ transition pathways. Having built on its initial disclosure framework with tailored transition planning guidance to financial institutions and other sector sectors, the TPT has handed on the baton to the IFRS Foundation, whose sustainability-related reporting rules the UK is widely expected to adopt.
Another consistent theme has been the need to mobilise one of the world’s largest pots of long-term investment to address the infrastructure challenges within its own borders. Under the Conservatives, this included the Production Finance Working Group’s recommendations for pension fund investment in less-liquid assets, and the Mansion House Compact, under which nine defined contribution pension providers pledged to invest 5% of their default funds into unlisted assets – including green infrastructure – by 2030. Both Labour’s NWF and its pension reform plans build on these by encouraging investment at scale in renewable energy and other sectors in need of transition finance, from manufacturing to transport to agriculture.
Grasping the opportunity
The net zero transition adds up to a significant opportunity for asset and wealth managers to provide institutional and retail investors with vehicles that offer sustainable returns and outcomes. Many are already grasping it by launching transition-related products and services, with dozens already engaged with obtaining a Sustainability Improvers label (explicitly designed for investments in companies that are on “a credible path to net zero”) under the FCA’s Sustainability Disclosure Requirements regime.
But product development and marketing is only part of the picture. Transition planning guidance for financial institutions is now expanding, and mandatory requirements are rapidly approaching.
As mentioned above, transition plans are not yet mandatory in the UK, but indications are that this will happen sooner rather than later. The EU’s Corporate Sustainability Reporting Directive does mandate transition plans for larger firms and early drafts of detailed guidance have been issued for consultation. There are also plans for a central body to coordinate transition finance frameworks in both the UK and the EU.
Mandatory transition disclosures are likely to require firms’ future strategies are not only net zero but also nature positive. Not one but two finance sector coalitions issued draft guidance on nature-related transition planning for companies and financial institutions at COP16 last month. Many large financial institutions have not waited for regulation, however, with Allianz, Aviva, Citi and HSBC among those to have already shared the first iterations of their transition plans with stakeholders. Indeed, recent research found that 43 of the world’s largest 100 financial institutions have published transition plans, although these only cover 34% of their collective assets under management.
A platform for transition
Both transition finance and transition planning are still relatively immature and imperfectly defined concepts, offering a range of opportunities for service providers. A recent Morningstar Sustainalytics study of transition readiness found that few firms or funds globally are on a net zero pathway. But the market is moving fast as evidence mounts of the urgent need to identify more clearly the assets and projects that must turn from brown to green in order to get both the UK and the world back on track for a net zero and nature positive future.
According to The Disruption House’s ESG Index, which assesses the relevance and quality of firms’ disclosures across 22 environmental, social and governance topics, both wealth and asset managers are performing creditably overall – albeit with evidence of a lag between disclosure and action. This suggests that at least some firms in the sector have the basis for developing comprehensive transition plans as part of their increased orientation toward the transition finance market.
Transition finance is an opportunity for the whole of the UK’s finance sector, but one that requires investment on a number of levels. “The front end of the company’s report needs to match what’s in the back end. The numbers need to add up to show that this is a real plan,” as former TPT Co-head Kate Levick recently told the Institute of Chartered Accountants in England and Wales.
COP29 saw UK Prime Minister Keir Starmer reiterate the UK’s green growth ambitions, albeit with investors needing more policy ‘scaffolding’. But it also underlined that private finance will have to play a critical role in funding climate mitigation and adaptation projects around the world. The growth opportunities arising from this transition challenge will belong to those that have most effectively aligned their business models to do so.
