Introductory Guide
to Green Finance1

Contents
1. Introduction…................................................................................................….….2
2. Why do we need green finance?......................................................................5
3. Unleashing the opportunities of the green transition…...….................13
4. Protecting against economic risks……….....................................................18
5. What has the UK already achieved?............................................................23
6. How can the UK maintain its leadership?..................................................28
Annex 1: Who governs the financial sector?.................................................30
Annex 2: Glossary of green finance terms……………...............................….33
References.................................................................................................................38

1. Introduction: The net zerotransition depends upon green finance
805 million tonnes CO2e: UK financial
institutions are responsible for supporting
activities that generate more emissions
than Germany and 1.8x the amount of
the UK’s domestic footprint.1£200 billion+: Value of the UK low carbon
economy in 2020/21, £70 billion greaterthan the construction sector.2
1.7 million jobs: Number of jobs that
could be created by the UK’s transition to
net zero.3
US$130 trillion: The total assets undermanagement by financial institutions thathave committed to net zero through the
Glasgow Financial Alliance for Net Zero
(GFANZ).4
The Government has committed toa legally binding target of net zero
emissions for the UK by 2050, as well
as reducing emissions by 78% of 1990
levels by 2035. Meeting this challenge
will require innovation to decarbonise all
sectors of the economy, from industry
and energy supply to transport andheating.
An additional £50-60 billion of private
investment will be needed every yearby 2030 to deliver net zero. The financial
sector is critical for delivering this green
finance and unleashing innovation.

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APPG on Sustainable Finance | UK100

But despite increasing awareness ofthe economic risks of climate change,
the UK financial sector continues todirect significant amounts of investment
towards unsustainable activities such as
fossil fuel extraction, which drives climatechange, nature loss, and exposes financial
institutions to future risks and challenges,
including legal action.
There is a growing need for green
finance to help mitigate climate change
and deliver a green economy. Capitalmust flow away from unsustainable
investments and into the sustainable,
low-carbon technologies, projects,
businesses, and infrastructure of the
future.
There is also a growing need for scrutiny
and transparency to guard against
greenwash and ensure that financial
institutions are truly financing green.
The UK has an enormous opportunity
to transform jobs and grow green
investment to level up every
community. But we need coordinatedaction and the right policies to create aworld-leading green financial systemthat drives forward a zero-carbon
economy.
Written by Seahorse Environmental
in partnership with the Green FinanceInstitute for the APPG on Sustainable
Finance. UK100 is the Secretariat for the
APPG.

Why is the financial sector important?
The UK financial sector is one of the most important sectors of the economy, contributing£165 billion (almost 9%) of the UK’s total economic annual output. A stable financial sector
is a crucial driver of growth, providing investment and capital for businesses to run theiroperations and grow, and for new infrastructure and other projects to take off.
Key players in the sector include:•

Commercial banks: Provide services forindividual customers and companies
including loans, savings accounts andcredit. For instance, they may provide
loans for specific projects, such as thedevelopment of a wind farm.

•

Insurers: Underwrite projects andbusinesses, taking on their risks.
Additionally, like pension funds, theyalso have large amounts of pooled funds
generated by insurance premiums, which
they invest.

•

Investment banks: Help raise moneyby acting as middlemen in financialtransactions, such as by helping
businesses issue shares or arranging thesale of bonds. They also advise investors
and provide research on markets.

••

Retail banks: Provide financial services
to the general public, such as savings
accounts, personal loans, and debit andcredit cards. For example, retail banks
might provide green mortgages.

Institutional investors: An organisationthat pools money from numerous
investors to invest on their behalf.
Examples include hedge funds, pension
funds (who invest large amounts ofpooled money for the long term) andinsurers (who underwrite projects andbusiness and also have large amountsof pooled funds generated by insurance
premiums, which they invest).

•

Venture capital: Investment fromindividual investors or financial
institutions, typically provided to startups and other early-stage firms. Because
businesses or technologies are in theirearly stages, this type of investment isrisky but can deliver higher returns.

•

Private equity: Investment typicallyprovided to companies with predictablerevenue generation and growth potential
whose shares are not publicly traded on
stock markets•

Investors and asset managers: Invest
in companies and projects, purchasing
shares or bonds and assets like realestate or power plants.

•

Angel investors: Individuals who provide
investment for early stage start-ups andentrepreneurs to help businesses andinnovations get off the ground.

•Impact investors: Investors who seek togenerate positive social or environmental
outcomes as well as financial returns.

Government institutions are also vital players in the sector. The Government provides grants
and other public finance, tax incentives, and policy supports to help grow sectors. Throughregulation, the Government can also support the financial sector in shifting flows of investment.

APPG on Sustainable Finance | UK100

32. Why do we needgreen finance?

What isgreen finance?
Green finance is any financial activity or investment that delivers sustainableoutcomes and environmental benefits, such as reducing emissions and pollution
or tackling climate change. Green finance ranges across all types of finance, fromcrowdfunding of small-scale community schemes to major infrastructure projects.
Green finance is a type of sustainable finance, which typically takes account ofenvironmental, social and governance (ESG) factors:

Environment: The impact
of businesses, investors,
and other stakeholders
on the environment, as
well as the impact ofenvironmental changes
on businesses. Companies
may report and takeaction on an array of
issues including climatechange, nature loss andpollution.

