Creating the right environment for the future of green finance
This article examines the ESG team’s responses and recommendations to the recent call for evidence from the UK Government to gather industry feedback for the update to the Green Finance Strategy, due to be published in late 2022.
The original strategy was published in 2019 and aimed to align the financial services sector with the UK's Net Zero commitment, direct private investment to support green activities and capture the opportunities presented by the transition to net zero so the UK could become a world leader. The call for evidence sought to understand current progress and how the UK Government can better support the financial services sector to achieve these goals.
The UK's current green finance regulatory framework is inadequate in the context of the current and future climate crisis. While it is largely considered to be one of the leading approaches globally, this is reflective of insufficient global action rather than an excelling UK initiative. The current UK strategy lacks clear action points, particularly regarding the role the private sector must play in the net zero transition.
Apex Group’s ESG team provided responses on a range of topics and offered recommendations which largely fall into two key categories: firstly, as new markets develop regulations, standards, and guidance will be needed to ensure a unified approach, whilst promoting sustainable growth and mitigating accusations of greenwashing. Secondly, the UK Government will need to provide subsidies and financial incentives to accelerate some aspects of the net zero transition.
Standards, Regulations and Guidance
Regulation is required to support the development of high integrity voluntary markets for carbon. Currently, the voluntary market is reliant on certification bodies which are over-stretched and under-resourced. A consistent, regulated process for appraising carbon offset projects will improve project reliability and fairness of capital allocation. Such a standard would require transparency on the methodology used for quantifying emissions avoided or removed, project longevity, vintages of carbon credits, cost of credits (including commission for the broker), assurances of no double-counting and confirmation of project additionality, i.e., that the carbon credit is funding a project that would have not taken place otherwise. While voluntary carbon markets will be key, the emphasis must be on encouraging companies to avoid and reduce emissions, and then considering offsetting.
Standards for disclosures and non-financial data will be required to facilitate access to robust, high-quality data that inform investors about climate-related risks and opportunities. This will increase the volume of data available to investors, as well as their comparability, clarity, and transparency. Standardisation of non-financial data is key for facilitating climate disclosure and it needs to happen at a global scale. This can be achieved through sharing best practices and working toward the convergence of sustainability assessment tools, standards, and taxonomies.
Subsidies and Financial Incentives
The development of voluntary carbon markets could be further enhanced by providing incentives for companies that engage with the voluntary carbon market. Furthermore, the UK government could unlock capital for more innovative, newer projects by providing subsides for the cost of credits, which could have a significant impact on accelerating climate action.
A similar approach could be taken to accelerate public and private investment to achieve the 2030 climate and nature targets in emerging and developing economies. The UK government could start by supporting public and private investment vehicles to encourage private sector participation into sectors and geographies which have historically been deemed too ‘risky’. If the UK government can support with first loss capital, i.e., agreeing to take the first losses in a socially and environmentally beneficial investment, there will be a greater incentive for private sector investors to participate.
It is clear that the UK needs to set robust action points in the update to the green finance strategy to direct private investment into achieving net zero goals. Standards, regulation, and guidance are needed to provide clarity to investors and prevent instances of greenwashing. Subsidies and financial incentives will be required in a number of areas to accelerate investment into riskier and more innovative projects.
Apex Group welcomed the opportunity to respond to the Government’s call for feedback and eagerly awaits the publication of their updated Green Finance Strategy, later this year.
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