The financial sector and the UK’s net zero transition

This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.

First Report of Session 2023–24

Author: Environmental Audit Committee

Related inquiry: The financial sector and the UK’s net zero transition

Date Published: 28 November 2023

Download and Share

Contents

Introduction

The role of the financial sector in achieving net zero emissions by 2050

1. In May 2021 the International Energy Agency (IEA) produced a roadmap for the global energy sector to achieve net zero by 2050, stating that while the political consensus on reaching net zero is growing, the global requirements needed are poorly understood. The Net-Zero Emissions by 2050 Scenario showed what the global energy sector needs to achieve to limit global temperature rise to 1.5°C and argued that governments would need to do more than meet their Nationally Determined Contributions (NDC) and net zero pledges.1

2. In its latest synthesis report, the Intergovernmental Panel on Climate Change (IPCC) concluded that projected CO2 emissions from existing fossil fuel infrastructure without additional abatement would exceed the remaining carbon budget for 1.5°C.2 Furthermore, globally across all sectors there are indicators of an “implementation gap” for policies addressing climate change mitigation applied as of the end of 2020 and uneven policy coverage across the board, which could lead to global warming of 3.2°C by 2100.3 This far exceeds the Paris Agreement target of limiting global temperature rise to 1.5°C and would have catastrophic consequences for wildlife and communities around the world.4

Box 1: Environmental, Social and Governance (ESG) investing

ESG is a framework that allows potential investors to study the behaviour standards that a company has set to determine whether their values align when considering potential investments. The criteria are broken down into three areas:

Environmental: how corporate policies address climate change and protect nature.

Social: how the entity engages with internal and external stakeholders including the local community.

Governance: how the entity responsibly manages its internal controls, leadership, and shareholder rights.

Source: Investopedia, What is Environmental, Social, and Governance (ESG) Investing?

3. Financial institutions, by integrating societal benefits into their capital allocation, can play a major role in the transition to net zero. While governments hold legislative responsibility, financial institutions can encourage decarbonisation by aligning their investment and lending decisions with social risks, a crucial factor in supporting net zero transition plans. We were told in evidence that as of June 2022, over 130 countries, representing 90% of global GDP, have made net zero commitments, requiring firms to decarbonise their business activities and expand their strategies, technologies, policies and initiatives to address climate change.5

4. Aligning business decisions with sustainability is something that consumers also expect. According to the Financial Conduct Authority (FCA) Financial Lives 2022 survey, 74% of consumers surveyed agreed that “environmental issues are really important to them”, while 79% agreed that “businesses have a wider social responsibility than simply making a profit”.6

5. The global financial sector has responded to the threat of climate change by developing climate finance products, an area that has grown substantially in recent years. The first green bonds were issued in 2007, and since then the global market of Green, Social, Sustainability, Sustainability-Linked and Transition (GSS+) debt has reached a cumulative volume of US$4.2 trillion.7 By 2026, Environmental, Social and Governance (ESG) Assets under Management (AuM) are forecast to reach US$34 trillion, increasing ESG share of all AuM from 14% in 2021 to 21%. We received evidence that to fulfil global net zero commitments requires an additional US$3 trillion of investment in energy infrastructure alone.8 At the same time, we heard that in 2021 alone global banks provided financing for approximately US$742 billion towards fossil fuels.9

Figure 1: ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years (US$ trillion)

A bar chart to show the difference in global assets under management between 2021 and 2026. The chart shows environmental, social and governance assets as separate from other assets under management in US dollars and on pace to increase from 18.4 trillion dollars to 33.9 trillion dollars, making up 21.5% of total global assets by 2026.

Source: “ESG-focused institutional investment seen soaring 84% to US$33.9 trillion in 2026, making up 21.5% of assets under management: PwC report”, PwC, 10 October 2022

6. The UK is a recognised global leader in green finance. The 11th edition of the Global Green Finance Index (GGFI 11) was published in April 2023, evaluating the green finance offerings from 86 major financial centres around the world. The index reports that London retains its place, which it has held for four years running, as the number one financial centre for commitments to environmental improvements both directly in finance and across the economy.10

Figure 2: The top five green financial centres index scores over time for each Global Green Finance Index

A line chart to show the change in index scores over time for the top five green financial centres over each of the eleven annual global green finance index reports. The chart shows that London continues to retain its number one place for the fourth year in a row, however other centres, namely New York, Stockholm, Geneva and Luxembourg are bridging the gap at the top.

Source: Long Finance, Global Green Finance Index 11, April 2023, p 11

7. The UK hosted the 26th Conference of the Parties (COP26) international climate conference in Glasgow from 31 October to 12 November 2021. For its presidency, the UK Government included the transition of finance models as a priority. It particularly focused on:

  • Doubling the adaptation finance commitment: an agreement to double levels of adaptation finance from 2019 by 2025 across all developed countries;
  • New country-led models for financing climate goals: collaborating internationally to support specific countries using Just Energy Transition Investment Plans;
  • Greening the global finance system: committing to an increase in ambition on climate action by the Multilateral Development Banks, alongside the launch of the Glasgow Financial Alliance for Net Zero and the International Sustainability Standards Board; and
  • Long term finance: agreeing a post 2025 climate finance goal and associated work programme to work alongside the United Nations Framework Convention on Climate Change (UNFCCC) Standing Committee on Finance.11

At COP26, the UK Government announced its ambition for London to become the first net zero financial centre in the world, and called on other countries to follow suit.12

The UK’s Green Finance Strategy

8. The UK Government published its first Green Finance Strategy in 2019.13 Its two overall objectives were to align private sector financial flows with clean, environmentally sustainable and resilient growth, and to strengthen the competitiveness of the UK financial sector. In October 2021 it published “Green Finance: A Roadmap to Sustainable Investing”, which focused on ensuring that the information exists to enable every financial decision to factor in climate change and the environment.14 In March 2023 the UK Government provided a substantial update to its 2019 Green Finance Strategy, setting out its ambition to place the UK at the forefront of green finance in global markets.15 The strategy outlined five key objectives (see Box 2).

Box 2: The UK Government’s five key objectives for green finance

UK financial services growth and competitiveness: supporting the financial services sector to prosper from a transitioning global economy;

Investment in the green economy: securing private investment in the UK’s net zero and nature-related goals;

Financial stability: managing the risks to the economy from climate change and nature loss;

Incorporation of nature and adaptation: incorporating nature and climate adaptation into the green finance policy framework; and

Alignment of global financial flows with climate and nature objectives: collaborating with international partners to support the alignment of global financial frameworks and stimulate investment towards emerging and developing markets.

Source: HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 7

9. The strategy does not show how the Government will report the success of its Green Finance Strategy, however it does refer to a “Net Zero-aligned Financial Centre Framework”, as shown in figure 3.

Figure 3: The Government’s Net Zero-aligned Financial Centre Framework

A flow chart to show the Government’s framework to be a net zero-aligned financial centre. The chart shows how government accountability flows into the financial sector transition pathway, and how in turn the tools for transition, including information disclosure, cost of capital and access to liquidity, feed into key performance indicators through companies, financial markets, and the real economy.

Source: HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 36

10. Alongside the Green Finance Strategy, the Government also published several other relevant documents. These include “Powering Up Britain”—the Government’s plan for enhancing energy security, taking advantage of the economic opportunities of the transition, and delivering on its net zero commitments; and the Nature Markets Framework—a framework for scaling up private investment in nature recovery and sustainable farming.16

The Glasgow Financial Alliance for Net Zero

11. GFANZ, a voluntary alliance, is the world’s largest coalition of financial institutions committed to transitioning the economy to net zero greenhouse gas emissions. Its aim is to coordinate efforts across all sectors of the global financial system to accelerate the transition to a net-zero global economy through eight sector-specific alliances (see Box 3).17 Participants in these alliances, such as the Net Zero Asset Owner Alliance and the Net Zero Banking Alliance, set their own goals and pathways towards achieving net zero emissions. In November 2021, GFANZ had over US$130 trillion of private capital committed to net zero,18 and as of COP27 in November 2022 it had over 550 members.19

Box 3: GFANZ sector-specific alliances

Financial institutions can join GFANZ by joining one of eight sector-specific alliances. These comprise:

  • Net Zero Asset Managers initiative;
  • Net Zero Asset Owner Alliance;
  • Paris Aligned Asset Owners;
  • Net Zero Banking Alliance;
  • Net Zero Financial Service Providers Alliance;
  • Net Zero Insurance Alliance;
  • Net Zero Investment Consultants Initiative; and
  • The Venture Climate Alliance.

Source: GFANZ, Sector-specific alliances

12. In November 2022, GFANZ published a progress report regarding its activities since its launch, which include guidance on net zero transition plans, policy recommendations to help build a net zero economy and meet the goals of the Paris Agreement, and work to support and develop initiatives to scale financing in emerging markets and developing economies.20 GFANZ has worked with the UK Government’s Transition Plan Taskforce on guidance alignment with global standards, which we consider in more detail in Chapter 2.21

13. Several high-profile companies have left the GFANZ initiative, starting with Vanguard, a global asset management firm based in the US, in December 2022. It was reported in the Financial Times that it decided to withdraw to “make clear that Vanguard speaks independently on matters of importance to our investors”, with environmental groups accusing Vanguard of duplicity and that “[joining GFANZ] was an exercise in greenwashing”.22 Since giving oral evidence to this inquiry AXA, an insurer, has decided to withdraw from the Net-Zero Insurance Alliance. Writing to us in July 2023, AXA explained that this was due to increased political pressure on companies that participate in climate initiatives in the United States, a region in which AXA has a significant footprint. However, it emphasised to us that it remained committed to its net zero commitments and decarbonisation strategy.23

About this inquiry

14. We launched this inquiry in May 2022 to examine the role of financial institutions in meeting the UK Government’s climate and environment targets, as this was a significant focus of the UK’s presidency of COP26. We were particularly interested in exploring:

  • Corporate approaches to the financing of existing and planned fossil fuel projects;
  • The potential effectiveness of the financial sector, including through alliances such as GFANZ, in encouraging the decarbonisation of the economy in time to limit global temperature rise to 1.5°C;
  • Pathways to reducing investment in fossil fuel extraction;
  • Current and planned investment in renewable energy generation, distribution and storage;
  • The effect (if any) on the pace and scale of disinvestment plans of disruption to supply chains and energy markets arising from Russia’s full-scale invasion of Ukraine, and what is being done to mitigate any such effects; and
  • Likely pathways to the responsible retirement of fossil fuel assets, in a way which is compatible with the UK’s national interest, reducing the risk of stranded assets and meeting the UK’s international climate obligations.

15. We received 39 written evidence submissions in response to our call for evidence. We also wrote to several UK signatories of GFANZ about their net zero investment policies, receiving 43 written responses.24 The Carbon Tracker Initiative reviewed and analysed the published responses and submitted this analysis to us as evidence.25 We held four public evidence sessions, hearing from fourteen witnesses including academics, financial institutions, policy makers, environmental campaigners, and thinktanks. To conclude the oral evidence to the inquiry we heard from Baroness Penn, Treasury Lords Minister, HM Treasury; Fayyaz Muneer, Deputy Director for Green Finance and Prudential Policy, Financial Services Group, HM Treasury; Lord Callanan, Parliamentary Under-Secretary of State (Minister for Energy Efficiency and Green Finance), Department for Energy Security and Net Zero; Amy Jenkins, Deputy Director, UK Net Zero Investment and Workforce, Department for Energy Security and Net Zero; and Zoe Norgate, Deputy Director, International Net Zero: Green Finance and Capability, Department for Energy Security and Net Zero.

16. We are very grateful to all of those who took the trouble to submit written evidence, who provided oral evidence, and who otherwise assisted us in this inquiry.

17. In Chapter 1 we will consider the balance between investing in fossil fuels and renewable energy sources in order to meet the UK’s net zero targets. In Chapter 2 we focus on data and disclosure when formulating transition plans and the standards that can be adhered to both nationally and globally. Chapter 3 examines securing private investment in net zero and the part that carbon pricing can play as part of a changing global market. In our last chapter, we consider the UK Government’s position as a global leader in green finance and the effect its policies have on the net zero transition and the implications for local authorities.

1 The financial sector’s impact on energy security

18. In this chapter we examine the balance between investing in fossil fuels and renewable energy in order to meet net zero, and how recent concerns about energy security in light of Russia’s full-scale invasion of Ukraine have affected that balance.

Continued reliance on fossil fuels

19. A 2022 report found that since 2016, 60 of the largest private banks financed US$4.6 trillion in fossil fuels since the Paris Agreement.26 It also assessed the investments of 30 of the largest asset managers headquartered in the US and Europe (seven of which are headquartered in the UK) and found combined holdings of US$82.5 billion in companies involved in coal expansions, and US$468 billion in 12 major oil and gas companies.27 The Guardian reported in September 2023 that banks have “helped fossil fuel companies to raise more than £869 billion from the global bond markets since the Paris climate agreement”, which entered into force in 2016.28 In November 2023 it was reported that research into the green finance credentials of global banks found a “structural lack of transparency” as only four banks that were investigated published information on how they calculate their targeted green finance activity. The report suggests that this could lead to a lack of clarity around the targets they are setting and their subsequent reporting”.29

20. In its 2021 report “A Roadmap for the Global Energy Sector”, the IEA argued that due to a drop in oil and natural gas demand, no new oil and gas fields are required “beyond those that have already been approved for development”.30 In a September 2023 update it reiterated that:

Declines in fossil fuel demand are sufficiently steep that there is no need for new long lead time upstream oil and gas conventional projects, nor for new coal mines or mine extensions.31

Figure 4: Necessary reduction in demand for fossil fuels over time to show pathway to net zero by 2050 in Exajoules (EJ)

A line chart showing the necessary reduction in demand for fossil fuels between 1990 and 2050 to meet net zero targets. The chart shows coal, oil and natural gas in exajoules and that demand needs to reduce significantly to 88 exajoules from a peak of 511 exajoules in 2022 to reach net zero in 2050.

Source: IEA, Fossil fuel supply: Net Zero Emissions Guide, September 2023

21. Mark Campanale, Founder and Director at the Carbon Tracker Initiative, told us that over the past decade global financial markets have seen 2,300 coal, oil, and gas Initial Public Offerings (IPOs), raising over US$600 billion.32 In contrast, renewable energy IPOs raised only US$56 billion during the same period.33

Figure 5: Current reserves of fossil fuels left in years as of 2020

A bar chart to show the current fossil fuel reserves left as of 2020. The chart shows coal, oil and gas reserves in years and that existing companies have decades of reserves left, particularly in coal.

Source: Our World in Data, Years of fossil fuel reserves left, 2020

22. The UK has still had new fossil fuel IPOs despite existing companies having decades of reserves,34 and the UK Government has pressed ahead with the expansion of new fossil fuel investments.35 Mark Campanale told us that approving new fossil fuel IPOs has a knock-on effect on pension funds that benchmark against these markets. When the markets against which they are benchmarked become more carbon intensive, so too do their investments become more carbon intensive, while sitting alongside their decarbonisation goals.36 Fossil fuels continue to attract more investment capital than renewables, with 90 cents going to low-carbon energy sources for every US$1 put towards fossil fuels.37 Mark Carney, UN Special Envoy for Climate Action and Finance, and Co-Chair of GFANZ and former Governor of the Bank of England, stressed to us that this ratio needed to quadruple by 2030.38

23. We received mixed views on whether the financial sector needed actively to phase out investment in fossil fuels in order to meet net zero. Some were of the view that it does.39 Some financial institutions have their own fossil fuel exclusion policies: the Investment Association pointed out that signatories to GFANZ’s Net Zero Asset Managers initiative require policies to phase out fossil fuel investments.40 Aviva told us that it exited the London fossil fuel power generation market in January 2019.41 However, analysis by Carbon Tracker of the 43 letters we received from financial institutions found that only 20% of respondents had clear fossil fuel financing statements publicly available on their websites. Carbon Tracker found that most respondents were not interested in retiring their fossil fuels assets, stating that to do so was impractical, or incompatible with considerations of just transitions or energy security. We explore both these issues in more detail later in this report.42

24. Only a minority of respondents had fossil fuel policies that covered all fossil fuels and expansion projects. Some had restrictions for ESG-focused portfolios, but lacked firmwide exclusion policies. Many respondents argued that they needed to continue to finance fossil fuel companies in order to assist with their decarbonisation strategies. Some financial institutions decided to stop investing in companies after such attempts to encourage them to transition failed, arguing that the publicity around that decision can have a powerful impact.43 Legal and General gave its view as to why financial institutions should continue investing in fossil fuels and why unilateral divestment was incompatible with net zero:

Some high-emitting companies will have an important role in developing and investing in the solutions required by the broader economy in their transition plans, such as renewable energy, infrastructure or carbon capture. While selective exclusions have a role to play, unilaterally divesting holdings is, therefore, not guaranteed to lead to the decarbonisation of the real economy and indeed could impede necessary investment in climate solutions.44

25. In December 2022 HSBC was the first large multinational bank to announce that it would stop funding new oil and gas projects. Tim Lord, UK Head of Climate Change at HSBC, told us that the three aspects driving this policy change were:

i) Driving transition in the real economy to reduce greenhouse gas emissions;

ii) Enabling an orderly and robust transition to build long term energy security; and

iii) Supporting a just transition.45

This applies to asset financing only and therefore financing to companies that have oil and gas expansion plans are still part of HSBC’s transition process.46

26. However, HSBC appears to be an outlier among financial institutions. Carbon Tracker’s analysis of the letters from financial institutions that we received found that most avoided giving a specific position on the IEA’s finding that no new fossil fuels investments are needed. Many argued that the timing of the IEA’s report—May 2021—was not representative of the current economic environment, and that calls for no new expansion were hard to justify. For the same reason as their continued investment in fossil fuels, some argued that in order for the transition in developing countries to be equitable, they needed to continue to finance new fossil fuels projects there too.47 In its recent announcement on new oil and gas licensing in the North Sea, the UK Government reiterated its target of achieving net zero by 2050 and argued that domestic oil and gas will “increase the UK’s energy security and reduce dependence on higher-emission imports, whilst protecting more than 200,000 jobs”.48

The risk of stranded assets

27. The continued financing of fossil fuels alongside net zero goals risks the creation of stranded assets.

Box 4: What are stranded assets and how do they become stranded?

