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Financing the UK net zero transition

How the National Wealth Fund and policy recommendations from the Transition Finance Market Review will steer progress

At a glance
 

  • Additional investment needed to support the UK’s transition to net zero is estimated by the UK’s Climate Change Committee at £50bn per year between 2030 and 2050, requiring the economy to transform on an unprecedented scale. On 17 October, the Transition Finance Market Review (TFMR) published recommendations to the Government on how to scale transition finance to deliver this. Deloitte was delighted to participate on the TFMR Expert Group and provide support to the Secretariat.
  • The TFMR publication followed the Government’s International Investment Summit on 14 October, publication of a Green paper outlining plans for a new Industrial Strategy, and an update on the development of the National Wealth Fund (NWF). Together, these policy developments aim to boost UK growth and competitiveness, and catalyse investments in green and growth industries.
  • The TFMR report emphasises the need for: a national transition plan; stronger financial incentives; and a supportive regulatory environment. The recommendations in the report are wide-ranging. In this blog we highlight several key policy areas that we expect to play a key role in shaping how access to transition finance develops, including:

    • Deploying the NWF.
    • Sector decarbonisation pathways and national transition planning, including a recommendation for the Net Zero Council to be re-established, to develop granular sectoral decarbonisation pathways.
    • Aligning on a principles-based definition of credible transition finance. The TFMR views transition finance as broader than green finance and propose a Transition Finance Classification System (TFCS) and principles-based Guidelines for Credible Transition Finance.
    • Transition plan disclosures, including addressing challenges around forward-looking statements and liability for omissions or misstatements.
  • While the UK transition financing need is significant, the scale of the challenge also underscores the opportunities for non-financial corporates and financial services firms seeking to invest in or finance the transition. Improved access to finance has the potential to transform investment opportunities and financial services. As 2030 approaches, it is also critical that organisations that have made net zero commitments consider what investments they will make to decarbonise their business.
  • What will be important now is whether, how and when the Government takes forward the TFMR recommendations and how effectively resources can be deployed by the NWF.  The Government’s Minister for Industry called the TFMR a “really important review” and that it would look to deliver clarity on decarbonisation pathways through “existing and new policy”. The FCA has already welcomed the report and will look at how best to embed the TFMR’s findings in its work. The TFMR recommends establishing a new Transition Finance Council, housed within the City of London Corporation, to act as an accountability mechanism for the Review’s recommendations. 

The UK Government views decarbonisation and the net zero transition as important catalysts for achieving its growth “mission”.

The NWF is intended to support clean energy industries and the delivery of the new Industrial Strategy. The TFMR, an independent review commissioned by the previous Government in 2023, complements the NWF by seeking to identify the conditions needed to scale transition finance in the UK and globally. It also seeks to position the UK as a "leading hub for the transition finance market” through its financial and professional services sectors. For example, the TFMR points to the importance of the UK general insurance sector in providing innovative insurance solutions to facilitate transition finance projects, while underscoring the critical role life and pensions firms can and should play in providing productive finance.

The recommendations in the 133-page TFMR report are wide-ranging and should be read by both non-financial corporates and financial services firms. They cover areas such as defining transition finance, sectoral pathways and policies, use of blended finance, carbon pricing and voluntary carbon markets, insurance as a de-risking tool, transition plan disclosure and assessment, stewardship and labelled instruments.

The TFMR describes transition finance as the “financial flows, products and services that facilitate an economy-wide transition to net zero consistent with the Paris Agreement”. This is broader than green finance in that the need for transition finance will be “particularly acute to support the decarbonisation of high-emitting sectors”. In our view, the implication of this is that general finance for high-emitting organisations and sectors may need to rise in the short- to medium-term to enable them to have the capacity to transition. For financial services firms, lowering headline scope 3 emissions may be counterproductive if this constrains finance to firms seeking to transition.

In this blog, we focus on five key areas of policy: (1) the NWF; (2) sector decarbonisation pathways and national transition planning; (3) defining transition finance; (4) transition plans; and (5) taking the TFMR recommendations forward.

1. National Wealth Fund

 

As of the 14 October, the UK Infrastructure Bank (UKIB) began operating as the NWF. The NWF will focus investment on green steel, green hydrogen, carbon capture, gigafactories and ports. It is intended to work alongside a new organisation, Great British Energy (GBE) by – at least initially – undertaking GBE’s investment activity.

