UK Updates Green Finance Strategy, Proposes ESG Ratings Regime
The UK government recently updated the green finance strategy, which the UK regulators—the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC), the Bank of England (BoE), and The Pensions Regulator (TPR)—have welcomed. The government will work closely with these financial regulators and the environmental regulator in England, the Environment Agency, to ensure that the regulatory framework in UK supports the growth of green finance. Along with the green finance strategy, HM Treasury is seeking comments, until June 30, 2023, on the future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers.
The Green Finance Strategy is a comprehensive blueprint that will unlock green finance and investment, reinforcing UK at the forefront of this market and enabling it to deliver on the climate and nature objectives. It sets out the actions the UK government will take to support the financial services sector and investment community to invest in the green economy, prosper from a transitioning global economy, provide information and tools to the financial sector to manage risks from climate change and nature loss, and support the global transition. The strategy sets out how the UK Government will pursue its ambition to become the world’s first Net Zero-aligned Financial Center and how the UK government is working with a range of public financing bodies to commercialize and finance the green technologies needed for the transition. The key activities to deliver on the objectives include:
- Publish a series of net zero investment roadmaps throughout 2023 and a nature investment roadmap by 2024.
- Consult on the UK Green Taxonomy in Autumn 2023 as well as consult on the steps and interventions needed to mobilize additional finance through high-integrity voluntary markets and to protect against the risk of greenwashing. After the Taxonomy is finalized, the government will initially expect companies to report voluntarily against the taxonomy for a period of at least two reporting years after which it will explore mandating disclosures.
- consult on the introduction of requirements for the largest companies in UK to disclose their transition plans. This is supported by the UK government-convened Transition Plan Taskforce (TPT), currently developing best practice for companies and investors seeking to disclose transition plans, ensuring quality and consistency. The consultation will take place in Autumn/Winter 2023, once the TPT has finalized its framework.
- set up a framework to assess the International Sustainability Standards Board (ISSB) standards for their suitability for adoption in the UK as soon as the final standards are published (expected in Summer 2023).
- launch a call for evidence on Scope 3 greenhouse gas (GHG) emissions reporting, to better understand the costs and benefits of producing and using this information. It will update the Environmental Reporting Guidelines, including for Streamlined Energy and Carbon Reporting, which provides voluntary guidance for UK organizations.
- work with industry partners to improve the approach to 2023 Green Finance Strategy climate resilience assessment and disclosure through the development of adaptation metrics and guidance. The final approach will be set out alongside the adaptation finance deliverables and action plan in 2024.
At present, UK is the largest green loans center with GBP 33 billion issuance in 2022. More than 45 green mortgage products are available in the UK. The Green Financing Program has so far raised ~GBP 26.6 billion in green gilts while the UK Infrastructure Bank, which was established in 2021, is channeling GBP 22 billion of financing into green projects and growth sectors. As the consideration of ESG factors increases, firms and consumers increasingly rely on related services, such as ESG ratings and data. ESG ratings—which assess firms’ management of ESG risks, opportunities, and impact—are a key element. Thus, developing the market for credible ESG ratings is a real opportunity to be seized by the UK, building on its strengths as an open, innovative, and sustainable global financial center. The potential new regulatory regime on which the government is consulting—one of the first of its kind globally—would be designed to deliver these aims.
The consultation on future regulatory regime for ESG ratings providers sets out a proposed policy approach to bringing ESG ratings providers into the UK regulatory perimeter. HM Treasury is consulting on whether regulation for providers of ESG ratings should be introduced and, if so, what could be the potential scope of such a regulatory regime. The regulatory perimeter for this is the scope of firms and activities that are regulated by the financial services regulators, including FCA and the Prudential Regulation Authority (PRA). It is set by HM Treasury in legislation, as the government department responsible for financial services policy. HM Treasury proposes that the new regulated activity would cover providing an ESG rating to be used by persons in the UK in relation to an Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) specified investment. This proposed approach requires ESG ratings providers to understand how the ESG rating they are providing is being used. This may be through agreements such as contractual relationships between an ESG ratings agency and a user, including licensing agreements (for example benchmark indices) or tailored services (for example metrics targeted at regulated disclosures). There are ESG ratings of other things, which may not be clearly in scope of specified investments, such as some voluntary carbon credits.HM Treasury will consider whether these kinds of ESG ratings should be accounted for within the scope of this regulation or through other channels. HM Treasury also seeks views on the best way to ensure a proportionate but effective scope of regulation focused on ESG ratings sector in the UK.
Keywords: Europe, UK, Banking, ESG, Climate Change Risk, Sustainable Finance, Green Finance Strategy, Net Zero Economy, ESG Ratings, Greenwashing, Green Taxonomy, FCA, BoE, UK Government, HM Treasury
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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