Stranded assets are assets which, due to changes in the market, devalue significantly, and can even become liabilities to the companies that own them. Reasons for their change in value could include:

  • Changes in consumer spending habits;
  • Fluctuations in the overall economy;
  • New legislation rendering the asset unsellable; and
  • Global events that could make retrieving the asset too costly for a business.

Source: Corporate Governance Institute, What are stranded assets, and why are they important?

28. It is estimated that half the world’s fossil fuel assets, valued between US$11 trillion and US$14 trillion, will become stranded by 2036 under a net zero transition,49 with those most exposed to this risk including individual investors, banks, pension funds, insurance companies and universities, among others.50

29. The UK Government states in its Green Finance Strategy that:

From increasingly frequent and severe weather events causing damage to infrastructure and supply chains, to changing consumer expectations and preferences shifting demand for certain products and services, companies and their investors need the right policies in place to support them in managing these risks and avoiding stranded assets.51

30. Carbon Tracker has identified the City of London as one of the four financial centres in the world where stranded asset risk exposure for oil and gas assets is concentrated.52 Several financial institutions acknowledged in evidence the risk of stranded fossil fuel assets, and said that this had increased due to Russia’s full-scale invasion of Ukraine disrupting supply chain and energy markets, and leading to investors and companies in the real economy to divest, or consider divesting, from assets linked to Russia.53

31. The Grantham Institute at the London School of Economics argues that “the economic impact of stranded assets could amount to trillions of dollars”, and that beyond investors, if infrastructure was phased out too soon, that could have a knock-on effect on jobs and income in local communities, “with the potential to exacerbate regional inequalities”.54 Mark Carney argued that there was a role for governments to ensure that stranded assets were disposed of responsibly, telling us that “it’s very difficult to have a just transition without active engagement and support of governments”.55 E3G wanted the Government to do more to support a managed phase-out of fossil-fuel investment, saying that a policy could “be established under the Green Finance Strategy to address this problem and minimise the risk of the cost of decommissioning stranded assets falling substantially on the state”.56

32. In our report on Accelerating the transition from fossil fuels and securing energy supplies, we looked at the role of domestic oil and gas extraction in the transition to net zero, concluding that there was a consensus on the need to accelerate the transition from fossil fuels.57 We also found that tax reliefs allow fossil fuel companies to deduct the costs of decommissioning old infrastructure from their taxable profits, though there was not a consensus as to whether this was considered a subsidy or not.58 For this inquiry, we heard from Sam Alvis, Head of Economy at Green Alliance, that the Government needs to support the market in recognising the real price of extraction for the North Sea. He argued that if the Bank of England could do more to update its advice on medium-term risks, there would then be the possibility of the North Sea Transition Authority imposing duties on operators to ensure that decommissioning costs are met by owners of capital. As ownership shifts from large oil companies to private equity firms in the North Sea, he said that these issues will become more crucial.59

33. We have heard that vast numbers of fossil fuel assets are at risk of devaluing before they are extracted due to changes in energy consumption and therefore becoming ‘stranded assets’. This is a particular risk in the City of London, as one of the top four financial centres where this concern is concentrated. This risk has also intensified due to Russia’s full-scale invasion of Ukraine leading to divestment from Russian-linked fossil fuel assets. While there have been some calls for the burden of this risk to sit with the companies which are driving the phase out of fossil fuel investment through individual policies, we have not identified a consensus on this matter.

34. We recommend that to mitigate against the risk of stranded assets from North Sea extraction, the North Sea Transition Authority should calculate what the impact to the UK taxpayer and company profitability would be of requiring the cost of decommissioning to be absorbed for new oil and gas licences through the introduction of duties on operators.

Delivering secure energy for the UK

35. The IEA defines energy security as “the uninterrupted availability of energy sources at an affordable price”.60

36. In April 2022 the UK Government published its British Energy Security Strategy. This focused on the following key objectives:

i) Oil and Gas: low carbon UK gas, and zero Russian imports;

ii) Nuclear: deliver Great British Nuclear with high ambition, expertise and backed to support projects;

iii) Solar: ramp up deployment on both roofs and ground;

iv) Wind: cheaper power for local areas by cutting planning and delivering better connections;

v) Hydrogen: boost commitment to green H2, accelerating the H2 economy; and

vi) Demand: accelerate energy efficiency deployment and phase out fossil fuel use.61

37. In March 2023, the UK Government published its energy security plan “Powering up Britain”, with the intention of building its ambitions to produce more energy domestically and reduce energy demand. It stated its target to double the UK’s electricity generation capacity before 2040 and committed to maximising the declining production of oil and gas in the North Sea.62 Two notable areas in which the Government is investing are:63

i) Great British Nuclear; and

ii) The Floating Offshore Wind Manufacturing Investment Scheme.

38. The Energy Act 2023, which received Royal Assent in October 2023, aims to “deliver a more efficient energy system in the long-term, helping keep energy costs low”, with the intention of unlocking “£100 billion private investment in energy infrastructure” and introducing measures to “accelerate development of offshore wind and help deliver net zero commitments”.64

39. On 5 November 2023 the Government announced new licences for North Sea oil and gas, stating that “each annual licensing round will only take place if key tests are met that support the transition to net zero”. Those tests were:

i) The UK must be projected to import more oil and gas from other countries than it produces domestically; and

ii) Carbon emissions associated with the production of UK gas are lower than the equivalent emissions from imported liquefied natural gas.65

40. Energy security has moved higher up the political agenda since Russia’s full-scale invasion of Ukraine, as countries have sought to reduce their reliance on imports of Russian gas. As we saw above, many financial institutions justify their continued investment in fossil fuels projects as supporting energy security. However, we also received evidence that the solution to the energy security crisis should instead be to reduce the UK’s reliance on fossil fuels. Several witnesses argued that in order to improve the UK’s energy security in light of the impact of Russia’s war, the UK should focus on securing a more stable supply of renewable energy, which would also lessen the rise in energy prices.66

41. Dr Anastasiya Ostrovnaya, Senior Research/Teaching Fellow, Centre for Climate Finance and Investment, Imperial College Business School, argued that new oil and gas exploration would not solve energy security in the short term, and in the longer term would lead to either failing to hit the UK’s climate targets or stranded assets (see Box 4).67 Mark Carney agreed, saying: “Once the infrastructure is built, clean energy is secure energy. It is domestic energy; nobody owns the wind and the sun, and hydrogen is everywhere”.68

42. However, Green Alliance said that the UK Government’s response to the energy security crisis had been to focus “primarily on increasing domestic fossil fuel production”.69 The MCS Charitable Foundation, a charity that seeks to increase awareness and access to climate change solutions across the UK, and Carbon Tracker Initiative, argued that in this way the UK Government diverged from the reaction by other European governments, which instead invested heavily in renewables.70 On the other hand, a January 2023 report by Imperial College London academics found that, while more investment in clean energy was needed, a record amount of energy from renewable sources was generated in the UK in 2022.71 On new oil and gas licences, some witnesses said that the time and effort to develop new fields would make only a limited and short-term contribution to address supply shortages.72 However, the UK Government said in its announcement that the new licences would “slow the rapid decline in domestic production of oil and gas” in an effort to increase energy security and reduce reliance on imported energy.73

43. Several accused the Government of sending mixed signals about net zero to the market in the name of energy security. Some of the policy developments that contributors felt sent mixed signals include:

  • 27 new North Sea oil and gas licences being approved;74
  • The approval, in December 2022, of the first new coal mine in 30 years;75
  • The tax reliefs contained in the Energy Profits Levy, announced in May 2022,76 which it was argued incentivises oil and gas producers to reinvest profits into new extraction77 (although the rate of the levy has increased from 25% to 35%, and the investment allowance has reduced from 80% to 29%);78
  • The then Business Secretary reportedly considering classifying natural gas as a “green investment” under the green taxonomy in May 2022;79 and
  • The Government overruling, in June 2022, Surrey County Council’s decision to reject exploratory gas drilling on the edge of the Surrey Hills.80

44. Green Alliance argued that the Government’s changed position in 2022 towards increasing domestic gas and oil production had “sent a poor signal about the Government’s net zero priorities” to investors,81 while Sam Alvis said it failed to deliver the “consistency of message … that is really important for financial institutions”.82 The MCS Charitable Foundation argued that it encouraged investors to invest more in fossil fuels,83 and this was picked up by Carbon Tracker’s analysis of the 43 letters the Committee received from financial institutions, which found that “some investors would prefer to take refuge in the fact that energy security has risen up the agenda this year because of geo-political concerns, as a means of defending ongoing investment in fossil fuels”.84 Tim Lord said that “clarity around the decarbonisation journey is frankly more helpful” than approving further oil and gas exploration.85

45. We received some suggestions of clear signals to the market that the Government could make in order to accelerate investment in renewable energy for the twin purposes of achieving energy security and meeting the UK’s net zero goals:

  • Reform planning laws to enable more renewable energy generation such as onshore wind;
  • Put the Government’s target to decarbonise the electricity grid by 2035 on a statutory footing;
  • Develop more household support for energy saving measures;
  • Invest in energy storage for renewables;
  • Set targets for renewable energy generation; and
  • Develop investment models for emerging technologies. (We consider this point in further detail in the next chapter).86

46. Since we concluded taking evidence for this inquiry, the UK Government has responded to calls for changes to planning laws for onshore wind by consulting through the Levelling-up and Regeneration Bill,87 launched a campaign in October 2023 called ‘It All Adds Up’ to assist people to make small changes to reduce their energy consumption and save at least £100,88 and awarded 11 successful bids to invest in low carbon electricity generation for tidal stream projects in the latest Contracts for Difference allocation round.89

47. In our January 2023 report on Accelerating the transition from fossil fuels and securing energy supplies, we considered the transitional role of oil and gas in the UK’s energy mix. We concluded that, while there was consensus on the UK’s need to accelerate the transition, there were differing views on speed, and whether continued oil and gas licensing in the UK is necessary to ensure the country’s energy security.90 We recommended that the UK set a clear date for ending new oil and gas licensing rounds in the North Sea, and consult on what this date should be, based on the oil and gas production currently being planned by the UK and other producer states, and on the remaining global carbon budget if global temperature rise is to be limited to 1.5°C.91

48. The Government responded to our recommendations, telling us that it had implemented a Climate Compatibility Checkpoint “to check whether offering new oil and gas licences remains compatible with meeting our climate targets”.92 These are compared to international production emissions and sector commitments in the North Sea Transition Deal to give Ministers overall climate impact assessments of oil and gas production.93

49. We pressed Ministers on whether they felt that they were sending mixed messages to the market by giving London the aim of being the first net zero-aligned financial centre, at the same time as prioritising new investment in fossil fuels in the name of energy security. The Minister for Energy Efficiency and Green Finance argued that they were not, saying that “energy security and net zero are effectively two sides of the same coin”.94 However he added that “we will never convince the public to go along with our transition plans if the lights go out”, and that there was “still a requirement for oil and gas”.95 He continued that ensuring that the UK has its own domestic sources of energy was the best way to ensure energy security, and that the Government was replacing energy from North Sea fossil fuel extraction as it was a declining asset.96

50. When we asked the Treasury Lords Minister about the balance that financial institutions should seek to strike between ramping up investments in renewables and reducing investment in fossil fuels, she said: “It will be for the individual company or business to determine that”.97

51. In its 2020 report “The Sixth Carbon Budget: Electricity Generation”, the Climate Change Committee predicted that the UK will continue to rely on oil and gas to meet its energy needs, even when it reaches net zero in 2050.98 In July 2023 the UK Government announced the awarding of new oil and gas licences, committing to making the UK more energy secure and said that the new licensing would reduce reliance on hostile states, slow the speed of decline of North Sea extraction, and limit higher emission imports, securing domestic energy supply.99

52. In a statement released following the announcement of new oil and gas licences in the King’s Speech on 6 November, the Secretary of State for Energy Security and Net Zero said that the licences “are a welcome boost for the UK industry, which already supports around 200,000 jobs and contributes £16 billion to the economy each year—while advancing our transition to low-carbon technologies, on which our future prosperity depends”.100

53. We have heard during our inquiry that despite the pledges set out and agreed upon by global governments in the Paris Agreement, private banks have financed trillions of US dollars into fossil fuels. New UK fossil fuel Initial Public Offerings are still being approved, and the UK Government is pressing ahead with new fossil fuel investment opportunities. We have been told that, while the current ratio of investment capital in low carbon energy compared to fossil fuels is 0.9:1, this needs to quadruple to 4:1 by the end of the next decade. While there are examples of financial institutions moving away quickly from fossil fuel investments, the engagement policies enacted by many organisations could be clearer about the extent to which they are still financing companies not aligned with the Paris Agreement.

54. We absolutely agree with the Minister for Energy Efficiency and Green Finance that energy security and net zero are two sides of the same coin. However, we are concerned that many believe that the Government is sending mixed signals to the market which in turn affects investment decisions in the energy transition. While business decisions are ultimately for those businesses to make, the Government should not underestimate its own influence.

55. We have previously concluded in our report ‘Accelerating the transition from fossil fuels and securing energy supplies’ that there is not a consensus on the speed of transition from fossil fuels as the Government endeavours to reach net zero by 2050. While the scientific consensus is clear that planned production of fossil fuels is already enough to exceed safe climate limits, with the IPCC’s recent Synthesis Report warning that “projected CO2 emissions from existing fossil fuel infrastructure without additional abatement would exceed the remaining carbon budget for 1.5°C”, there is a view from some financial institutions, recently endorsed by the UK Government, that new licences have a role to play in reducing reliance on imported fossil fuels. Energy security is sometimes used as justification to pursue new oil and gas exploration, but we have found that this approach may not reflect climate goals effectively, as there is a risk that it may lead to either missing climate targets or ending up with stranded assets. Therefore when planning for net zero energy security and a just transition for the workforce, it is crucial that the Government considers the balance between the North Sea as a declining asset, and the UK’s capacity for renewable energy as the UK moves towards a net zero future.

56. We recommend that the Government publish quarterly reports to show how the UK is moving towards greater energy independence while staying on track to meet its net zero target, including an assessment of the effect of scope three emissions on global efforts to limit global temperature rise to 1.5°C. The notion of “energy security” should increasingly shift towards renewable energy, which can support greater energy independence and reduce reliance on fossil fuels.

57. We reiterate the recommendation of our earlier report that the Government set a clear date for ending new oil and gas licensing rounds in the North Sea: this date should fall well before 2050.

2 Plans for transition: reporting requirements

58. In this chapter we examine the Government’s proposals for the types of sustainability-related information that it will require companies to publish. These include transition plans, climate finance and nature finance disclosures, and the UK green taxonomy.