The NWF will have total capitalisation of £27.8 billion, with the aim of crowding in private investment at a ratio of 1:3. It will use the UKIB’s existing £22 billion, plus £5.8 billion additional capital committed over the course of the Parliament (reduced from the £7.3 billion previously announced). This public funding support will be important in helping to unlock private capital where additional risks exist (e.g., in relation to technology maturity, investment viability, demand certainty, or value chain readiness).

Building on the NWF Taskforce recommendations published in July 2024, the NWF will in future have a broader mandate than the UKIB, an expanded suite of financial instruments (e.g. performance guarantees, as well as trialling new blended finance solutions), and higher risk appetite. It will only invest where an undersupply in private finance exists and invest initially on a deal-by-deal basis.

We expect to learn more as the Government brings forward legislation to enshrine the NWF’s investment mandate (timing uncertain), and publishes “in the coming months” an updated framework document for the NWF, and further detail on the NWF’s strategic priorities and investment principles. The NWF is also expected to publish a strategic plan “in the next financial year”.

Transition Finance Market Review
 

2. Sector decarbonisation pathways and national transition planning
 

The TFMR recommends that the Government reinstate a form of the Net Zero Council before the end of 2024, which would focus on the development of granular real-economy sector decarbonisation pathways. In our view, this is one of the most important recommendations in the report. Aligning around one narrative and a set of assumptions can help simplify conversations across the UK value chain, provide increased clarity on policy which builds confidence in what to finance/invest in, and drive further discussion on additional policy levers that are needed for the transition.

The TFMR also recommends that the Government considers, through the update to the Carbon Budget Delivery Plan in Spring 2025, the emerging global framework for national transition planning and embraces medium-term development of a National Transition Plan.

What will be important now is whether, how and when the Government takes forward these recommendations. The Government’s Minister for Industry said that the Government would “strive to deliver” more clarity on decarbonisation pathways for key sectors through “existing and new policy, including [its] Industrial Strategy”, but did not set out what new policy it might introduce.  The Government will also need to deliver on any plans it publishes. Non-financial corporates and financial services firms will need to see the Government taking action to reduce the uncertainties around making the necessary investments.

3. Defining transition finance
 

There is no universal definition of transition finance, and the term is often understood in different ways. This can lead to increased reputational, liability, and greenwashing risks, particularly for firms financing high-emitting sectors. The TFMR has adopted a TFCS, setting out illustrative examples of transition finance activities/entities, aligned to the four GFANZ transition strategies. While the TFMR recommends that the Government consults on the use cases for a UK Green Taxonomy, it states that the TFCS is not intended to replicate a taxonomy-style classification system.

Green and sustainability linked-bonds and loans are highlighted in the report as key conduits of transition financing, however the report acknowledges that there are several challenges that the industry and regulators need to work through including: integrity and ambition of KPIs, quality of disclosures, and a perceived lack of a “greenium”. Separately, the report stresses the importance of stewardship for the economy’s transition and the opportunity presented by the review of the Stewardship Code.

The TFMR has also proposed principles-based Guidelines for Credible Transition Finance, intended to set credibility and integrity parameters for financial institution transition finance frameworks. The TFMR states that the greatest potential for scaling transition finance is widely recognised to be at the entity-level. However, insufficient data makes assessing the credibility of a company’s transition strategy at the entity-level challenging. Therefore, it is likely to be less common for entity-level general purpose finance to be able to be categorised as transition finance under the Guidelines.

4. Transition plans
 

To address challenges with insufficient data noted in the previous paragraph, the TFMR recognises that widespread, credible, and comparable transition planning is key to scaling entity-level transition finance.

Non-financial corporates and financial services firms are increasingly developing and disclosing transition plans, and there is increasing regulation in this area. The review recommends that the Government publishes (in conjunction with regulators) a roadmap outlining when and how it will implement Transition Plan Taskforce (TPT)-aligned disclosure requirements for the largest listed companies, private companies and financial institutions, and consult on what its Manifesto Commitment of 1.5 degree alignment could mean, including on its sequencing to avoid “unintended consequences”.

