The UK is well positioned to lead the world in transition financing, says Irem Yerdelen
There is no room for complacency or delays in the transition to net zero. Not only have countless governments and companies committed publicly to net zero, but the pressures of climate change are being felt increasingly across the world. Earlier this year, the Green Finance Institute published findings linking nature degradation to a 12 per cent slump in UK GDP by the 2030s, while leading climate scientists warn that climate crisis will mean average incomes will fall by a fifth within the next 26 years.
Significant capital is required to fund the global transition to net zero and decarbonise our economies. BloombergNEF estimates that to match their ‘economic transition’ scenario, annual investment must increase to $6.7 trillion per year. In the UK alone, a total of £2.7 trillion of investment is required between 2021 and 2035 to meet the nation’s net zero commitments – accounting for a five-fold growth in investments to approximately £50bn per year in 2030.
Alongside the economic imperative, the threat of climate change also represents an opportunity for businesses to capitalise from the development of a transition finance market. Transition finance, in the broadest sense incorporates the financial flows, products and services that facilitate an economy-wide transition to net zero consistent with the Paris Agreement. The recently published Transition Finance Market Review (TFMR), co-sponsored by HM Treasury and the Department for Energy Security and Net Zero and hosted by the City of London Corporation, sets out a roadmap to seize this growth opportunity and provide a framework. The UK is already a world-leader in sustainable finance, and the Review now provides a pathway for the UK to play a lead role in developing a global, economy-wide transition finance market.
The net zero transition could being £1 trillion to UK businesses
McKinsey & Company estimate that enabling the net zero transition could bring in £1 trillion to UK businesses by 2030, although tapping into this opportunity is no easy feat. One of the overarching observations of the TFMR is the urgent need for more coordinated collaboration between government, regulators and industry to scale a robust transition finance market. The amount of capital required cannot be delivered by public finances alone, therefore businesses need clear transition pathways and policy certainty from government to see the flows of investment required from the private sector. There must be public-private sector innovation and effective policymaking to reach commercial maturity for emerging transition activities. One of the key recommendations of the TFMR calls for a ‘Transition Finance Lab’ that will allow the development and testing of these financial solutions to ensure they are robust and market appropriate.
The TFMR also calls for a principles-based approach to establish credibility and integrity which works across markets to avoid fragmentation and for different sized companies, encouraging all businesses to develop transition plans. And underpinning all the proposals, a new Transition Finance Council to oversee the monitoring, delivery and implementation of the review’s recommendations.
However, the opportunity afforded by transition finance is timebound. Like us, many markets across the world would like to lead the way in this area and create global best practice for others to follow. Failing to act on the recommendations risks losing ground to other markets, including in Asia and Europe, which are rapidly building their capacity in transition finance.
The UK’s leadership on the global stage is undeniable. The UK continues to have one of the highest numbers of companies with ambitious net zero targets. The UK has the business environment, talent, academic institutions and ambition to succeed in the ‘green industrial revolution’ needed to deliver the net zero transition.
As part of the TFMR’s Expert Group, working alongside chair Vanessa Havard-Williams, I’ve contributed firsthand the many workshops, bilateral engagements and consultation responses from government, industry and regulators that have informed this Review. The motivation to scale transition finance is present, now there must be action.
Irem Yerdelen is the City of London Corporation’s sustainable finance lead