Transition plans

The requirement to disclose a transition plan

59. A transition plan sets out a company’s targets and actions towards achieving net zero. The Green Finance Strategy outlines three components that an organisation’s transition plan should include:

  • High-level targets for mitigating climate risk, including for reducing greenhouse gas emissions;
  • Interim milestones; and
  • Actionable steps towards meeting those targets.101

60. In the UK, listed companies and large asset owners and managers are currently required, by the FCA, to disclose transition plans on a “comply or explain” basis. “Comply or explain” is a regulatory approach whereby a company either has to comply with a provision, or, if it does not comply, explain either why it does not comply, or how it achieves the provision through other means. Of the 43 financial institutions from which we received responses to our letter, only three volunteered that they had or were developing their own transition plan. Other organisations which submitted written evidence to us highlighted their transition plans or those of financial institutions.102 Several more referred, in correspondence and in evidence, to assessing the transition plans of their clients when making investment decisions.103

61. The Government’s ambition to become the world’s first net zero-aligned financial centre, announced at COP26 two years ago, included an intention to make it mandatory for firms to disclose their transition plans.104 In the Green Finance Strategy published in March this year, the Government committed to consulting on requiring the UK’s largest companies to disclose their transition plans “if they have them”. It added that the consultation would be on the basis that the rules for disclosure for the wider economy would align with those that the FCA requires for listed companies and large asset owners, including the “comply or explain” basis. The strategy says that this would “ensure parity between listed and private companies”, and “ensure requirements are consistent and comparable across the economy”.105

62. The Green Finance Strategy explains that the reason why the Government does not intend to consult on making transition plans mandatory is to avoid placing “undue burdens” onto companies:

The Government wishes to encourage companies to plan for their transition but does not wish to place undue burdens onto companies whose size or scale makes mandatory disclosure unreasonable. Therefore, we will consult on proposals with proportionality in mind and within the context of the UK’s non-financial reporting review, which will consider the thresholds used to determine which companies must comply with reporting obligations under the Companies Act 2006. As a result, any future obligations will only apply to the UK’s most economically significant entities – the vast majority of companies will not have additional burdens placed on them by these proposals.106

63. WWF wrote to us after the Green Finance Strategy was published to express its disappointment that the Government had stopped short of making transition plans mandatory as had been promised at COP26. It questioned the utility of the Government’s approach in terms of achieving net zero, saying that “companies can easily not disclose a transition plan by simply not having one”.107 In written evidence, several environmental campaign groups called for the Government to make transition plans mandatory,108 but so did other groups representing the financial sector. TheCityUK, a UK industry advocacy group for the financial services sector, said it supports “the UK government’s plans to make transition plan publication mandatory”; UK Finance argued that the Government should require and enforce disclosure of transition plans; and the Institutional Investors Group on Climate Change said that the Government should require all companies and financial institutions to publish transition plans.109

64. In oral evidence, given before the Green Finance Strategy was published, Mark Carney suggested that the UK should eventually make transition plans mandatory and that doing so would cement the UK’s global leadership position in green finance. He compared the issue of transition plans to that of firms disclosing financial information recommended by the Taskforce on Climate-related Financial Disclosures, which originated with “major institutions”, and was “then picked up by climate leaders such as the UK and made mandatory”. He continued:

We are in effect doing the same thing with transition planning, because firms have just started to do this with GFANZ.110 The question is: how long will it be before it gets picked up and made mandatory, with comprehensive coverage? … The UK is already working on this for the largest companies and financial institutions in the country. There is a chance that the peloton … will follow and reshape it in a way. Given that it is the leading international financial centre, it is probably appropriate that the UK plays that leading role in shaping this approach.111

65. In terms of how to approach introducing mandatory transition plans, Mark Carney suggested that “it would make sense to look at one or two rounds of transition planning and get a sense of what is working and where the holes are before the approach were locked in”.112

66. When we asked the Treasury Lords Minister and the Treasury official why the Green Finance Strategy had modified the Government’s stance on mandatory transition plans since COP26, they replied that the Government was not “rowing back” because the Government is “moving towards mandatory disclosure of transition plans”, which had been the commitment at COP26.113 The Minister confirmed that “disclosure can include if you do not have a transition plan”.114 She added that the Government was not making transition plans mandatory in order to remain “internationally competitive”: the Minister for Energy Efficiency and Green Finance explained that this meant addressing the risk of companies wanting to “list elsewhere in the world where they are not forced to produce these plans”.115 They both repeated the point that there is already momentum within the market to disclose transition plans. The Treasury Lords Minister said, for example:

[W]e are seeing demand from the market itself in companies’ plans to transition. The companies that are not able to articulate what their plan is will face challenges from investors and others around what their plans are and how they will manage to operate in that environment.116

67. When asked whether this impetus from the market did not lend more weight to the case for making transition plans mandatory, the Treasury Lords Minister set out the Government’s position that it is not for the Government to tell businesses how to transition:

We think it is for firms and shareholders to decide how their business adapts to the economy-wide transition that we will have, given our legally binding net zero targets … It is for the companies to define how they plan to transition in this environment.117

68. We welcome the Government’s intention to consult on requiring companies to disclose transition plans. However, the current “comply or explain” basis should be for an interim period only: a company can disclose by simply not having a transition plan, defeating the point of the policy.

69. We agree with the Government that the operating environment will become increasingly difficult for those firms that do not set out their plans for contributing to net zero. However, we do not think it is enough to leave the issue of transition planning to the market. The UK led the way globally with its introduction of mandatory reporting in relation to the Taskforce on Climate-related Financial Disclosures (TCFD), and now risks losing its leadership position in the green finance space by deferring its commitment to mandatory transition planning made at COP26. At the same time, we understand the risk of capital flight and the need to remain internationally competitive.

70. The Government’s consultation on requiring companies to disclose transition plans should include consideration of making it compulsory to have and to disclose a transition plan—not just if a company happens to have one—and the most suitable timetable for doing so. Beyond this consultation, mandatory reporting of transition plans should remain the Government’s ultimate aim.

A mandatory framework for transition plans

71. We certainly saw, from the responses from financial institutions to our letter, the pressure from investors for companies to disclose transition plans. Many respondents justified their continued investment in fossil fuels on the basis that they only invest in companies with a “credible” transition plan, the word “credible” appearing time and again. A minority of firms set out in their responses how they go about assessing a client’s transition plan. In written evidence, the UK Sustainable Investment and Finance Association argued that investors “have an important role to play in evaluating the quality of companies’ transition plans, scrutinising how boards’ strategies intend to reduce companies’ carbon footprint in time”.118 The Institutional Investors Group on Climate Change pointed to guidance that it developed to help investors judge the robustness of a transition plan.119 However, the majority of respondents to our letter did not expand on how they would determine the “credibility” of a transition plan. From these responses we could see the need for a consistent framework for transition plans.

72. In April 2022 the Government launched the Transition Plan Taskforce (TPT), a group of industry experts charged with developing guidance for “gold standard” transition plans. It published that guidance, following consultation, on 12 October 2023, after we had concluded taking evidence for this inquiry.120 The TPT was broadly welcomed in evidence.121 The Green Finance Strategy promises that the consultation on disclosing transition plans, mentioned above, will take place following the publication of the TPT’s guidance.122

73. GFANZ has also published guidance on transition plans. The Green Finance Strategy states, and Mark Carney and the Treasury Lords Minister told us in evidence, that GFANZ and the TPT have worked closely to align their sets of guidance.123

74. Our evidence stressed the importance of having a mandatory framework for transition plans, so that firms can be compared on a consistent basis and be held accountable. Sam Alvis said:

We need to get to the stage where transition plans are comparable, so they include the same baseline, for example, and the same timeframes so they can be compared. We should also use those transition plans to be able to whitelist or blacklist companies as net zero credible. If you have not published one in a certain period of time, if you haven’t made sufficient progress against your own reported baseline, these sorts of things give you that accountability and credibility.124

For Mark Carney, a compulsory transition planning framework was the single most important recommendation he wanted to make to the Committee: “If I could stress one point in today’s session, it is the importance of a mandatory comprehensive framework for net zero transition planning”. He added some parameters for how a mandatory framework should be introduced, saying that they “should phase in over time, from the largest and most sophisticated to mid-size and smaller. They should be proportionate, both for financial institutions, which is the focus here, and, in parallel, large companies”.125

75. It was not clear, either from the Green Finance Strategy or from our evidence from Ministers, whether the Government intends to make the TPT’s transition planning framework compulsory for those companies who wish to, or who may be required to by the comply or explain basis, disclose a transition plan. The strategy states that “disclosure of transition plans … will enhance the availability of reliable, comparable reporting on the transition pathways of UK corporates and financial institutions”. It also says that the TPT’s guidance on transition plans will “enable investors to exercise more effective stewardship, by using consistent and comparable transition plans to better allocate and oversee capital”.126 In evidence, the Treasury Lords Minister said: “it is not for the Government to impose on firms what their plan for transition should be; that would be moving towards saying you need to move towards the same timeline or on the same path”.127 Fayyaz Muneer emphasised that the purpose of the TPT was to produce a “gold standard for making a transition plan”,128 but he also referred to the “TPT standard [getting] into regulation”.129

The principles of a ‘just transition’

Box 5: ‘Just Transition’

The term ‘just transition’ is regularly used in multilateral discussions to agree environmental targets. While definitions differ, the aim of just transition approaches is to address potential sources of unfairness to provide better outcomes for different groups of people. Justice issues can arise from proactive climate action undertaken to tackle climate change, but also from reactively adapting to the impacts of unpreventable climate change and biodiversity loss. Individuals’ vulnerability is a combination of these. Action may place unaffordable costs on people and nations who are the most politically, socially and economically marginalised.

Source: What is a just transition for environmental targets?, POSTNote 706, Parliamentary Office of Science and Technology, October 2023

76. As part of its COP26 presidency the UK brought forward the International Just Transition Declaration in partnership with the governments of South Africa, France, Germany and the United States of America, alongside the European Union, to support the decarbonisation efforts in South Africa, primarily in the electricity sector. There was an initial funding commitment of US$8.5 billion for its first phase, delivered through grants, concessional loans, investments, and risk-sharing instruments, with a focus on engaging the private sector. Its anticipated impact includes preventing 1–1.5 gigatonnes of carbon emissions over the next two decades and aiding South Africa to transition away from coal towards a low-emission, climate-resilient economy.130 In the Green Finance Strategy the Government committed to continue to include just transition principles in its International Climate Finance and broader funding streams and intends to do this in collaboration with international partners.131

77. The Grantham Institute at the London School of Economics argued that the financial sector has a role to play in reducing the risk of stranded communities, defined as those “reliant on fossil fuel industries which will be left behind economically if they are not supported through the transition away from fossil fuel reliant industries to other economic opportunities”.132 The institute has established the ‘Financing a Just Transition Alliance’, to identify steps the financial sector can take to support a just transition in the UK.133

78. Our evidence showed that several financial institutions include just transition principles in their net zero strategies, including Aviva, Citigroup, abrdn plc, Royal London Asset Management and Legal and General plc.134

79. Michael Marks, Head of Investment Stewardship and Responsible Investment Integration at Legal and General, told us that it was important to ask companies with which a financial institution engages how they consider internal and external stakeholders, such as employees or local communities, when planning a just transition.135 Roslyn Stein, Group Head of Climate and Biodiversity, AXA, gave us a perspective from the EU, that when dealing with climate issues including a just transition, AXA had regular contact with unions as a first port of call, and that “[we may see] an evolution in how private firms engage on some of the issues related to climate change”.136 Steve Waygood, Chief Responsible Investment Officer, Aviva Investors, warned us that there could be a slowdown in the implementation of transition principles caused by specific regional growth not aligning with long-term macro-economic growth, explaining that this was a challenge for institutions implementing global policy, and that it was important that all regions are considered as part of a just transition.137

80. In response to the TPT consultation on its framework and implementation guidance, the Grantham Research Institute urged it to “make an explicit acknowledgement of the importance of supporting the just transition to net zero”, and called for more specific guidance on how just transition principles and affected stakeholders could be considered within transition planning.138 The taskforce then set up a specific workstream to develop guidance on incorporating just transition principles into net zero planning as part of its disclosure framework.139

81. In its report published in September 2023, the taskforce included a definition of a just transition, and acknowledged that the Paris Agreement and the Convention on Biological Diversity “recognise the need to pursue their goals in a manner that respects the imperative of a just transition and meets the needs of people everywhere”.140

Including nature in transition plans

82. A theme throughout our inquiry was that many contributors—some from industry as well as from campaign groups—repeated the principle that the Government should be seeking to align the financial sector with its goals to halt nature loss as well as its net zero target. They argued that the nature and climate crises should be tackled in tandem and that further regulation of the financial sector was needed in respect of nature and biodiversity.141 Some suggested that one means of doing so would be to include nature targets, as well as climate targets, in transition plans.142

83. The Treasury Lords Minister explained that “as part of the Transition Plan Taskforce we have set up a nature working group to look at how nature considerations can be incorporated into the transition plan guidance and any supplementary guidance that should be made available to firms”.143 The final framework for transition planning published in October 2023 recommends the following disclosures in relation to nature:

  • Whether and how the entity has assessed the impacts and dependencies of its transition plan on the natural environment;
  • Policies on land use and land management changes; and
  • Policies on safeguards to address potential adverse impacts on the natural environment.

The framework does not require that the “strategic ambition” of an organisation’s transition plan should include its objectives towards contributing to the Government’s targets around halting and reversing nature loss. Instead the “strategic ambition” centres on the organisation’s objectives for a “low-GHG emissions, climate-resilient economy”.144

84. A natural capital approach to policy and decision making considers the value of the natural environment for people and the economy. The UK Government has provided guidance on Enabling a Natural Capital Approach which covers:

i) The natural capital framework;

ii) Economic valuation of the environment;

iii) How project or policy appraisal can incorporate natural capital;

iv) Natural capital accounting principles and methods, benefits and challenges; and

v) Applying natural capital at a local level.145

85. In October 2022 the UK Government published the Natural Capital and Ecosystem Assessment (NCEA), a transformation programme that covers land and water environments.146 The NCEA commits to leaving the environment in a better state for future generations and reach net zero by 2050 through up-to-date evidence accessible to a wide range of decision makers. In August 2023 the UK Government updated the Environment Agency’s Natural Capital Register and Account Tool, a public access tool to help to establish a “baseline of the natural assets in a place and the services they provide”.147 We will explore issues of natural capital further in our inquiry on The role of natural capital in the green economy.148

Monitoring transition plans

86. Other witnesses added that it was important that transition plans should be monitored. There were no plans for this in the Green Finance Strategy.149 Steve Waygood suggested that such monitoring could be a role for the Climate Change Committee.150 Green Alliance made the general point that relying on investor behaviour alone is not enough:

Whilst reporting and disclosure standards are welcome, relying on investor behaviour will not move the dial fast enough. These standards must be embedded into a robust legal and regulatory framework to ensure firms and financial institutions act on the climate-related risks they identify and make progress against their transition plans.151

87. Ministers, however, preferred to leave the role of accountability to the market. For example, the Treasury Lords Minister said that “it is for the company’s investors to look at the credibility of [their] plans”, while the Minister for Energy Efficiency and Green Finance said:

Ultimately the market will drive companies towards [disclosing transition plans]. You are starting to see that now. If your company is not on track, you have difficulty in accessing finance. A lot of financial institutions are interested in seeing this information and your shareholders will be increasingly concerned. If you are not taking account of the reality in which your firm operates, ultimately in a market you will go out of business. That is the ultimate sanction that you have.152

88. We welcome the publication of the Transition Plan Taskforce’s disclosure framework for transition plans, and the steps taken to achieve international alignment of that framework. We believe that those who publish transition plans should follow a compulsory framework, to ensure comparability and to mitigate the risk of greenwashing. While investors have an important role to play in determining the credibility of transition plans, it is vital for measuring our progress towards net zero that ‘credibility’ is not subjective. We recommend that the Government should introduce regulations, to be phased in and monitored over time, to ensure that companies developing and disclosing transition plans do so in accordance with the Transition Plan Taskforce’s guidance.

89. A plan is only effective if it delivers its contents. The Government should set out simple, consistent regulatory expectations for net zero transition plans and establish an independent mechanism for monitoring and evaluating and verifying organisations’ net zero transition plans, to ensure that they are aligned with Paris Agreement compliant pathways.

90. We welcome the Government’s commitment to just transition principles in its Green Finance Strategy and the inclusion of specific workstreams in the creation of the transition plan disclosure framework and implementation guidance. While the Transition Plan Taskforce acknowledges the inclusion of just transition principles within its working group and includes a definition within its guidance, we are concerned that it does not appear to include those principles explicitly within the transition framework itself, which may leave organisations with no further knowledge of how their transition plans should consider wider stakeholders.

91. We recommend that the Government publish further guidance to stakeholders to advise explicitly how just transition principles should be considered within the transition plan framework, to ensure that companies are able to provide better outcomes for all people, including workers and their communities.

92. We welcome the references to nature in the Transition Plan Taskforce’s framework; however, we consider that the framework could go further on nature. We recommend that the Government should take steps to incorporate into the framework the contribution by a company towards halting and reversing nature loss within the overall strategic ambition of its transition plan.