Social: The social impactof a business, for instancethe health and safety of
its employees, impact onhuman rights (such as
the use of child labour
in its supply chains), andcustomer satisfaction.

Governance: How a
company is led andgoverned, such as througha board of directors.
Companies are expected
to be transparent about
how they are run and may
take action to improve inareas such as diversityof board members,
corruption, and executive
pay.

Achieving net zero and creating a green economy will
require significant changes across sectors, includinga shift to renewable energy, the development ofcarbon capture and storage, and the electrificationof transport. These technologies and projects willneed finance and support to develop and take off at
scale: up to £60 billion of private investment will beneeded every year by 2030 to transition to net zero.5
However, by 2050 investment in delivering net zero
could also yield annual operating costs savings forbusinesses of up to £60 billion, including savings
from energy efficiency, renewables, and reduced
costs from shifting to electric vehicles.6
Some technologies and business models are only at
the very early stages and are not ready for market.
It is important that there is enough investment instart-up businesses and research and development(R&D) to ensure these vital technologies can scale
up and make it to market.
Other technologies and businesses are moreestablished, but still require capital to scale up anddeliver new projects, such as new solar energy andwind farms or the rollout of electric vehicle fleets, aswell as develop next generation technologies.

Green finance typically focuses on delivering environmental outcomes, though
it often also delivers social benefits such as green jobs, improved health andwellbeing, access to nature, and stable renewable energy supplies. There is a
growing need for green finance to support climate adaptation and deliver naturepositive outcomes. Investment in adaptation will be essential for protecting the
economy against the risks of climate change.

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APPG on Sustainable Finance | UK100

5Growing the green economy

Greening Finance
The Government recognises thatstrong policy frameworks are essential
for bringing innovations to market
and accelerating the flow of private
capital into green investments, awayfrom fossil fuels and other damaging
investments.
Green finance is starting to flow.
However, currently the UK finance sector
invests in activities which generate
805 million tonnes CO2e every year,
equivalent to more emissions than
Germany.7

Source: UK Net Zero Strategy

Green finance is needed to grow the green economy and ensure green innovations and projects
become viable. The UK has already had great success in growing the offshore wind sector
through a strategic policy framework that has encouraged over £90 billion of new private
investment in renewable energy since 2012.
Different types of finance are needed at different stages of a sector’s maturity and an asset’s
life. A high level illustration of this is provided above. As a sector matures, the financial risk
decreases, and investors with a lower risk/return profile (seeking lower returns and lower risk)
will enter the market. As this happens, the need for public finance intervention also decreases.

Policy and regulatory frameworks
can help green the financial sector by
ensuring information on sustainability isavailable to investors, and by encouraging
firms to mainstream this information into
their investment and lending decisions.

Currently there is no accepted standard
definition of which economic activities
can be considered as sustainable, making
it difficult for investors and companies
to understand the environmental impactof their decisions, and opening themto accusations of greenwashing. The
Government hopes the Taxonomy will
help provide clarity and consistency forinvestors.
The Government is also introducing new
Sustainability Disclosure Requirements
which will ensure businesses andfinancial institutions are reporting on theirimpact on the environment, including inline with the Green Taxonomy.
See section 6, below, for what the UK has
already achieved in greening the financial
sector.

For instance, the Government isdeveloping a Green Taxonomy to clearly
define which economic activities count as
green.

Green guarantees can help overcome the barriers to green investment. Guarantees provide
a contractual promise of repayment of debt. Guarantors, such as the Government, banks,
insurance companies or even individuals provide assurance to lenders that all or part ofthe losses in the event of default of payment from the borrower will be covered. Therefore,guarantees in effect provide insurance on debt, “derisking” investment.
Key sources of capital are outlined on page 3, above.

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APPG on Sustainable Finance | UK100

7

Green loans

Financing GreenThe importance oftransparency

To finance green, financial flows need to
be aligned with clean, environmentally
sustainable and resilient growth. Improving the access to green finance for individuals, private businesses, local government and others will be essential. This
will involve providing financial productsthat deliver green outcomes, such as:Green bonds

A sustainable, net-zero aligned and nature positive financial
sector depends upon transparency. Financial institutions andinvestors need to know that the businesses and projects they
are investing in are addressing their environmental impact andrisks. In turn, investors are increasingly expected to show thatthey are investing in a way which takes account of climate andwider sustainability risks and tries to mitigate them.
When businesses report on their environmental, social andgovernance impacts in this way it is called sustainability
disclosure. When financial institutions may report on climatechange in particular through climate-related financial risks
disclosures. This information empowers investors andcustomers to make informed decisions about how to invest
sustainably and to make sustainable purchases. It also
allows regulators and governments to ensure companies andfinancial firms are doing what they can to address risks that
could harm the financial sector, and that they are supporting
the green transition.
The Government is introducing rules for companies to
produce sustainability disclosures, as well as requirements forcompanies to report on climate and sustainability risks in linewith international standards.

