UK Transition Finance Market Review sets out bid to become green finance hotspot

Policy certainty and cross-sector collaborations and the establishment of a Transition Finance Council could help the UK to attract cash for the energy transition. These are some of the key findings presented in the Transition Finance Market Review revealed at the Guildhall at the heart of the City of London this morning.

The review, co-sponsored by HM Treasury (HMT) and the Department for Energy Security and Net Zero (DESNZ) is based on findings of a call for Evidence issued by the government which ran between March and May this year and attracted 57 responses. 

Vanessa Havard-Williams, chair of the review, highlighted the urgent need for credible transition finance to drive decarbonisation, especially in sectors where rapid change is difficult. "This review comes at a critical moment," she said. "The industrial revolution required to deliver the energy transition is a once-in-200-years opportunity, and the UK is well-placed to lead this effort."

While the initial call for evidence was launched by the previous government, the current administration is keen to back the initiative, as Sarah Jones, minister for Industry emphasised: "Clean energy is at the heart of this government’s agenda, we believe it is the economic and industrial opportunity of the 21^st century, mobilising public and private finance will be critical to achieving our clean energy ambition and international climate goals."

Context of the review

The review is set against the backdrop of urgent global climate challenges. IPCC projections suggest the world is on track to exceed the Paris Agreement’s target unless strong, near-term action is taken. BloombergNEF estimates that annual global investment in the energy transition needs to rise to $6.7trn to meet the required goals.

The UK's Climate Change Committee has estimated that £2.7trn in investment will be needed between 2021 and 2035 to meet the country's net zero commitments, requiring investment levels to grow fivefold by 2030.

With half of the world’s largest businesses committing to net zero targets, there is an increasing demand for policies and market conditions that will enable companies to access the capital required to transition.

But investors at the event stressed that there were still significant obstacles. Thomas Tayler, head of climate finance at Aviva Investors pointed out that despite progress, the transition finance market still faces barriers. "At the moment, it is easier to make money from high-emission activities than from transition initiatives. We need to move the conversation out of the echo chamber and push for real change," he said.

Based on the feedback, it outlines a framework to support the country's decarbonisation goals and contribute to global efforts to meet the Paris Agreement targets.

Opportunities for the UK

The review argues that transition finance is critical for the UK to meet its own growth and clean energy targets. While decarbonisation of the power supply has driven emissions reductions so far, harder-to-abate sectors such as aviation, transport, and heavy industry will need significant financial backing to achieve their decarbonisation goals.

The UK’s established leadership in sustainable finance, combined with its financial services expertise, makes it well-suited to play a leading role in the global transition finance market, the review finds. This could generate up to £1trn in opportunities for UK businesses by 2030, according to McKinsey & Company.

Action and recommendations

The review urges swift action to avoid missing this economic opportunity. Key recommendations include:

• National sectoral transition planning and policy certainty: the review calls for greater collaboration between industry and government to develop detailed sector-specific transition pathways. It recommends resourcing the Net Zero Council to drive these efforts.
• Catalytic capital and risk mitigation: the review suggests using public capital to de-risk early-stage transition activities and help them reach commercial maturity. It proposes the creation of a Transition Finance Lab to test new financial solutions.
• Entity-level transition finance: It recommends mandatory transition plans aligned with the Transition Plan Taskforce’s guidelines, along with improved data and assessment mechanisms to ensure credibility.
• Credibility and integrity: the review proposes adopting a Transition Finance Classification System and creating guidelines for credible transition finance, emphasising the importance of international standards.
• Roadmap for transition finance: to ensure these recommendations are delivered, the Review calls for the establishment of a Transition Finance Council to oversee coordination and capacity building.