Disclosures and the UK green taxonomy

Disclosures

93. The demand for climate finance information has grown in recent years, leading to a proliferation in reporting standards. The Green Finance Strategy states that between 2013 and 2016, the number of sustainability reporting frameworks doubled to nearly 400.153 As a result, we heard that there is a risk of greenwashing, as companies “shop around” for the indicators that make them look most favourable.154

94. Linked to the risk of greenwashing, we also heard complaints that because there are so many different standards it is difficult to collect data that can be compared across companies, as different companies publish different information.155 To illustrate this difficulty, Dr Anastasiya Ostrovnaya gave the example of trying to find the carbon emissions targets of a European steel company and not succeeding “because they measure it in percentages from 2019 level and then it is also carbon intensity and not the carbon emissions”.156

95. Following a recommendation by our predecessor Environmental Audit Committee in 2018, the UK became the first G20 country to enshrine in law mandatory requirements to disclose climate-related financial risk as set out by the Taskforce on Climate-related Financial Disclosures (TCFD). These rules came into force in April 2022.157

96. The Green Finance Strategy refers to several commitments by the UK Government around disclosure and reporting. These include assessing the suitability for adoption of the International Sustainability Standards Board standards in the UK (see Box 6), consulting on scope 3 greenhouse gas emissions reporting,158 consulting on a green taxonomy (see section below), and providing detail on the UK’s Sustainability Disclosure Requirements, first set out in 2021 (see Box 7).

Box 6: ISSB standards

At COP26, in November 2021, the International Financial Reporting Standards Foundation (IFRS) launched the International Sustainability Standards Board (ISSB). The purpose of the ISSB is to set a global baseline for sustainability reporting. It published its first two standards—a general requirement standard, and a climate-related standard—in June 2023. Following this publication, the UK Government is now assessing the suitability of the ISSB standards for endorsement in the UK, as it committed to in its Green Finance Strategy.

Source: IFRS, IFRS Sustainability Disclosure Standards; Department for Business and Trade, UK Sustainability Disclosure Standards, 2 August 2023; HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 9

97. Contributors to our inquiry highlighted that having consistent reporting requirements, not just across companies,159 but also across jurisdictions, was important to achieve net zero.160 Steve Waygood pointed out that having to conform to multiple different standards creates higher costs for firms, which in turn leaves less resource for working with companies to steer them towards net zero:

At the moment we are almost seeing countries competing with each other and not just on the taxonomy; it is other sustainable finance standards too, and disclosure. For those of us that are global, that makes the cost of execution and the resources involved much more material and probably less effective. It gives us less resource to encourage companies to undertake the transition. To my mind, as far as possible and reasonable, I agree we would be looking for alignment.161

Green Alliance pointed out that misaligned disclosures for reporting across jurisdictions creates a risk of “carbon financing leakage”, i.e. “where firms move production or operation to countries with lower environmental standards to reduce exposure to regulatory risk”.162 On the other side of that coin, TheCityUK argued that by encouraging other countries to implement the same mandatory disclosure requirements, the UK would “help to attract cross-border financial flows to the UK green economy”.163

98. There was also support in evidence for the UK Government to require disclosures to be mandatory,164 with TheCityUK saying that this was especially the case “for smaller and privately held companies”.165

Box 7: Sustainability Disclosure Requirements

In July 2021, the then Chancellor announced the introduction of Sustainability Disclosure Requirements (SDR). The purpose of these requirements is to create a framework for disclosures on sustainability across the economy, bringing together existing disclosure requirements under one integrated framework. The framework is intended to build on the UK’s implementation of TCFD-aligned disclosures. The Green Finance Strategy committed the Government to providing more detail on the SDR in summer 2023, saying that the SDR regime would cover four components:

  • Disclosure of transition plans (see section above);
  • ISSB standards (see Box 6);
  • Reporting on greenhouse gas emissions, nature-related financial risks and impacts, and physical climate risks; and
  • Fund labels and FCA approach to SDR.
  • The FCA has consulted on the last of these components and intends to publish a policy statement in Q3 of 2023. Following the publication of the ISSB standards in June 2023, the Secretary of State for Business and Trade is now considering their endorsement, in order to turn them into UK Sustainability Disclosure Standards by July 2024.

Source: HM Government, Greening Finance: A roadmap to sustainable investing, October 2021, p 11; HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 40; FCA, CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels, updated 29 March 2023; Department for Business and Trade, UK Sustainability Disclosure Standards, 2 August 2023

99. In oral evidence the Treasury Lords Minister explained that the SDR was the overarching framework by which the Government intends to move disclosures “into a more mandatory framework for reporting over time”. She explained that this framework includes the ISSB standards, scope 3 greenhouse gas emissions, and the green taxonomy, which are all at “different phases of maturity”.166 The Government launched a consultation on scope 3 emissions reporting in October 2023.167 The ISSB standards are due to be adopted in July 2024, and the Minister confirmed that the ISSB standards, in the form that they are endorsed and incorporated into the SDR, will be mandatory.168 The Minister was confident that “our assessment process will conclude that those standards are suitable and usable within the UK context”, because the Government “worked very closely in the development of the ISSB standards”.169 Fayyaz Muneer explained that IFRS standards “always require a bit of adaptation to local context”.170 The Department for Business and Trade, which is leading the assessment of the ISSB standards, has stated that “UK endorsed standards will only divert from the global baseline if absolutely necessary for UK specific matters”.171

Nature disclosures

100. Another way in which the financial sector could address the principle of tackling the nature crisis alongside the climate crisis is through disclosing nature-related financial risk. In 2021 the Taskforce on Nature-related Financial Disclosure (TNFD), a global initiative, was launched, with a remit of creating a risk management and disclosure framework for nature-related risks and opportunities. It published its framework in September 2023.172 The UK’s Green Finance Strategy commits to exploring how the final TNFD framework should be incorporated into UK policy and legislative architecture.

101. Some witnesses warned us about the length of time it could take for the TNFD to evolve into an operational disclosures regime in the UK.173 For example, Ryan Jude, Programme Director for Green Taxonomy, Green Finance Institute, compared the timeline to that of its predecessor, the TCFD, which took seven years from initiation to mandatory reporting requirements in the UK.174 The Treasury Lords Minister recognised this time pressure in evidence, saying on the one hand that “nature is more complex to disclose against than climate”, and on the other that “we need to move faster with TNFD, so testing and learning as that standard is developed is an important way of ensuring or encouraging quick adoption when it is produced”.175

102. We welcome the Government’s intentions for Sustainability Disclosure Requirements (SDR). As part of that framework, we welcome the Government’s intention to incorporate International Sustainability Standards Board (ISSB) standards and make them mandatory, its consultation on reporting scope 3 greenhouse gas emissions, and its intention to adopt the Taskforce on Nature-related Financial Disclosures (TNFD) reporting. Having internationally-aligned standards such as the ISSB standards is vital for reducing the risks of greenwashing and carbon financing leakage.

103. To maintain the UK’s global leadership in green finance reporting, the Government must keep up the momentum. We recommend that Ministers set out an overarching implementation timetable for the SDR, including for TNFD reporting, and commit to making TNFD reporting mandatory, continuing the trail the UK blazed for TCFD. The Government should consult on TNFD definitions, and should phase in compulsory TNFD disclosures over the next three to five years, starting with the largest companies.

UK green taxonomy

104. In June 2021 the Government set up the Green Technical Advisory Group (GTAG) with a remit to deliver a UK green taxonomy. We were advised to think of a green taxonomy as a “dictionary” that explains how sustainable an activity or investment is.176 In establishing GTAG, the Government defined “green taxonomy” as “a common framework setting the bar for investments that can be defined as environmentally sustainable”.177 Our witnesses explained that a green taxonomy is a tool within a disclosures regime, not an alternative to a disclosures regime.178

105. A green taxonomy is a weapon against greenwashing, as explained to us by Ryan Jude, Programme Director for Green Taxonomy at the Green Finance Institute, which chaired GTAG:

We have seen various regulators now issue fines to different financial institutions for overstating their ESG claims of certain products and certain investments. That is where taxonomies come in and are so important. They are an objective, science-based dictionary for what economic sustainable activities look like, and they go across every sector and have science-based targets and thresholds, which then allows us all as scrutinisers or investors or consumers to look at two different firms and compare apples to apples.179

106. The Government had a statutory obligation to legislate on the taxonomy by 1 January 2023: this derived from the EU Taxonomy Regulation, which was retained in UK law after the UK left the EU. On 14 December 2022, the Treasury Lords Minister delayed the introduction of UK taxonomy regulations by repealing the statutory requirements and therefore removing the obligation to make technical screening criteria regulations by 1 January 2023.180 In evidence she explained the reason for the delay:

In looking at the implementation of the EU’s green taxonomy, we saw some very practical difficulties in how it was being framed and implemented and we wanted to take the time to be able to learn the lessons from that and get it right in the UK. That is why we have taken a little bit more time on our approach.181

107. In the Green Finance Strategy the Government committed to consulting on the green taxonomy in autumn 2023. After the taxonomy has been finalised, it expects companies to report voluntarily against the taxonomy for a period of at least two reporting years, after which it will explore mandating disclosures. It explains that “Government does not wish to place undue burdens onto companies whose size or scale makes the disclosure of taxonomy-related information unreasonable”.182 At the time of agreement of this report, the Government had not yet opened this consultation. When pressed on the possible timeframes for publication of the final approach, the Treasury Lords Minister implied that sometime in 2024 would be “sensible”.183

108. The concept of a UK green taxonomy was welcomed in evidence.184 For example WWF-UK said that a science-based taxonomy would “help tackle ‘greenwashing’, improve understanding of environmental impact to help companies and investors make informed green choices, support investment in sustainable projects and boost efforts to tackle climate change”.185 As with disclosure requirements, our evidence underlined the importance of international alignment of the UK green taxonomy.186

109. Contributors suggested that where a taxonomy could be particularly useful would be in providing a spectrum of definitions. Roslyn Stein criticised the EU taxonomy for being binary, saying: “the [EU] taxonomy is very clear on what is green, but everything that is not yet green, there is no other way to classify it at the moment”.187 Steve Waygood added that what a green taxonomy needs is “50 shades of green” because “there is nothing in life that you can say is purely green or purely evil”.188

110. GTAG, which comprises financial and business stakeholders, taxonomy and data experts, and experts from academia, NGOs, the Environment Agency and the Committee on Climate Change, had an initial remit of two years, concluding in June 2023, whereupon its remit was due to be reviewed. When we asked the Ministers whether, on account to the delays to the introduction of the green taxonomy, GTAG’s remit would be extended so as to oversee and provide advice to the Government on the consultation, the Treasury Lords Minister said that GTAG “has been able to provide a series of pieces of advice that will inform that consultation”, and that “its current remit ends in June this year and no decision has been made”.189 In October 2023, GTAG’s Chair published a statement saying that “GTAG has advised, now the UK must implement”, referring to the last of GTAG’s publications which advised that the taxonomy now requires a long-term “institutional home”.190 In that paper, GTAG recommended that the Financial Reporting Council, soon to become the Audit, Reporting and Governance Authority, should be given a statutory remit to provide that institutional home.191

111. While we welcome the Government’s intention to introduce a UK green taxonomy, we are concerned to note the delays to its introduction. As with transition plan frameworks and disclosures, we support the principle of a mandatory taxonomy to ensure comparability. We recommend that the Government seek to introduce the UK green taxonomy as soon as possible. That taxonomy should include a spectrum of definitions—‘fifty shades of green’, as one of our witnesses put it. During the period of voluntary reporting against the green taxonomy, the Government should monitor and report quarterly on progress, to optimise its implementation and ensure that it becomes mandatory no less than two years after the beginning of the voluntary period.

112. It is unfortunate that, due to the delays to the introduction of the green taxonomy, the remit of the Green Technical Advisory Group expired before the testing period of voluntary disclosures could begin. We urge Ministers to heed the group’s calls for a long-term institutional home for the UK green taxonomy.

3 Private investment: a roadmap to net zero

113. In this chapter we assess the Government’s plans for securing and monitoring private investment in the net zero transition.

Investing for net zero

Blended finance solutions

114. The Government defines blended finance as “a catch-all term that covers financial products or structures that combine different funding sources aimed at lowering the risk profile of specific companies or projects and ultimately attracting private capital”.192 We heard in evidence that blended finance solutions could be particularly effective for emerging low carbon technologies, by reducing some of the risk for private investors.193 An example of a blended finance model in a social justice context is given in Box 8.

Box 8: Blended Finance Case Study: The Impact Investment Exchange’s (IIX) Women’s Livelihood Bond (WLB)

The Impact Investment Exchange’s Women’s Livelihood Bond (WLB) was one of the world’s first finance instruments that utilised private funding for social impact. It was listed on the Singapore Exchange with an initial value of US$8 million and a four-year maturity, paying 6 monthly yields to bondholders. The bond proceeds were directed towards supporting women’s empowerment through sustainable livelihood programs in Southeast Asia, facilitated by three distinct beneficiary organisations. There was a risk management framework surrounding the WLB in the adoption of a blended capital structure through a US$500k first-loss tranche194 and an equitable guarantee covering 50% of the principal loan amount.

According to the case study authors Convergence, the WLB marked a key development in impact investing in Asia through its innovative use of existing capital markets instruments.

Source: Convergence, IIX Women’s Livelihood Bond Case Study, 21 February 2018

115. UK100, a network of local authorities that have pledged to reach net zero ahead of the Government’s 2050 target, said that the Government should “share some of the financial risks in early-stage development of new low-carbon markets”.195 TheCityUK explained that by supporting low carbon projects with blended finance solutions, the Government sends a signal that such projects are “dependable”, making it “very likely” that further sources of capital will become available;196 a point echoed by Tim Lord:

I think we can de-risk [novel low-carbon technologies] through things like blended finance and so on, but a relatively small amount of Government support and clarity can go quite a long way in getting the investment moving in some of the technologies that I have mentioned.197

116. One blended finance model already in operation is the UK Infrastructure Bank (UKIB), a UK government-owned policy bank. It partners with the private sector and with local government to increase infrastructure investment in both regional growth and tackling climate change.198 At the time of publication of the Green Finance Strategy, UKIB had an initial £22 billion of financial capacity which it aimed to deploy over five to eight years.199 In evidence in May 2023, the Minister for Energy Efficiency and Green Finance said that UKIB had announced 15 deals into which it had invested £1.4 billion, unlocking more than £6 billion of further private capital.200 UKIB was welcomed in evidence for its potential to deliver blended finance net zero projects.201 Some called for increased support for UKIB,202 with others making specific recommendations for it to develop offers around green homes and buildings, including retrofitting projects.203

117. In the Green Finance Strategy, the Government referred to other examples of blended finance models already underway, including:

  • The £30 million Big Nature Impact Fund, which aims to crowd in private sector investment in nature recovery;204
  • The £50 million Woodland Carbon Guarantee, which offers a price guarantee for verified carbon credits sold to the UK Government to accelerate woodland planting rates; and
  • The Environmental Land Management schemes, in particular the Landscape Recovery scheme, which involves trialling different ways to secure private funding alongside public funding.205

The strategy adds that the Government is “committed to exploring additional areas where such structures could have impact”, saying:

We will work with the Green Finance Institute and industry leaders in the finance sector to develop a forward-looking analysis of blended finance models and where they could be better deployed in the UK.206

118. When we asked for further details on these plans, the Treasury Lords Minister referred to “a number of different potential models”, including the UKIB.207 Amy Jenkins added that “the Government already support[s] a variety of blended finance approaches”, and repeated that the Government was looking at the area in more detail with the Green Finance Institute, providing the timescale of “in advance of the next spending review”.208

Net zero investment roadmaps

119. A roadmap to net zero outlines the steps and actions needed to help government and businesses achieve net zero emissions by aligning their activities with climate change targets. The Department for Energy Security and Net Zero outlines four criteria for business sector net zero roadmaps:

i) A credible pathway aligned to the UK Government’s Net Zero Strategy;

ii) Robust delivery plan and structures;

iii) Collaboration on barriers, gaps and dependencies; and

iv) Independent assessment to ensure credibility.209

The guidance outlines that a roadmap would also include identifying finance challenges.

