Climate Bonds sets out proposals for UK leadership in sustainable finance

Following last week’s general election, the United Kingdom has a chance to lead in sustainable finance.

The Climate Bonds Initiative says that investors in the UK are looking for clarity and guidance in sustainable investment, and emerging markets are looking for international financial support for their green ambitions.

The new government can choose to lead investors and industry actors into a more sustainable economy by providing policy certainty for a green future.

The United Kingdom already has many of the building blocks in place for a strong, ambitious, and facilitative sustainable finance policy environment.

Climate Bonds argues that it’s time to bring them together, building a UK economy that is more sustainable, resilient, and prosperous – and that includes building the City of London as a centre for finance for climate action.

Climate Bonds proposes five policy steps:

Make the transitions central to UK climate action
In coming years all economies need to transition to being low-carbon and climate resilient. Transition is about managed, if rapid, change that maximises economic wealth opportunities and ensures that the transition is just.

Industry and capital need science-based guidance on necessary trajectories of change needed. And policy and incentives are needed to drive those transitions.

The UK Taxonomy provides a clear opportunity to do so by providing that guidance on what is eligible for transition financing. Forward-looking guidance and sectoral pathways are critical to unlocking transition finance flows. Including clear pathways in the UK Taxonomy will facilitate this kind of credible transition across the economy.

The taxonomy should also include resilience criteria covering physical, economic, social and ecosystem dimensions of resilience to address the major adaptation finance gap.

The criteria would guide huge swathes of expenditures in infrastructure, housing, health, etc. to sustainable financing; it would also expand the financing potential of programmes like the green gilt.

Harmonisation with other taxonomies such as the EU would also encourage the use of the UK Taxonomy internationally, enabling cross-border investment and encouraging sustainable finance transactions to migrate to the City.

Transition plans will form the basis for credible sustainable financing, particularly Sustainability-Linked Bonds – Climate Bonds says it is are already seeing correlations between robust transition planning and quality SLB issuance.

The UK should extend existing reporting requirements to make transition planning mandatory and to apply to financial institutions. These should be integrated into existing reporting requirements to reflect their central role in an entity’s planning process – a transition plan is a business plan for the future. Bank transition planning could help tilt lending to green. Green lending currently massively lags bonds, with the former at USD30bn/year and the latter at USD870bn/year.

Sustainable finance regulations provide financial actors with the credibility and certainty they need to go about their business. The planned Regulatory Innovation Office can ensure green regulations are not layered on top of existing regulations, providing an efficient, streamlined regulatory landscape for UK businesses.

Use green gilts to finance a national Transition Opportunities Plan
A national Transition Opportunities Plan is an economic development plan that demonstrates how the country will respond to climate risks and take advantage of new opportunities.

Linking the green gilt framework to the Transition Opportunities Plan would provide a clear signal of the government’s climate commitments and set out a best-practice example to the market.

Only 2% of the 1.8tn gilt market is specifically allocated to climate action, compared to 18% in France, and 46% in Chile.

The government can ensure new debt is issued as green gilts and rolling over outstanding debt as green. Expanding the UK Taxonomy to include resilience criteria will help increase this proportion.

Green public sector procurement and capital investment plans
The government should introduce green public procurement policies aligned with the UK Taxonomy. Green public procurement will drive the growth of a green supplier’s market, providing UK industry with crucial demand certainty for goods like electric vehicles, green steel, and green cement.

Direct ministries to align their capital investment plans with the UK Taxonomy. The national Transition Opportunities Plan can provide further guidance on this.

Instruct the proposed GBP7.3bn National Wealth Fund to use the Taxonomy to guide investments, ensuring that it finances a net zero resilient future for the UK. With the fund aiming to crowd in GBP3 for every GBP1 invested, this would have an outsize effect(link is external) on UK investment

Drive international finance through a green trade window, CBAM, and UK export finance
Trade policy provides an opportunity for the UK to influence transition globally and ensure the resilience of UK trade to physical climate and transition shocks. The UK is already planning a carbon border adjustment mechanism (CBAM), similar to that in the EU, which would apply UK carbon price to imports – ensuring a level playing field for UK business.

Developing a green trade window, providing lower tariffs for low carbon (Taxonomy-aligned) imports would compensate for CBAM tariff increases. While WTO members have discussed such an agreement, they have so far failed to reach a consensus.

Greening export guarantees, providing preferential terms and fast-track applications for Taxonomy-aligned projects, would transform UK exports. UK Export Finance hasn’t financed fossil fuel extraction since 2021 but it retains exposure to existing projects and still supports other carbon-intensive projects. As a member of the Net Zero Export Credit Agencies Alliance, it can take on a more active role in facilitating the transition(link is external). The UK can follow the example of Germany and tilt all guarantees to align with the Taxonomy.

Champion green DFIs, encouraging crowding in of private finance
A focus on catalytic financing will maximise the impact of the UK Infrastructure Bank, the British Business Bank (BII), UK Export Finance, British International Investment, and the planned National Wealth Fund, which is expected to target a mobilisation ratio of GBP3 for every GBP1 of public investment.

BII already has a strong focus on climate action. It can take a global leadership role, championing the role of development finance institutions (DFIs) and national development banks in crowding in private finance for climate action. While 87% of European DFIs have a climate target, only 35% have a private capital mobilisation target.

BII can foster collaboration with other DFIs in concessional finance provision, accessibility, and coordination. It can also leverage its expertise to provide capacity building and lessons learned to other national development banks looking to increase efforts on climate financing and private investment mobilisation.

The UK has an opportunity to drive sustainable finance and climate action through application of strategic fiscally-efficient policies.


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