Interestingly, the TFMR recommends that the Government “explores different means of incentivising” good quality transition plans, including looking at a concept similar to the Financial Conduct Authority’s (FCA) proposed “protected forward-looking statements”, or providing clarity over standards of “liability for omissions or misstatements”. This could encourage increased transition plan disclosures through reducing liability risk for non-financial corporates and financial services firms, and would no doubt be welcomed by the industry, but could also increase the risk of greenwashing.

The TFMR sets out the importance of assessing the credibility and integrity of transition plans. It focuses on the role of assurance and verification, recommending that the Institute of Chartered Accountants in England and Wales (ICAEW) and the Institute of Chartered Accountants of Scotland (ICAS) produce a plan for the development of TPT assurance skills and methodologies. It also looks at Second-Party Opinion (SPO) providers, rating agencies, and sustainability data, analytics and research providers, recommending that the FCA should, as it develops a regulatory approach to ESG ratings, consider transition ratings.

Similar to how the market forms a view on the credibility of firms’ business plans, we see a range of actors playing a part in the assessment of transition plans. In our view, it is important that financial services firms assess the credibility and integrity of their clients’ transition plans when providing both activity-level and entity-level transition finance. Assessments can also help firms identify transition finance opportunities, monitor their clients’ progress against plans, and manage climate risk. In a review of the key climate disclosure reports of ten European-headquartered G-SIB banks, we found that eight out of ten of the banks were already doing this. However, there is variation in the criteria they use to assess transition plan credibility, and what they use the assessments for1.

The TFMR notes that the demand for “methodology transparency and some level of convergence on credibility assessment criteria and processes” is only going to increase. It notes the important contribution of the initiatives put forward by not-for-profit organisations (such as CDP, TPI, World Benchmarking Alliance, and TransitionArc) and says there is a clear argument for transitioning some or all of the initiatives developed by these organisations onto a more secure footing and funding base. It also suggests considering whether they should be subject to regulatory oversight.

5. Taking the TFMR recommendations forward

The TFMR is an important report, but what matters now is how its recommendations are taken forward by the Government and other actors. The FCA has already welcomed the report and will look at how best to embed the TFMR’s findings e.g. on ESG ratings, ISSB standards and its review of the sustainability-linked loans market.

In addition to the proposed reestablishment of the Net Zero Council, the TFMR recommends a new Transition Finance Council, housed within the City of London Corporation, to act as an accountability mechanism for the Review’s recommendations, support transition finance capacity building, and promote interoperability.

The review also recommends establishing a Transition Finance Lab, housed within the Green Finance Institute, to help develop and test targeted financial solutions. With the majority of the report focused on policy and regulation, the Transition Finance Lab has the potential to be an important way to identify and tackle transition finance challenges in the market.

What should firms be doing?
 

The NWF paper and recommendations from the TFMR represent important steps forward in mobilising the financing required for the UK’s transition to net zero. However, there is still more to come, and despite the urgency and scale of the challenge to finance the transition, there is little immediate action for non-financial corporates and financial services firms.

As more detail on the NWF emerges, non-financial corporates and financial services firms can look to build their relationship with the NWF and consider how they might best use the NWF’s product offering to leverage the opportunities of the transition.

Financial services firms and non-financial corporates can consider pressing ahead with developing and disclosing TPT-aligned transition plans.

Financial services firms can already look at the TFCS and Guidelines for Credible Transition Finance put forward by the TFMR and consider developing their transition finance frameworks and look at how they segment their portfolios and the relative sizes of the segments. The Review recommends that the Transition Finance Council finalises them for use by the market, potentially under trade association or industry-led initiatives.

Industry should consider engaging with the Transition Finance Lab once it is up and running. The TFMR particularly calls on insurance brokers and (re)insurers to convene relevant stakeholders to assess challenges related to transition financing and design insurance solutions to address them.

As firms look to 2030 and beyond, it’s important that they position themselves competitively and assess the opportunities the transition provides. The NWF and TFMR are an important first step to help them do so.
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References

1 In our review of the key climate disclosure reports of 10 European-headquartered G-SIB banks, eight of the banks disclosed that they assess their clients’ transition plans. Four of the banks also disclosed the criteria they use to assess plans and disclosed that they assigned a credibility “score” and had an escalation process in place. The results of client transition plan assessments were most commonly used to inform client engagement. Assessments were also used to identify opportunities, support business decisions, and manage climate risks.