120. In 2022 the Government published several sector-based net zero roadmaps for the automotive,210 hydrogen,211 carbon capture, usage and storage (CCUS),212 and aviation industries.213 A roadmap for offshore wind was published alongside the Green Finance Strategy, which also contained commitments to publish a further roadmap for heat pumps, and updates to the CCUS and hydrogen roadmaps.214 The strategy further committed to continue to develop and publish further net zero roadmaps to “articulate investment needs by sector alongside summarising the relevant government policy and funding to make the sector investable”.215

121. While welcoming the roadmaps outlined in the Green Finance Strategy, E3G and WWF were disappointed that they were not economy-wide,216 and called for an overarching net zero investment plan.217 This echoed evidence we received from the Institutional Investors Group on Climate Change, which argued that the sector roadmaps “should be underpinned by a Net Zero Investment Plan that tracks financial flows across the economy”.218 WWF told us that a few policy changes aimed at only specific areas do not give the financial sector enough information on economy-wide incentives to transition, and that a holistic investment plan would give the financial sector the certainty and confidence it needs to invest in the net zero transition.219

122. While these organisations called for an economy-wide net zero investment plan, this was not a common theme in our evidence. Indeed, some others underlined the importance of having granular, sector-focused detail.220

123. The Minister for Energy Efficiency and Green Finance told us that in addition to the roadmaps that the Government had already produced and committed to in the Green Finance Strategy, it also planned to publish net zero roadmaps for nature, nuclear, heat networks, electric vehicles, and transport in autumn 2023.221 He acknowledged that an economy-wide investment plan could be produced—by amalgamating the various sector roadmaps—but appeared to dismiss the idea, arguing that “for individual investors the important thing is to focus on their particular areas of the economy”.222 Amy Jenkins agreed, telling us that “Powering Up Britain”, alongside the three roadmaps announced in the Green Finance Strategy, delivers “the investment plan that was asked for”.223

Tracking financial flows

124. In its 2021 paper “Greening finance: a roadmap to sustainable investing”, the Government described three phrases of “greening the financial system”:

  • Phase 1: Informing investors and consumers;
  • Phase 2: Acting on the information; and
  • Phase 3: Shifting financial flows.224

The roadmap focused on the first of these phases. Some contributors to our inquiry called for more action on phrase 3—”ensuring that financial flows across the economy shift to align with the UK’s net zero commitment and wider environmental goals”.225 In the Government’s Net Zero Strategy, published in October 2021, the Government committed to “work with external partners and data providers to better track private investment into the net zero economy going forward”.226 In the Green Finance Strategy, it explained that it will deliver on this commitment by commissioning two pieces of external research on investment tracking methodologies—one on net zero investment and one on nature investment—and explore the feasibility of adopting some of those methods.227

125. Ryan Jude pointed out that currently in the UK “we do not have a formal mechanism to track the financial flows”, saying that without this, it is not possible to “see what progress we are making up to that £50 billion”,228 a reference to the £50 billion in annual net zero capital flows that the Climate Change Committee has judged it necessary to reach by 2030 in order for the Government to reach its target of net zero emissions by 2050.229 E3G argued that financial flows should be tracked independently “to identify investment gaps hindering the UK from meeting its climate, nature, and adaptation targets”, and Global Witness said that regulators should be given a mandate to “measure the extent to which capital is being realigned with a 1.5°C pathway”.230

126. The Treasury Lords Minister referred us in evidence to the two pieces of commissioned research on tracking financial flows, but did not provide any timescales for implementation.231

Our view on investing for net zero

127. We welcome the Government’s progress in developing blended finance models for net zero projects, in particular the work of the UK Infrastructure Bank (UKIB) which, according to the evidence given to us by the Minister, has created around £4 of private capital for every £1 of public funding invested. Such models are valuable for de-risking and stimulating investments in emerging technologies that may help the UK achieve its net zero target. We therefore welcome the Government’s continued work with the Green Finance Institute in this area and its timely goal of drawing conclusions in advance of the next spending review.

128. The Government must keep to its ambition of setting out its future plans for net zero blended finance solutions by the next spending review, and should include nature recovery projects within this suite of solutions. The Government should set out in one document all its different blended finance models, cross-checking them against its various sector roadmaps both to ensure that solutions are targeted towards the investment gaps that need to be filled, and also to ensure that institutions such as UKIB are supporting the right projects with appropriate levels of investment.

129. We welcome the many net zero sector roadmaps that the Government has published and plans to publish, which should provide investors with the detail they require to help their investments align with the Government’s net zero target. We particularly welcome the fact that nature is included among these investment roadmaps, and urge the Government to publish the next round of roadmaps, promised this autumn, without delay. While we received limited calls for an economy-wide net zero investment roadmap, we did not receive enough evidence to arrive at a conclusion on whether this is needed. This makes tracking green financial flows across the economy all the more important.

130. Understanding levels of investment across the economy is vital for knowing whether the UK is on track to meet its climate and nature targets. That is why we welcome the work underway by the Government to explore methodologies for tracking both net zero-related financial flows and nature-related financial flows. We recommend that the Government go further and turn this research into a formal tracking mechanism by a date no later than the end of the current Parliament. The Government should task either an existing independent body, or create a new independent body, to track net zero and nature-related financial flows, as well as investment in high-carbon projects. Within a year of setting up this tracking mechanism, the Government should review financial flows against its investment roadmaps to determine whether those roadmaps provide sufficient coverage of the whole economy. It should also use this information to inform whether further incentives or regulation are required to shift financial flows towards the Government’s net zero and nature targets.

Unlocking a global carbon market

131. The United Nations Development Programme defines carbon markets as “trading systems in which carbon credits are sold and bought”.232 There are two types of carbon market:

i) Voluntary: where credits are bought and sold on a voluntary basis.

ii) Compliance: created by national, regional and/or international policy or regulatory requirement.233

In evidence, we heard that carbon markets can help to offset and reduce emissions, channel climate finance to the Global South, and reduce the attractiveness of existing and planned fossil fuel projects, all of which would help to contribute to net zero.234

132. Article 6 of the Paris Agreement, approved at COP26, allows countries to voluntarily cooperate with each other to achieve emissions reduction targets set out in their NDCs, and is a reason why interest in global carbon markets is growing.235 Independent bodies such as the Voluntary Carbon Markets Initiative (VCMI) and the Integrity Council for the Voluntary Carbon Market (ICVCM) are developing and publishing international guidance for buyers of carbon credits.236 Both Mark Carney and Zoe Norgate told us in evidence that much of this work is driven by civil society organisations in the UK; for example the UK’s Green Finance Institute provides the secretariat for the ICVCM.237

133. In April 2021 the Taskforce on Scaling Voluntary Carbon Markets released its final report on the scaling up of the carbon credit trading market, highlighting the need to remain within a 570 gigatonne (Gt) CO2 cumulative 2018–50 carbon budget, which would require net GHG emissions to fall by 23 Gt by 2030.238 It argues that fifteen times more voluntary offsetting is required in 2030 compared to 2019 to achieve 2 Gt of emissions sequestration and removal, with corporate commitments forecast to achieve 0.2 Gt based on evidence at the time of its publication.239

134. One example of a compliance carbon market is the UK’s Emissions Trading Scheme (ETS), which applies a cap-and-trade system to the electricity generation and aviation industries. In a ‘cap-and-trade’ model, participants have an emissions allowance. If they exceed their allowance, they must purchase permits from other participants. The cap is reduced over time, so that total emissions fall. The Government has committed to continuing the scheme until at least 2050, alongside exploring the expansion of the scheme to more sectors of the economy.240 The UK ETS is broadly based on the EU ETS,241 and we heard from abrdn plc that as a short term solution it supported this “nearer term, national level action”, while supporting moves towards a global carbon price as a longer term solution.242

Figure 6: The UK cost of carbon over time (£ per tonne)

A line chart showing how the UK’s cost of carbon has changed over time between 2021 and 2023. The cost of carbon is measured in pounds per tonne and shows a peak of nearly 100 pounds in 2022 before falling back below 50 pounds in 2023.

Source: Ember, Carbon Price Tracker

135. Dr Anastasiya Ostrovnaya told us that the environmental costs of producing goods, including the energy costs, are not factored into the price of goods, and that therefore the majority of goods are not traded at the correct price, so “carbon pricing is extremely important”.243 However she explained that there are some risks with carbon pricing schemes too, risks which ultimately derive from lack of alignment across jurisdictions. She explained that under the UK ETS, companies can obtain carbon credits as free allocations or buy them in the market (which is where the market price comes from). Dr Ostrovnaya said that “about 50% of the emissions are covered by free allocations and these are usually given to the industries that are considered to be a flight risk, as I call it, or a carbon leakage risk, including cement and steel”. To stop those companies headquartering elsewhere and taking their emissions with them, Dr Ostrovnaya said that because of these free allocations, “some of the heavy emitters were actually getting subsidies rather than being penalised”, being able to sell their free allocations on the market for a profit.244

136. Steve Waygood told us that the UK’s ETS needed to grow comparably to the EU’s over a much shorter timeframe to “mobilise the economic incentives”.245 Aligning the UK ETS with other jurisdictions was something abrdrn plc also called for, along with a global carbon price.246 But a global carbon price, though desirable, was described as something of a ‘pipe dream’ by our witnesses.247 Dr Ostrovnaya explained that a global price for carbon was politically difficult to achieve, given that developed economies have built their economies with no carbon price and would now be expecting emerging economies to pay for carbon emissions.248

Box 9: What is a Carbon Border Adjustment Mechanism (CBAM)?

In July 2021, the EU Commission presented a unilateral mechanism where EU importers of certain energy intensive goods—cement, iron and steel, fertilisers and electricity—would have to buy carbon certificates. The cost of the certificates would cover the difference in carbon price in countries with lower climate standards and the price that would have been paid, had the goods been produced under the EU’s carbon pricing rules (the Emissions Trading System). The purpose of the CBAM is to reduce the risk of carbon leakage by encouraging producers in non-EU countries to make their production processes more green.

Source: What role does trade policy have in addressing climate change?, House of Commons Library Insight, 17 November 2021; European Commission, Carbon Border Adjustment Mechanism: Questions and Answers, 14 July 2021

137. In the absence of a global carbon price, at least for now, contributors suggested that so-called carbon border adjustment mechanisms (CBAMs) could help to address carbon leakage and international competitiveness. Dr Ostrovnaya explained that a CBAM would “tax at the border goods that are produced elsewhere where they are not paying [a carbon price]”.249 The EU reached a provisional agreement on its own CBAM in December 2022, and started its transitional phrase in October 2023.250 Dr Ostrovnaya argued that the purpose of a CBAM is to ensure that industries covered by an ETS—such as in the EU or the UK—do not lose out on business to other countries. Academics from Bournemouth University pointed out that, on the other hand, CBAMs in turn may reduce the competitiveness of emerging economies that are carbon-intensive.251 But this in turn, as suggested by Dr Ostrovnaya, may give the countries that the EU and the UK trade with an incentive to develop their own carbon pricing.252 The same academics from Bournemouth University were of the view that CBAMs are needed when an ETS is implemented, in order to combat carbon leakage.253

138. Earlier in this Parliament we carried out an inquiry into CBAMs, publishing our findings in March 2022. We found that that the UK ETS, which applies only to UK production and not to imports of equivalent products into the UK, risks carbon leakage.254 In our report we recommended that the UK Government should begin work immediately to introduce its own CBAM, while continuing to pursue global approaches to carbon pricing.255 In response, the Government committed to consulting on a range of carbon leakage mitigation options, including CBAMs.256 It published this consultation alongside the Green Finance Strategy in March 2023.257 The consultation has now closed, and no timescales have been published for its next steps. In the Autumn Statement on 22 November 2023, the Chancellor said that the Government would publish the response to it consultation “shortly”.258

139. In the Green Finance Strategy, the Government stated that both the VCMI and the IVCMI will publish their guidance this year and that the Government will “consider the potential for their outputs to serve as a basis for international best practice on market integrity, and the extent to which they could be incorporated within relevant regulatory regimes, including through the consultation” on carbon leakage mitigation.259

140. On voluntary carbon markets, Zoe Norgate told us in evidence that the Government intended to launch a consultation this year.260 At the time of consideration of our report this had not been published. On the UK’s carbon price and the risk of carbon leakage, the Minister for Energy Efficiency and Green Finance described CBAMs as “a difficult area”, saying “in the short term it is better to work internationally with other countries, to persuade them of the case for introducing carbon pricing in their own areas, but it is certainly something that we keep under review”.261

141. We applaud the UK Government and civil society for leading the way in building a global voluntary carbon market. We appreciate the difficulty of achieving a global price for carbon, but it is ultimately needed to prevent a race to the bottom where industries flock to headquarter in jurisdictions with the lowest penalties for polluting the planet and derailing the Paris Agreement to limit global warming to 1.5°C. A global price for carbon would also help to remove the perverse incentives in individual nations’ carbon pricing schemes such as the UK emissions trading scheme, where high-emitting industries may be inadvertently subsidised to prevent capital flight. We recommend that the Government launch its promised consultation on voluntary carbon markets without delay.

142. Having been a long-standing leader in climate finance, the UK now risks falling behind by failing to install mechanisms to mitigate carbon leakage. The EU has already launched its carbon border adjustment mechanism (CBAM). It is now over a year and a half since we called on the Government to begin work immediately to develop a UK CBAM. We welcome the Government’s consultation on addressing carbon leakage risk, but are concerned to note the Minister’s view that it is better to encourage other countries to develop their own carbon pricing than to introduce our own CBAM. As we have argued before, the UK should be doing both. The Government must get on with it and plug the leaks that the UK’s emissions trading scheme risks causing, by developing a carbon border adjustment mechanism.

4 The effect of UK government policy on global and local investment

143. In this chapter we consider the UK Government’s position as a global leader in green finance and the effect its policies have on the net zero transition. We also consider its role in supporting local authorities and the implications of policy at a household level.

The global stage

144. The Global Green Finance Index has placed the City of London as the top green finance centre globally for four years running,262 and we heard throughout our inquiry that the UK is a, if not the, global leader on financial regulation and thought leadership with respect to climate change.263 Mark Carney used the road cycling analogy of a “peloton”, with the UK out in front, and countries following its lead.264 He said: “From my experience [ … ] the UK has traditionally led on these types of issues in terms of not just thought leadership but deploying its financial resources consistently”.265

145. Mark Carney implied that interest in and commitment to net zero is not internationally consistent across the financial sector, by outlining that membership in GFANZ is not spread equally throughout the world’s financial centres. He said: “representation in GFANZ is much higher in the UK and Europe [...i]t is quite considerable in the US, Japan and elsewhere, and lower in terms of the emerging economies”.266 This inconsistency also came through in Carbon Tracker’s analysis of letters received by the Committee from financial institutions, which scored European companies more highly than those headquartered in the United States and Asia.267

146. Contributors to this inquiry from financial institutions suggested that in facing the global challenges of a net zero transition, the UK should use its leadership position to help to introduce more consistent rules and systems across borders, particularly in the realm of disclosures and reporting as we saw in chapter two.268 Steve Waygood added that the UK should use its influence and leadership position to encourage other countries to align their financial centres with net zero objectives,269 but he recognised that some parts of the world are easier to engage than others:

It would be wonderful to be able to use the network of embassies and maybe the offices of the FCDO to engage better with organisations in Central America and the Middle East where I know other peer investors also are experiencing problems mobilising the state-owned enterprises. They would probably listen to us if we were able to work with [the UK Government] more.270

147. Witnesses said that in order to lead the way globally, the UK needs its own strong targets and regulations.271 However, there are concerns that in recent years the UK could be losing its leadership position on net zero, most notably with the Climate Change Committee concluding in its June 2023 progress report to Parliament that “the UK has lost its clear global leadership position on climate”.272 Following the publication of “Powering Up Britain”, Dr Chris Jones, an expert in climate change at the University of Manchester, told the BBC that the strategy was “a weak response to the UK’s zero carbon energy needs” and warned that it could “downgrade the UK’s role as a leader in tackling climate change”.273 The UK remains in third place on the Aviva Climate-Ready Index behind France and Germany, however that report warns that the UK’s mitigation score dropped by more than any other country this year and was one of a number of countries that were “struggling to maintain momentum in crucial elements of climate-readiness”.274 In the green finance space, Sylvera, an independent provider of data on nature-based carbon, warned us that while London had initially been the leader for carbon trading, for example, other countries were now leapfrogging the UK.275

148. The Green Finance Strategy provides a great deal of detail on the Government’s plans to continue to leverage its influence on a global stage. It sets out three high-level objectives for this work: aligning the global financial system; aligning development finance; and building partnerships with emerging markets and developing economies (EMDEs). The Government states that it will support EMDEs to grow sustainably while creating opportunities for shared prosperity through its commitment to provide £11.6 billion in International Climate Finance up to 2025–26. It outlines five areas of focus:

i) Deepen country partnerships and build green finance capability;

ii) Provide strategic investment and enhance the scale of investment opportunities;

iii) Develop innovative approaches to unlock private finance;

iv) Achieve global impact through the reform of the international financial architecture; and

v) Enable private investment in international climate adaptation.276

The strategy also outlines other commitments such as continuing to support Just Energy Transition Partnerships in South Africa, Indonesia and Vietnam, and introducing and promoting climate resilient debt clauses.277

149. The Treasury Lords Minister told us of the Government’s intentions to continue to lead in the area of green finance, and that the aim of the updated Green Finance Strategy was to “build on the UK financial services growth and competitiveness internationally and make us a real leader in this space”.278 On cross-border alignment, the Minister highlighted the take up of the ISSB standards and the Government’s hopes to shore up “global support” for those, as well as the Government’s support of the TNFD.279 She went on to highlight that the UK is a member of the Coalition of Finance Ministers for Climate Action, leading on a private finance mobilisation workstream, and was keen to support green finance agreements through the G7 and G20, in particular through the G20 Sustainable Finance Working Group.280

150. The UK Government should be proud of its world-leading track record in supporting green finance initiatives. At the same time, it must neither be complacent nor lose momentum. The UK must continue to use its leadership position to bring other countries on board and create policy alignment across jurisdictions. For its influence to continue, the UK cannot be perceived to be watering down its own net zero policies.

The local stage

151. The Government’s Net Zero Strategy, published in October 2021, states that over 80% of greenhouse gas emissions are within the scope and influence of local authorities.281 We heard in evidence of the significant and positive role that local authorities can play in achieving net zero, through delivering projects at the household level, collaborating with financial institutions, and crowding in finance for large scale projects. Indeed, the Minister for Energy Efficiency and Green Finance offered as an example of the importance of local authorities the fact that all £6.6 billion of the Government’s funding for energy efficiency is delivered through local authorities.282 A specific example of this is the Government’s Boiler Upgrade Scheme, a grant that is distributed at the household level “to help households who want to replace their gas boilers with a low-carbon alternative like a heat pump”, the value of which the Government recently increased by 50% to £7,500, albeit that the total envelope of funding was not increased.283

152. At the household level, we heard that local authorities have an important role to play in distributing grants for retrofitting people’s homes, such as through installing heat pumps or solar panels. The MCS Charitable Foundation gave the example of Demand Aggregation Finance schemes, “typically sponsored by local authorities”, which allow residents to come together to “form a group with sufficient purchasing power to bulk order and mass install low carbon technologies”.284

153. As an example of the positive work that local authorities can achieve in partnership with the financial sector, Michael Marks described how Legal and General worked with Thurrock Council and Kensa in three tower blocks to replace traditional heating with ground source heat pumps, as just one example of the types of net zero projects on which financial institutions collaborate with councils.285

154. As we saw in the previous chapter, another role for local authorities is to crowd in private finance for large scale net zero projects that may otherwise be deemed too risky without some public financial backing. UK100 explained:

Local authorities are key to opening up the investment opportunities to enable a significant investment of private finance into low-carbon projects. Local authorities can offer a route to market for private capital looking to invest in low-carbon and socially beneficial projects.286

UK100 cited research which found that, along with some funding for local authorities to increase their capacity to manage such large capital projects, a £5 billion injection from UKIB (see paragraph 116) could unlock £100 billion in local energy systems in 2030.287 We were also signposted to research which found that net zero projects that are locally designed and delivered require less investment and deliver more energy savings than so-called “place-agnostic” projects (see Figure 7).288

Figure 7: Place-specific low carbon measures generate twice the energy savings for consumers with over three times less investment compared to place-agnostic measures (£ million)

A bar chart showing the difference in investment and consumer savings between a place-agnostic scenario and a place-specific scenario for local net zero projects. The chart shows investment needed to drive £57 million of energy savings in a place-agnostic scenario is £195 million, whereas in a place-specific scenario £108 million of energy savings can be delivered for only £58 million of investment.
Source: UKRI, Accelerating Net Zero Delivery

155. We heard of two main barriers to local authorities being able to deliver their full potential in financing the net zero transition. The first was a fragmented funding landscape. Analysis by UK Research and Innovation and the Green Finance Institute in July 2022 found that there are currently no clear pathways to fund net zero projects at both the regional and household level.289 A National Audit Office report on local government and net zero in England, requested by this Committee in 2021, found that 22 grant funds were available for local authorities in England to apply to for net zero related work, and that this competitive and time-limited funding model was inefficient and could pose a risk that “money does not go to where the need or opportunity is greatest”.290

156. Ryan Jude explained that by having to divert resources to compiling bids for competitive grants, councils in this position “have lost months” and that this process of funding local net zero projects was therefore “not an efficient way when we have this looming net zero target coming down the line”.291 He also explained that by not having visibility of the grant funding that a local authority may or may not have coming in, that in turn affects their ability to scale up finance from the private sector, saying: “if the local authority cannot even see where the grant funding is coming from, it cannot plan which sectors to speak to investors to get that bigger funding in”.292 He recommended having more non-competitive funding for local authorities, such as by ring-fencing funding for the areas in the country with the worst average EPC (Energy Performance Certificate) ratings.293

157. The NAO’s report recommended that the Government “carry out an overall outline analysis of local authority funding for net zero”, and in the Net Zero strategy published three months later the Government committed to simplify and consolidate the number of local net zero funding streams.294 The then Housing, Communities and Local Government Committee made similar recommendations in its October 2021 report Local government and the path to net zero, recommending that the Government “come up with a plan for funding local authority climate action in a way that gives councils the confidence and ability to plan for the long term, including by making good on its commitment in the Net Zero Strategy to simplify and consolidate the number of local net zero funding streams”.295

158. The “Powering Up Britain” plan, published in March 2023, reiterated the promise of work to streamline local authority net zero funding, by saying that the Government will “explore simplification of the net zero funding landscape for local authorities where this will deliver better outcomes for net zero”.296 Since then, the Crown Commercial Service has published a website to act as a “one stop shop” for information on “carbon net zero funding and grants” for local authorities. Last updated on 24 July 2023, it lists all the local authority net zero grant competitions that local authorities can enter. The total stands at 22, but includes one grant offered by the Welsh Government and three from the Scottish Government (the 22 grants identified by the NAO covered English local authorities only).297

159. The second barrier for local authorities is limited technical expertise. UK100 said:

Many local and combined authorities have high ambition to drive the large available global pools of capital into local Net Zero projects, but they often lack the technical capacity to take projects forward. … Advancing investable propositions for local Net Zero projects requires high time demands on already stretched officers and financial risk for local authorities that suffer from stretched budgets. Financial support and guidance from the UK Government and the UK Infrastructure Bank is needed to build capability and capacity for local authorities to develop investable projects for private finance to partner with them on.298

Ryan Jude echoed this, saying that local authorities are not always “speaking the language of the investors” by “putting the financial metrics in front of them” to convince investors that their project idea is investable. He too said that the Government or UKIB should “provide that technical assistance”.299

160. The Green Finance Strategy and “Powering Up Britain” both refer to several ongoing workstreams designed to upskill local authorities in relation to net zero investment:

i) Local Net Zero Hubs build capacity and capability in local government and support councils in England to attract commercial investment;

ii) The UK Infrastructure Bank is building an advisory and lending strategy, partnering with local government and the private sector to increase infrastructure investment;

iii) Net Zero Go is a free to use digital platform providing net zero advice; and

iv) The Local Net Zero Forum brings together national and local government to provide a single engagement route on local net zero policy and delivery issues.300

The Green Finance Strategy adds that “the UK government and its Local Net Zero Hubs will work with UKIB and GFI to provide expertise to local authorities in identifying, developing and framing commercially attractive investments”.301

161. Local authorities have a significant role to play in green finance, from delivering grants at the household level, to collaborating with financial institutions on local net zero projects, and crowding in private capital for large scale projects. However, they are hindered by a fragmented funding landscape and limits on technical capacity.

162. We welcome the 50% increase permitted for individual grants under the Boiler Upgrade Scheme, and we would wish to see the overall envelope of funding increased subject to sufficient uptake.

163. We welcome the work that the Government has done so far to provide a “one stop shop” of information on net zero grants to which local authorities can submit competitive bids. The Government appears to have streamlined the number of competitions for English local authorities somewhat, apparently taking the total from 22 to 18. However, this does not solve the problem of local authorities having to spend time and resource putting together applications that may fail, preventing them from having the visibility they need to plan for the long-term and develop investable projects. Furthermore, place-specific net zero measures have been shown to be more effective than place-agnostic measures. We recommend that the Government move away from competitive grants for net zero projects, and consider allocating some funds on a needs basis, and provide core funding for all councils to take forward climate action across their own services. We also recommend that the Government consider issuing funds for place-specific measures that are less constrained by the nationally set criteria of central-government issued grants.

164. We welcome the ongoing work to provide technical support and advice to local authorities, including through the Local Net Zero Hubs, UKIB, Net Zero Go, and the Local Net Zero Forum. We also welcome the Government’s intention to work with the Green Finance Institute to provide assistance to local authorities to develop commercially attractive net zero investments. We suggest that the Government conduct a mapping exercise to ensure that local authorities most in need of technical support receive it.

Conclusions and recommendations

The financial sector’s impact on energy security

1. We have heard that vast numbers of fossil fuel assets are at risk of devaluing before they are extracted due to changes in energy consumption and therefore becoming ‘stranded assets’. This is a particular risk in the City of London, as one of the top four financial centres where this concern is concentrated. This risk has also intensified due to Russia’s full-scale invasion of Ukraine leading to divestment from Russian-linked fossil fuel assets. While there have been some calls for the burden of this risk to sit with the companies which are driving the phase out of fossil fuel investment through individual policies, we have not identified a consensus on this matter. (Paragraph 33)

2. We recommend that to mitigate against the risk of stranded assets from North Sea extraction, the North Sea Transition Authority should calculate what the impact to the UK taxpayer and company profitability would be of requiring the cost of decommissioning to be absorbed for new oil and gas licences through the introduction of duties on operators. (Paragraph 34)

3. We have heard during our inquiry that despite the pledges set out and agreed upon by global governments in the Paris Agreement, private banks have financed trillions of US dollars into fossil fuels. New UK fossil fuel Initial Public Offerings are still being approved, and the UK Government is pressing ahead with new fossil fuel investment opportunities. We have been told that, while the current ratio of investment capital in low carbon energy compared to fossil fuels is 0.9:1, this needs to quadruple to 4:1 by the end of the next decade. While there are examples of financial institutions moving away quickly from fossil fuel investments, the engagement policies enacted by many organisations could be clearer about the extent to which they are still financing companies not aligned with the Paris Agreement. (Paragraph 53)

4. We absolutely agree with the Minister for Energy Efficiency and Green Finance that energy security and net zero are two sides of the same coin. However, we are concerned that many believe that the Government is sending mixed signals to the market which in turn affects investment decisions in the energy transition. While business decisions are ultimately for those businesses to make, the Government should not underestimate its own influence. (Paragraph 54)

5. We have previously concluded in our report ‘Accelerating the transition from fossil fuels and securing energy supplies’ that there is not a consensus on the speed of transition from fossil fuels as the Government endeavours to reach net zero by 2050. While the scientific consensus is clear that planned production of fossil fuels is already enough to exceed safe climate limits, with the IPCC’s recent Synthesis Report warning that “projected CO2 emissions from existing fossil fuel infrastructure without additional abatement would exceed the remaining carbon budget for 1.5°C”, there is a view from some financial institutions, recently endorsed by the UK Government, that new licences have a role to play in reducing reliance on imported fossil fuels. Energy security is sometimes used as justification to pursue new oil and gas exploration, but we have found that this approach may not reflect climate goals effectively, as there is a risk that it may lead to either missing climate targets or ending up with stranded assets. Therefore when planning for net zero energy security and a just transition for the workforce, it is crucial that the Government considers the balance between the North Sea as a declining asset, and the UK’s capacity for renewable energy as the UK moves towards a net zero future. (Paragraph 55)

6. We recommend that the Government publish quarterly reports to show how the UK is moving towards greater energy independence while staying on track to meet its net zero target, including an assessment of the effect of scope three emissions on global efforts to limit global temperature rise to 1.5°C. The notion of “energy security” should increasingly shift towards renewable energy, which can support greater energy independence and reduce reliance on fossil fuels. (Paragraph 56)

7. We reiterate the recommendation of our earlier report that the Government set a clear date for ending new oil and gas licensing rounds in the North Sea: this date should fall well before 2050. (Paragraph 57)

Plans for transition: reporting requirements

8. We welcome the Government’s intention to consult on requiring companies to disclose transition plans. However, the current “comply or explain” basis should be for an interim period only: a company can disclose by simply not having a transition plan, defeating the point of the policy. (Paragraph 68)

9. We agree with the Government that the operating environment will become increasingly difficult for those firms that do not set out their plans for contributing to net zero. However, we do not think it is enough to leave the issue of transition planning to the market. The UK led the way globally with its introduction of mandatory reporting in relation to the Taskforce on Climate-related Financial Disclosures (TCFD), and now risks losing its leadership position in the green finance space by deferring its commitment to mandatory transition planning made at COP26. At the same time, we understand the risk of capital flight and the need to remain internationally competitive. (Paragraph 69)

10. The Government’s consultation on requiring companies to disclose transition plans should include consideration of making it compulsory to have and to disclose a transition plan—not just if a company happens to have one—and the most suitable timetable for doing so. Beyond this consultation, mandatory reporting of transition plans should remain the Government’s ultimate aim. (Paragraph 70)

11. We welcome the publication of the Transition Plan Taskforce’s disclosure framework for transition plans, and the steps taken to achieve international alignment of that framework. We believe that those who publish transition plans should follow a compulsory framework, to ensure comparability and to mitigate the risk of greenwashing. While investors have an important role to play in determining the credibility of transition plans, it is vital for measuring our progress towards net zero that ‘credibility’ is not subjective. We recommend that the Government should introduce regulations, to be phased in and monitored over time, to ensure that companies developing and disclosing transition plans do so in accordance with the Transition Plan Taskforce’s guidance. (Paragraph 88)

12. A plan is only effective if it delivers its contents. The Government should set out simple, consistent regulatory expectations for net zero transition plans and establish an independent mechanism for monitoring and evaluating and verifying organisations’ net zero transition plans, to ensure that they are aligned with Paris Agreement compliant pathways. (Paragraph 89)

13. We welcome the Government’s commitment to just transition principles in its Green Finance Strategy and the inclusion of specific workstreams in the creation of the transition plan disclosure framework and implementation guidance. While the Transition Plan Taskforce acknowledges the inclusion of just transition principles within its working group and includes a definition within its guidance, we are concerned that it does not appear to include those principles explicitly within the transition framework itself, which may leave organisations with no further knowledge of how their transition plans should consider wider stakeholders. (Paragraph 90)

14. We recommend that the Government publish further guidance to stakeholders to advise explicitly how just transition principles should be considered within the transition plan framework, to ensure that companies are able to provide better outcomes for all people, including workers and their communities. (Paragraph 91)

15. We welcome the references to nature in the Transition Plan Taskforce’s framework; however, we consider that the framework could go further on nature. We recommend that the Government should take steps to incorporate into the framework the contribution by a company towards halting and reversing nature loss within the overall strategic ambition of its transition plan. (Paragraph 92)

16. We welcome the Government’s intentions for Sustainability Disclosure Requirements (SDR). As part of that framework, we welcome the Government’s intention to incorporate International Sustainability Standards Board (ISSB) standards and make them mandatory, its consultation on reporting scope 3 greenhouse gas emissions, and its intention to adopt the Taskforce on Nature-related Financial Disclosures (TNFD) reporting. Having internationally-aligned standards such as the ISSB standards is vital for reducing the risks of greenwashing and carbon financing leakage. (Paragraph 102)

17. To maintain the UK’s global leadership in green finance reporting, the Government must keep up the momentum. We recommend that Ministers set out an overarching implementation timetable for the SDR, including for TNFD reporting, and commit to making TNFD reporting mandatory, continuing the trail the UK blazed for TCFD. The Government should consult on TNFD definitions, and should phase in compulsory TNFD disclosures over the next three to five years, starting with the largest companies. (Paragraph 103)

18. While we welcome the Government’s intention to introduce a UK green taxonomy, we are concerned to note the delays to its introduction. As with transition plan frameworks and disclosures, we support the principle of a mandatory taxonomy to ensure comparability. (Paragraph 111)

19. We recommend that the Government seek to introduce the UK green taxonomy as soon as possible. That taxonomy should include a spectrum of definitions—‘fifty shades of green’, as one of our witnesses put it. During the period of voluntary reporting against the green taxonomy, the Government should monitor and report quarterly on progress, to optimise its implementation and ensure that it becomes mandatory no less than two years after the beginning of the voluntary period. (Paragraph 111)

20. It is unfortunate that, due to the delays to the introduction of the green taxonomy, the remit of the Green Technical Advisory Group expired before the testing period of voluntary disclosures could begin. We urge Ministers to heed the group’s calls for a long-term institutional home for the UK green taxonomy. (Paragraph 112)

Private investment: a roadmap to net zero

21. We welcome the Government’s progress in developing blended finance models for net zero projects, in particular the work of the UK Infrastructure Bank (UKIB) which, according to the evidence given to us by the Minister, has created around £4 of private capital for every £1 of public funding invested. Such models are valuable for de-risking and stimulating investments in emerging technologies that may help the UK achieve its net zero target. We therefore welcome the Government’s continued work with the Green Finance Institute in this area and its timely goal of drawing conclusions in advance of the next spending review. (Paragraph 127)

22. The Government must keep to its ambition of setting out its future plans for net zero blended finance solutions by the next spending review, and should include nature recovery projects within this suite of solutions. The Government should set out in one document all its different blended finance models, cross-checking them against its various sector roadmaps both to ensure that solutions are targeted towards the investment gaps that need to be filled, and also to ensure that institutions such as UKIB are supporting the right projects with appropriate levels of investment. (Paragraph 128)

23. We welcome the many net zero sector roadmaps that the Government has published and plans to publish, which should provide investors with the detail they require to help their investments align with the Government’s net zero target. We particularly welcome the fact that nature is included among these investment roadmaps, and urge the Government to publish the next round of roadmaps, promised this autumn, without delay. While we received limited calls for an economy-wide net zero investment roadmap, we did not receive enough evidence to arrive at a conclusion on whether this is needed. This makes tracking green financial flows across the economy all the more important. (Paragraph 129)

24. Understanding levels of investment across the economy is vital for knowing whether the UK is on track to meet its climate and nature targets. That is why we welcome the work underway by the Government to explore methodologies for tracking both net zero-related financial flows and nature-related financial flows. (Paragraph 130)

25. We recommend that the Government go further and turn this research into a formal tracking mechanism by a date no later than the end of the current Parliament. The Government should task either an existing independent body, or create a new independent body, to track net zero and nature-related financial flows, as well as investment in high-carbon projects. Within a year of setting up this tracking mechanism, the Government should review financial flows against its investment roadmaps to determine whether those roadmaps provide sufficient coverage of the whole economy. It should also use this information to inform whether further incentives or regulation are required to shift financial flows towards the Government’s net zero and nature targets. (Paragraph 130)

26. We applaud the UK Government and civil society for leading the way in building a global voluntary carbon market. We appreciate the difficulty of achieving a global price for carbon, but it is ultimately needed to prevent a race to the bottom where industries flock to headquarter in jurisdictions with the lowest penalties for polluting the planet and derailing the Paris Agreement to limit global warming to 1.5°C. A global price for carbon would also help to remove the perverse incentives in individual nations’ carbon pricing schemes such as the UK emissions trading scheme, where high-emitting industries may be inadvertently subsidised to prevent capital flight. We recommend that the Government launch its promised consultation on voluntary carbon markets without delay. (Paragraph 141)

27. Having been a long-standing leader in climate finance, the UK now risks falling behind by failing to install mechanisms to mitigate carbon leakage. The EU has already launched its carbon border adjustment mechanism (CBAM). It is now over a year and a half since we called on the Government to begin work immediately to develop a UK CBAM. We welcome the Government’s consultation on addressing carbon leakage risk, but are concerned to note the Minister’s view that it is better to encourage other countries to develop their own carbon pricing than to introduce our own CBAM. As we have argued before, the UK should be doing both. The Government must get on with it and plug the leaks that the UK’s emissions trading scheme risks causing, by developing a carbon border adjustment mechanism. (Paragraph 142)

The effect of UK government policy on global and local investment

28. The UK Government should be proud of its world-leading track record in supporting green finance initiatives. At the same time, it must neither be complacent nor lose momentum. The UK must continue to use its leadership position to bring other countries on board and create policy alignment across jurisdictions. For its influence to continue, the UK cannot be perceived to be watering down its own net zero policies. (Paragraph 150)

29. Local authorities have a significant role to play in green finance, from delivering grants at the household level, to collaborating with financial institutions on local net zero projects, and crowding in private capital for large scale projects. However, they are hindered by a fragmented funding landscape and limits on technical capacity. (Paragraph 161)

30. We welcome the 50% increase permitted for individual grants under the Boiler Upgrade Scheme, and we would wish to see the overall envelope of funding increased subject to sufficient uptake. (Paragraph 162)

31. We welcome the work that the Government has done so far to provide a “one stop shop” of information on net zero grants to which local authorities can submit competitive bids. The Government appears to have streamlined the number of competitions for English local authorities somewhat, apparently taking the total from 22 to 18. However, this does not solve the problem of local authorities having to spend time and resource putting together applications that may fail, preventing them from having the visibility they need to plan for the long-term and develop investable projects. Furthermore, place-specific net zero measures have been shown to be more effective than place-agnostic measures. We recommend that the Government move away from competitive grants for net zero projects, and consider allocating some funds on a needs basis, and provide core funding for all councils to take forward climate action across their own services. We also recommend that the Government consider issuing funds for place-specific measures that are less constrained by the nationally set criteria of central-government issued grants. (Paragraph 163)

32. We welcome the ongoing work to provide technical support and advice to local authorities, including through the Local Net Zero Hubs, UKIB, Net Zero Go, and the Local Net Zero Forum. We also welcome the Government’s intention to work with the Green Finance Institute to provide assistance to local authorities to develop commercially attractive net zero investments. We suggest that the Government conduct a mapping exercise to ensure that local authorities most in need of technical support receive it. (Paragraph 164)

Formal minutes

Wednesday 22 November 2023

Members present

Philip Dunne, in the Chair

Duncan Baker

Barry Gardiner

Clive Lewis

Caroline Lucas

Anna McMorrin

Dr Matthew Offord

Cat Smith

Claudia Webbe

The financial sector and the UK’s net zero transition

The Committee deliberated.

Draft report (The financial sector and the UK’s net zero transition), proposed by the Chair, brought up and read.

Paragraphs 1 to 164 read and agreed to.

Summary agreed to.

Resolved, That the Report be the First Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Adjournment

Adjourned till Wednesday 29 November at 2.00pm.


Witnesses

The following witnesses gave evidence. Transcripts can be viewed on the inquiry publications page of the Committee’s website.

Monday 24 October 2022

Mark Carney, Special Envoy for Climate Action and Finance, United Nations, Co-Chair, Glasgow Financial Alliance for Net ZeroQ1–63

Wednesday 14 December 2022

Sam Alvis, Head of economy, Green Alliance; Mark Campanale, Founder and Director, Carbon Tracker Initiative; Ryan Jude, Programme Director for Green Taxonomy, Green Finance Institute; Dr Anastasiya Ostrovnaya, Senior Research/Teaching Fellow, Centre for Climate Finance and Investment, Imperial College Business SchoolQ64–106

Wednesday 08 March 2023

Tim Lord, UK Head of Climate Change, HSBC UK; Michael Marks, Head of Investment Stewardship and Responsible Investment Integration, Legal and General Investment Management; Roslyn Stein, Group Head of Climate and Biodiversity, AXA; Steve Waygood, Chief Responsible Investment Officer, Aviva InvestorsQ107–169

Thursday 18 May 2023

The Baroness Penn, Treasury Lords Minister, HM Treasury; Fayyaz Muneer, Deputy Director for Green Finance and Prudential Policy, Financial Services Group, HM Treasury; The Lord Callanan, Parliamentary Under-Secretary of State (Minister for Energy Efficiency and Green Finance), Department for Energy Security and Net Zero; Amy Jenkins, Deputy Director, UK Net Zero Investment and Workforce, Department for Energy Security and Net Zero; Zoe Norgate, Deputy Director, International Net Zero: Green Finance and Capability, Department for Energy Security and Net ZeroQ170–243


Published written evidence

The following written evidence was received and can be viewed on the inquiry publications page of the Committee’s website.

FSUK numbers are generated by the evidence processing system and so may not be complete.

1 abrdn plc (FSUK0032)

2 Ario Advisory (FSUK0021)

3 Association of British Insurers (FSUK0022)

4 Aviva Plc (FSUK0023)

5 AXA (FSUK0041)

6 B Corp Finance & Investment Working Group (FSUK0034)

7 Bright Blue (FSUK0003)

8 British Private Equity and Venture Capital Association (FSUK0019)

9 Carbon Tracker Initiative (FSUK0011, FSUK0036, FSUK0040)

10 City of London Corporation (FSUK0031)

11 ClientEarth (FSUK0025)

12 Cushon (FSUK0017)

13 E3G (FSUK0035)

14 Glasgow Financial Alliance for Net Zero (GFANZ) (FSUK0024)

15 Glennmont Partners (FSUK0014)

16 Global Witness (FSUK0008)

17 Grantham Research Institute on Climate Change and the Environment (FSUK0007)

18 Green Alliance (FSUK0004)

19 Institutional Investors Group on Climate Change (FSUK0038)

20 Investment Association (FSUK0029)

21 Legal & General Group Plc (FSUK0012)

22 MCS Charitable Foundation (FSUK0005)

23 Mohamed, Dr Tahani (Lecturer at the Department of Accounting, Finance and Economics, Bournemouth University); Kirkpatrick, Dr Alan K. (Lecturer at the Department of Accounting, Finance and Economics, Bournemouth University); and Adedoyin , Dr Festus (Lecturer at the Department of Computing and Informatics, Bournemouth University) (FSUK0006)

24 Phoenix Group (FSUK0020)

25 Positive Money UK (FSUK0028)

26 Principles for Responsible Investment (FSUK0037)

27 Rouch, David (FSUK0002)

28 ShareAction (FSUK0015)

29 St James’s Place plc (FSUK0030)

30 Sylvera (FSUK0033)

31 The Open Data Institute (FSUK0026)

32 TheCityUK (FSUK0018)

33 UK Finance (FSUK0016)

34 UK Sustainable Investment and Finance Association (UKSIF) (FSUK0013)

35 UK100 (FSUK0027)

36 WWF-UK (FSUK0010, FSUK0039)


List of Reports from the Committee during the current Parliament

All publications from the Committee are available on the publications page of the Committee’s website.

Session 2022–23

Number

Title

Reference

1st

Building to net zero: costing carbon in construction

HC 103

2nd

Pre-appointment hearing: Chair of the Environment Agency (Pre-appointment hearing)

HC 546

3rd

Recommendations on the Government’s draft environmental principles policy statement

HC 380

4th

Accelerating the transition from fossil fuels and securing energy supplies

HC 109

5th

Seeing the wood for the trees: the contribution of the forestry and timber sectors to biodiversity and net zero goals

HC 637

6th

The UK and the Arctic Environment

HC 1141

1st Special

Water quality in rivers: Government Response to the Committee’s Fourth Report of Session 2021–22

HC 164

2nd Special

Greening imports: a UK carbon border approach: Government Response to the Committee’s Fifth Report of Session 2021–22

HC 371

3rd Special

Building to net zero: costing carbon in construction: Government Response to the Committee’s First Report

HC 643

4th Special

Accelerating the transition from fossil fuels and securing energy supplies: Government and Regulator Response to the Committee’s Fourth Report

HC 1221

Session 2021–22

Number

Title

Reference

1st

Biodiversity in the UK: bloom or bust?

HC 136

2nd

The UK’s footprint on global biodiversity

HC 674

3rd

Green Jobs

HC 75

4th

Water quality in rivers

HC 74

5th

Greening imports: a UK carbon border approach

HC 737

1st Special Report

Energy efficiency of existing homes: Government Response to the Committee’s Fourth Report of Session 2019–21

HC 135

2nd Special Report

Growing back better: putting nature and net zero at the heart of the economic recovery: Government and Bank of England Responses to the Committee’s Third Report of Session 2019–21

HC 327

3rd Special Report

Biodiversity in the UK: bloom or bust?: Government Response to the Committee’s First Report

HC 727

4th Special Report

Green Jobs: Government Response to the Committee’s Third Report

HC 1010

5th Special Report

The UK’s footprint on global biodiversity: Government Response to the Committee’s Second Report

HC 1060

Session 2019–21

Number

Title

Reference

1st

Electronic Waste and the Circular Economy

HC 220

2nd

Pre-appointment hearing for the Chair-Designate of the Office for Environmental Protection (OEP)

HC 1042

3rd

Growing back better: putting nature and net zero at the heart of the economic recovery

HC 347

4th

Energy Efficiency of Existing Homes

HC 346

1st Special Report

Invasive species: Government Response to the Committee’s First report of Session 2019

HC 332

2nd Special Report

Our Planet, Our Health: Government Response to the Committee’s Twenty-First Report of Session 2017–19

HC 467

3rd Special Report

Electronic Waste and the Circular Economy: Government Response to the Committee’s First Report

HC 1268


Footnotes

1 IEA, Net Zero by 2050 - A Roadmap for the Global Energy Sector, May 2021, p 47

2 IPCC, AR6 Synthesis Report: Climate Change 2023 Summary for Policymakers, p 58

3 IPCC, AR6 Synthesis Report: Climate Change 2023 Summary for Policymakers, p 11

4 UNFCC, Paris Agreement 2015

5 Glasgow Financial Alliance for Net Zero (GFANZ) (FSUK0024)

6 FCA, Financial Lives Survey 2022, 26 July 2023, p 43

7 Climatebonds, Sustainable Debt Market Summary, August 2023

8 Glasgow Financial Alliance for Net Zero (GFANZ) (FSUK0024)

9 E3G (FSUK0035)

10 Long Finance, GGFI 11 Report, April 2023, p 4

11 Cabinet Office, COP26 Presidency Outcomes, 30 November 2022, Section 10

12 “Chancellor: UK will be the world’s first net zero financial centre”, HM Treasury, 3 November 2021

13 HM Government, Green Finance Strategy: Transforming Finance for a Greener Future, July 2019

14 HM Treasury, Greening Finance: A Roadmap to Sustainable Investing, October 2021

15 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023

16 HM Government, Powering Up Britain, March 2023; HM Government, Nature markets: A framework for scaling up private investment in nature recovery and sustainable farming, March 2023

17 GFANZ, Sector-specific Alliances

18Amount of finance committed to achieving 1.5 degrees now at scale needed to deliver the transition”, GFANZ, 3 November 2021

19GFANZ Reveals Year of Membership Growth and Implementation in Annual Progress Report, Expands Leadership with New Principal Group Members”, GFANZ, 27 October 2022

20 GFANZ, Financial Institution Net-Zero Transition Plans, November 2022

21 Q195 [Baroness Penn)

22Vanguard quits climate alliance in blow to net zero project”, Financial Times, 7 December 2022. ‘Greenwashing’ is the practice of making misleading or unsubstantiated claims about environmental performance.

23 AXA (FSUK0041)

24 Responses received to letters sent to signatories of the Glasgow Financial Alliance for Net Zero; Additional responses received to letter sent to signatories of the Glasgow Financial Alliance for Net Zero

25 Carbon Tracker Initiative (FSUK0036); Carbon Tracker Initiative (FSUK0040)

26 Reclaim Finance, Banking on Climate Chaos, 30 March 2022, p 3

27 Reclaim Finance, The Asset Managers Fuelling Climate Chaos scorecard, 20 April 2022, pp 4–5

28Europe’s banks helped fossil fuel firms raise more than €1tn from global bond markets”, The Guardian, 26 September 2023

29 “Banks accused of ‘lack of transparency’ over green finance activities”, Alliance News, 21 November 2023

30 IEA, Net Zero by 2050: A Roadmap for the Global Energy Sector, October 2021, p 51

31 IEA, Fossil Fuel Supply: Net Zero Emissions Guide, September 2023

32 Q68; An initial public offering, or IPO, is the first sale of stock issued by a company to the public.

33 Q68

34 Our World in Data, Years of fossil fuel reserves left, 2020

35Untapped Rosebank oil and gas field north of Scotland approved for development amid row over climate damage, Sky News, 28 September 2023

36 Q86

37Investment in Renewable Energy Needs to Quadruple by 2030”, Bloomberg, 6 October 2022

38 Q6

39 E.g. Carbon Tracker Initiative (FSUK0011); UK100 (FSUK0027); E3G (FSUK0035)

40 Investment Association (FSUK0029)

41 Aviva Plc (FSUK0023)

42 Carbon Tracker Initiative (FSUK0036)

43 Carbon Tracker Initiative (FSUK0036); Q132 [Michael Marks]; Grantham Research Institute on Climate Change and the Environment (FSUK0007); UK Sustainable Investment and Finance Association (UKSIF) (FSUK0013); ShareAction (FSUK0015); Aviva Plc (FSUK0023); St James’s Place plc (FSUK0030); abrdn plc (FSUK0032)

44 Legal & General Group Plc (FSUK0012)

45 Q126

46 Q127

47 Carbon Tracker Initiative (FSUK0036)

48Hundreds of new North Sea oil and gas licences to boost British energy independence and grow the economy”, Prime Minister’s Office, 10 Downing Steet and DESNZ, 31 July 2023

49 J-F Mercure et al., “Reframing incentives for climate policy action”, Nature Energy, vol 6, 1133–1143 (2021)

50 Grantham Institute, What are stranded assets?, 27 July 2022

51 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 5

52 Carbon Tracker, Unburnable Carbon: Ten Years On, 23 June 2022

53 abrdn plc (FSUK0032); Green Alliance (FSUK0004); Grantham Research Institute on Climate Change and the Environment (FSUK0007); UK Sustainable Investment and Finance Association (UKSIF) (FSUK0013)

54 Grantham Institute, What are stranded assets?, 27 July 2022

55 Q57

56 E3G (FSUK0035)

57 Environmental Audit Committee, Fourth Report of Session 2022–23, Accelerating the transition from fossil fuels and securing energy supplies, HC 109, para 176

58 Environmental Audit Committee, Fourth Report of Session 2022–23, Accelerating the transition from fossil fuels and securing energy supplies, HC 109, para 230

59 Q72

60 IEA, Energy Security

61 BEIS, DESNZ, and Prime Minister’s Office, 10 Downing Street, British Energy Security Strategy, updated 7 April 2022

62 HM Government, Powering Up Britain, March 2023, p 2

63 HM Government, Powering Up Britain, March 2023, p 7

64New laws passed to bolster energy security and deliver net zero”, DESNZ, Ofgem, The Rt Hon Claire Coutinho MP, and Andrew Bowie MP, 26 October 2023

65New opportunities for North Sea oil and gas”, Prime Minister’s Office, 10 Downing Street and The Rt Hon Rishi Sunak MP, 5 November 2023

66 WWF-UK (FSUK0010); Legal & General Group Plc (FSUK0012); Q88 [Dr Anastasiya Ostrovnaya]

67 Q88

68 Q6

69 Green Alliance (FSUK0004)

70 MCS Charitable Foundation (FSUK0005); Carbon Tracker Initiative (FSUK0011)

712022 was a record-breaking year for renewable energy in the UK”, World Economic Forum, 6 January 2023

72 MCS Charitable Foundation (FSUK0005); Investment Association (FSUK0029); E3G (FSUK0035)

73Hundreds of new North Sea oil and gas licences to boost British energy independence and grow the economy”, Prime Minister’s Office, 10 Downing Street and DESNZ, 31 July 2023

74 MCS Charitable Foundation (FSUK0005); Ario Advisory (FSUK0021)

75 Ario Advisory (FSUK0021)

76 HMRC, Energy (Oil and Gas) Profits Levy, 21 November 2022

77 E3G (FSUK0035); Green Alliance (FSUK0004)

78 HMRC, Energy (Oil and Gas) Profits Levy, 21 November 2022

79 Green Alliance (FSUK0004)

80 Green Alliance (FSUK0004); MCS Charitable Foundation (FSUK0005)

81 Green Alliance (FSUK0004)

82 Q88

83 MCS Charitable Foundation (FSUK0005)

84 Carbon Tracker Initiative (FSUK0036)

85 Q135

86 Green Alliance (FSUK0004); Glennmont Partners (FSUK0014); Phoenix Group (FSUK0020)

87 DLUHC, Levelling-up and Regeneration Bill reforms to national planning policy, updated 21 September 2023

88Families to cut bills with energy saving tips and support for most vulnerable”, DESNZ, The Rt Hon Claire Coutinho MP, and Amanda Solloway MP, 16 October 2023

89 DESNZ, Contracts for Difference Allocation Round 5: results, 8 September 2023. Contracts for Difference work by guaranteeing a set price for electricity that generators receive per unit of power output. As the wholesale price of electricity fluctuates, the generator is either paid a subsidy up to the set price, or pays back any surplus above the set price to the scheme, so that they have the certainty of always receiving the value of the strike price. The cost, or benefit, is passed on to consumers through their bills.

90 Environmental Audit Committee, Fourth Report of Session 2022–23, Accelerating the transition from fossil fuels and securing energy supplies, HC 109, para 176

91 Environmental Audit Committee, Fourth Report of Session 2022–23, Accelerating the transition from fossil fuels and securing energy supplies, HC 109, para 180

92 Environmental Audit Committee, Fourth Special Report of Session 2022–23, Accelerating the transition from fossil fuels and securing energy supplies: Government and Regulator Response to the Committee’s Fourth Report; HC 1221, para 75

93 Environmental Audit Committee, Fourth Special Report of Session 2022–23, Accelerating the transition from fossil fuels and securing energy supplies: Government and Regulator Response to the Committee’s Fourth Report; HC 1221, para 75

94 Q180

95 Qq180–181

96 Q197

97 Q179

98 Climate Change Committee, The Sixth Carbon Budget: Electricity Generation, p 27

99Hundreds of new North Sea oil and gas licences to boost British energy independence and grow the economy”, Prime Minister’s Office, 10 Downing Street and DESNZ, 31 July 2023

10027 licences offered in first batch of 33rd Oil and Gas Licensing Round”, North Sea Transition Authority, 30 October 2023

101 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 40

102 E.g. Grantham Research Institute on Climate Change and the Environment (FSUK0007); Phoenix Group (FSUK0020); Association of British Insurers (FSUK0022); Aviva Plc (FSUK0023)

103 E.g. Phoenix Group (FSUK0020)

104 HM Treasury, COP26 Finance Day speech, 3 November 2021

105 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 41

106 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 42

107 WWF-UK (FSUK0039)

108 WWF-UK (FSUK0010); ShareAction (FSUK0015); ClientEarth (FSUK0025); Positive Money UK (FSUK0028)

109 TheCityUK (FSUK0018); UK Finance (FSUK0016); Institutional Investors Group on Climate Change (FSUK0038)

110 GFANZ has published guidance on how to develop a transition plan (see section below) but does not require members to publish a transition plan.

111 Q4

112 Q18

113 Q176 [Baroness Penn]; Q178 [Fayyaz Muneer]

114 Q176

115 Q194

116 Q176

117 Q177

118 UK Sustainable Investment and Finance Association (UKSIF) (FSUK0013)

119 Institutional Investors Group on Climate Change (FSUK0038)

120 TPT, Disclosure Framework, October 2023

121 E.g. UK Finance (FSUK0016); Phoenix Group (FSUK0020); Investment Association (FSUK0029)

122 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 41

123 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 41; Q3; Q195

124 Q101

125 Q3

126 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 41

127 Q189

128 Q189

129 Q193

130Joint Statement: International Just Energy Transition Partnership”, Prime Minister’s Office, 10 Downing Street, 2 November 2021

131 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 114

132 Grantham Research Institute on Climate Change and the Environment (FSUK0007)

133 Grantham Research Institute on Climate Change and the Environment, Financing a Just Transition

134 Grantham Research Institute on Climate Change and the Environment (FSUK0007); Legal & General Group Plc (FSUK0012)

135 Q158

136 Q156

137 Q124

138 LSE, Response to TPT consultation on disclosure framework and implementation guidance, March 2023

139 TPT, Disclosure Framework, October 2023, p 5

140 TPT, Disclosure Framework, October 2023, p 10

141 E.g. Global Witness (FSUK0008); WWF-UK (FSUK0010); ShareAction (FSUK0015); Association of British Insurers (FSUK0022); Aviva Plc (FSUK0023); ClientEarth (FSUK0025); E3G (FSUK0035); Institutional Investors Group on Climate Change (FSUK0038)

142 WWF-UK (FSUK0010); E3G (FSUK0035)

143 Q230

144 TPT, Disclosure Framework, October 2023

145 UK Government, Enabling a Natural Capital Approach

146 UK Government, Natural Capital and Ecosystem Assessment Programme, October 2022

147 UK Government, Natural Capital Asset Register and Account Tool, August 2023

148 Environmental Audit Committee, The role of natural capital in the green economy

149 E.g. Global Witness (FSUK0008); ShareAction (FSUK0015); UK100 (FSUK0027)

150 Q121

151 Green Alliance (FSUK0004)

152 Q192

153 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 42

154 The Open Data Institute (FSUK0026)

155 Q99 [Ryan Jude]; TheCityUK (FSUK0018); Phoenix Group (FSUK0020); The Open Data Institute (FSUK0026)

156 Q99

157 Environmental Audit Committee, Seventh Report of Session 2017–19, Greening Finance: embedding sustainability in financial decision making, HC 1063, para 59

158 Scope 3 emissions encompass those not directly originating from the company’s operations or assets under its control. Instead, they originate from entities within the value chain for which the company holds indirect responsibility. An example of this is when consumers buy, use and dispose of products from suppliers.

159 E.g. ShareAction (FSUK0015)

160 E.g. Institutional Investors Group on Climate Change (FSUK0038); UK Finance (FSUK0016); Investment Association (FSUK0029); abrdn plc (FSUK0032)

161 Q164

162 Green Alliance (FSUK0004)

163 TheCityUK (FSUK0018)

164 E.g. ShareAction (FSUK0015); UK Finance (FSUK0016); Phoenix Group (FSUK0020) (for listed companies); ClientEarth (FSUK0025); Principles for Responsible Investment (FSUK0037)

165 TheCityUK (FSUK0018)

166 Q203

167 DESNZ, UK greenhouse gas emissions reporting: scope 3 emissions, 19 October 2023

168 Q204

169 Q206

170 Q207

171 Department for Business and Trade, UK Sustainability Disclosure Standards, 2 August 2023

172 TNFD, Recommendations of the Taskforce on Nature-related Financial Disclosures, September 2023

173 Global Witness (FSUK0008)

174 Q105

175 Q229

176 Q67 [Ryan Jude]

177New independent group to help tackle ‘greenwashing’”, HM Treasury, 9 June 2021

178 E.g. Q100 [Dr Anastasiya Ostrovnaya, Ryan Jude]

179 Q67

180 HC Deb, 14 December 2022, col 53WS [Written ministerial statement]

181 Q208

182 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 48

183 Q215

184 E.g. ShareAction (FSUK0015); TheCityUK (FSUK0018); ClientEarth (FSUK0025); Principles for Responsible Investment (FSUK0037); Institutional Investors Group on Climate Change (FSUK0038)

185 WWF-UK (FSUK0010)

186 E.g. TheCityUK (FSUK0018)

187 Q163

188 Q164

189 Qq211–212

190 Green Finance Institute, Closing statement from the Chair of GTAG: GTAG has advised, now the UK must implement, 5 October 2023

191 GTAG, Creating an institutional home for the UK Green Taxonomy: exploring options, September 2023

192 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 89

193 TheCityUK (FSUK0018); Q113 [Tim Lord]

194 Financial products are divided into tranches based on risk profiles. The first loss tranche is the riskiest, and while it is the first to experience any losses that may arise, it also typically offers the highest potential returns.

195 UK100 (FSUK0027)

196 TheCityUK (FSUK0018)

197 Q113

198 “UK Infrastructure Bank opens for business”, HM Treasury, 17 June 2021

199 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 91

200 Q220

201 Phoenix Group (FSUK0020); UK Finance (FSUK0016)

202 Positive Money UK (FSUK0028); UK100 (FSUK0027)

203 MCS Charitable Foundation (FSUK0005); E3G (FSUK0035)

204 To “crowd in” investment is to source financing from a large number of backers who all invest a relatively small amount.

205 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 89

206 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 90

207 Q227

208 Q227

209 DESNZ, Net Zero business sector roadmap guidelines

210 Department of Business and Trade and BEIS, Automotive Roadmap: Driving us all forward, 25 March 2022

211 DESNZ and BEIS, Hydrogen investor roadmap: leading the way to net zero, 8 April 2022

212 DESNZ and BEIS, Carbon capture, usage and storage (CCUS): investor roadmap

213 Department for Transport, Jet Zero strategy: delivering net zero aviation by 2050, 19 July 2022

214 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 74

215 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 12

216 E3G, “How green is the UK’s Green Finance Strategy?”, 31 March 2023

217 E3G, WWF, Unlocking the Economic Opportunity of the 21st Century: The need for a UK net zero investment plan, February 2023

218 Institutional Investors Group on Climate Change (FSUK0038)

219 WWF-UK (FSUK0039)

220 Green Alliance (FSUK0004); UK Finance (FSUK0016); Principles for Responsible Investment (FSUK0037)

221 Q222; Letter to the Chair from the Minister for Energy Efficiency and Green Finance, following his appearance before the Committee on 18 May 2023, dated 2 June 2023

222 Q225

223 Q226

224 HM Government, Greening finance: a roadmap to sustainable investing, October 2021, p 7

225 Ibid.; Global Witness (FSUK0008); Positive Money UK (FSUK0028)

226 HM Government, Net Zero Strategy: Build Back Greener, October 2021, p 216

227 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 75

228 Qq88–89

229 The Climate Change Committee, The Road to Net-Zero Finance, Dec 2020, p 3

230 E3G (FSUK0035); Global Witness (FSUK0008)

231 Q221

232 UNDP, What are carbon markets and why are they important?, 18 May 2022

233 UNDP, What are carbon markets and why are they important?, 18 May 2022

234 Q79 [Dr Anastasiya Ostrovnaya]; Sylvera (FSUK0033); abrdn plc (FSUK0032)

235 World Bank, What You Need to Know About Article 6 of the Paris Agreement, 17 May 2022

236 VCMI, Voluntary Carbon Markets Integrity Initiative; ICVCM, The Integrity Council for the Voluntary Carbon Market

237 Q3; Q234

238 Institute of International Finance, Taskforce on Scaling Voluntary Carbon Markets Report, January 2021, p 28

239 Institute of International Finance, Taskforce on Scaling Voluntary Carbon Markets Report, January 2021, p 4

240 BEIS and DESNZ, Participating in the UK ETS, updated 4 September 2023

241 BEIS and DESNZ, Participating in the UK ETS, updated 4 September 2023

242 abrdn plc (FSUK0032)

243 Q74

244 Q76; cf. Dr Tahani Mohamed (Lecturer at the Department of Accounting, Finance and Economics at Bournemouth University); Dr Alan K. Kirkpatrick (Lecturer at the Department of Accounting, Finance and Economics at Bournemouth University); Dr Festus Adedoyin (Lecturer at the Department of Computing and Informatics at Bournemouth University) (FSUK0006)

245 Q160

246 abrdn plc (FSUK0032)

247 Q7 [Mark Carney]; Q81 [Dr Anastasiya Ostrovnaya]

248 Q81

249 Q76

250 “Deal reached on new carbon leakage instrument to raise global climate ambition”, European Parliament, 13 December 2022; “Carbon Border Adjustment Mechanism starts this weekend in its transitional phase”, European Commission, 29 September 2023

251 Q76; Dr Tahani Mohamed (Lecturer at the Department of Accounting, Finance and Economics at Bournemouth University); Dr Alan K. Kirkpatrick (Lecturer at the Department of Accounting, Finance and Economics at Bournemouth University); Dr Festus Adedoyin (Lecturer at the Department of Computing and Informatics at Bournemouth University) (FSUK0006)

252 Q83

253 Dr Tahani Mohamed (Lecturer at the Department of Accounting, Finance and Economics at Bournemouth University); Dr Alan K. Kirkpatrick (Lecturer at the Department of Accounting, Finance and Economics at Bournemouth University); Dr Festus Adedoyin (Lecturer at the Department of Computing and Informatics at Bournemouth University) (FSUK0006)

254 Environmental Audit Committee, Fifth Report of Session 2021–22, Greening imports: a UK carbon border approach, HC 737

255 Environmental Audit Committee, Fifth Report of Session 2021–22, Greening imports: a UK carbon border approach, HC 737, paras 31, 34

256 Environmental Audit Committee, Second Special Report of Session 2022–23, Greening imports: a UK carbon border approach: Government Response to the Committee’s Fifth Report of Session 2021–22, HC 371

257 HMT and DESNZ, Addressing carbon leakage risk to support decarbonisation, 30 March 2023

258 HMT, Autumn Statement 2023, November 2023, p 68

259 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 105

260 Q234

261 Q201

262London proves it’s easy being green: Capital clinches eco finance crown for fourth year in a row”, City AM, 25 April 2023

263 Q65; Q74; Q88; Q113; Green Alliance (FSUK0004); E3G (FSUK0035)

264 Q4

265 Q46

266 Q61

267 Carbon Tracker Initiative (FSUK0036)

268 Q110 [Roslyn Stein]; David Rouch (FSUK0002); WWF-UK (FSUK0010); Legal & General Group Plc (FSUK0012); UK Sustainable Investment and Finance Association (UKSIF) (FSUK0013); abrdn plc (FSUK0032); E3G (FSUK0035)

269 Q113; cf. UK Sustainable Investment and Finance Association (UKSIF) (FSUK0013)

270 Q152

271 WWF-UK (FSUK0010); Glennmont Partners (FSUK0014)

272 CCC, Progress in reducing emissions: 2023 report to Parliament, June 2023, p 13

273New UK plan to reach net zero goal faces criticism”, BBC, 30 March 2023

274 Aviva, Climate-Ready Index Report, October 2023

275 Sylvera (FSUK0033)

276 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 110

277 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, pp 112–113, 116

278 Q172

279 Q199

280 Q199

281 HM Government, Net Zero Strategy: Build Back Greener, October 2021

282 Q240

283PM recommits UK to Net Zero by 2050 and pledges a “fairer” path to achieving target to ease the financial burden on British families, Prime Minister’s Office, 10 Downing Street and The Rt Hon Rishi Sunak MP, 20 September 2023

284 MCS Charitable Foundation (FSUK0005)

285 Q161

286 UK100 (FSUK0027)

287 UK100 (FSUK0027)

288 Q91 [Ryan Jude]; UK100 (FSUK0027)

289 UKRI and GFI, Mobilising local net zero investments: challenges and opportunities for local authority financing, July 2022, p 3

290 NAO, “Local government and net zero in England”, 16 July 2021

291 Q91

292 Q91

293 Q91

294 HM Government, Net Zero Strategy: Build Back Greener, October 2021, p 265

295 Housing, Communities and Local Government Committee, Fifth report of session 2021–22, Local government and the path to net zero, HC 34, para 32

296 HM Government, Powering Up Britain, March 2023

297 Crown Commercial Service, Carbon net zero funding and grants

298 UK100 (FSUK0027)

299 Q92

300 HM Government, Powering Up Britain, March 2023, p 109

301 HM Government, Mobilising Green Investment: 2023 Green Finance Strategy, March 2023, p 95