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Bonds are issued by companies orgovernments to raise money fromlenders, known as bond investors orbond holders. The issuer of a green bondpromises to spend the money raised on
projects and activities that have a positiveenvironmental impact (referred to as the“use of proceeds”). Governments have also
issued sovereign green bonds to encourageand directly fund green investment – see
below for more information on the UK’s
green bonds. In 2021 nearly £25bn ofgreen bonds were issued in the UK.8

Social bonds
Like green bonds, except the proceedsof social bonds are used exclusively for
projects with a positive social outcome,such as clean water, access to healthcare
and affordable housing.

Sustainability bonds
The proceeds of sustainability bonds areused exclusively for projects that deliver
both green and social outcomes.

Loans are mostly provided directly bybanks to those looking to borrow money,
while the capital for bonds mainly
comes from investors and institutions
purchasing bonds, which can be tradedon bond markets. Lenders may offerloans specifically to fund green projects or
encourage sustainable activities. Barclays
and NatWest offer green loans to help
UK businesses deliver sustainable green
projects, such as retrofitting buildings,
installing renewable energy, purchasing
electric vehicles and even conserving andrestoring habitats such as forests.9

Sustainability-linked bonds andloans
Unlike the above, these bonds and loans
do not have restrictions on where proceeds
can be spent. Those issuing sustainabilitylinked bonds pledge to improve specific
key performance indicators (KPIs) relating
to their ESG performance, which is
linked to the interest (or “coupon”) they
pay to investors. Similarly, the interestfor sustainability-linked loans is tied tosustainability performance. For instance,energy company Enel recently issued a£750 million sustainability-linked bondlinked to the achievement of gas emissions
reductions – if these are not met, theinterest will increase.10

Green mortgages
Some banks now offer green mortgages
that reward people with lower interest
rates or cashback for improving the energy
efficiency of their home or move to agreener property. For instance, Nationwide
offers up to £500 cashback for buying anenergy efficient home and additional green
borrowing at a low interest rate to financehome improvements.11

APPG on Sustainable Finance | UK100

9Green Mortgage Products Available
in the UK (number)

The importance of
public finance – the
UK Infrastructure Bank
Because investment in early-stage
technology and business model
innovation is risky, it is harder
to secure finance. Public funds
such as guarantees, grants andgovernment-backed investments
can help bringing down risk to
private investors and scale up
important businesses, projects, andtechnologies that might otherwise
miss out access to on vital capital.

Source: Green Finance Institute Green Mortgage Hub

10

Local Climate Bonds

Pensions

Local Climate Bonds (LCBs), a type ofCommunity Municipal Investment,
are regulated investment products
launched by local authorities to accesscost-effective funding for specificdecarbonisation projects. They offer
local residents the opportunity toinvest in their local area, through a
crowdfunding platform, from as little as£5. They provide crucial access for Local
Authorities to a new source of finance.
As of June 2022, six councils have issued
LCBs. The Green Finance Institute haslaunched a campaign to help morecouncils issue them, in partnership with
Abundance Investment, UK100, Local
Partnerships and InnovateUK.12

In the UK, pension funds are collectively
worth £2.6 trillion.13 People’s pensions
are put into a range of investments,
including property and real estate,stocks, and bonds. According to the Make
My Money Matter campaign, ensuring
one’s pension goes to sustainable
investments could be 21x more effectiveat reducing their carbon footprint thanbecoming vegetarian, giving up flying andswitching to a renewable energy provider
combined. Pension funds can also takeaction: pensions and insurance giant
Aviva has committed to ensuring that thecompanies it invests in through its autoenrolment pensions funds are committed
to delivering net zero by 2050. The
government is taking steps to green UK
pensions (see below).

APPG on Sustainable Finance | UK100

For instance, the Government hasestablished the UK Infrastructure
Bank (UKIB) to “crowd in” private
finance for important projects andinnovations by providing £22 billionof public funding. UKIB investments
include:• Up to £250 million matchfunding in a £500 million solar
infrastructure fund to develop
subsidy-free solar energy to
power 280,000 households, toencourage private investment.
• A £107 million loan tofinance the South Bank Quay
development in Teesside, which
will provide a new quay to service
the offshore wind sector andsupport around 800 local, highquality jobs.14

The role of the Green
Finance Institute
The Green Finance Institute (GFI)
was established in 2019 in response
to a key policy recommendation
made by the industry-led Green
Finance Taskforce to the UK
Government. Its mission is toaccelerate the transition to a clean,resilient, and environmentally
sustainable economy by channelling
capital at pace and scale towards
real-economy outcomes. Sittingat the nexus between the public
and private sectors, the GFI leads
sectoral coalitions of experts that
identify and unlock barriers toinvestment towards economic
outcomes that benefit ourenvironment, society, and business.
The GFI is an independent,
commercially focused organisation
backed by government and led bybankers. Its flagship programme, theCoalition for the Energy Efficiency
of Buildings (CEEB), was set up to
develop the market for financing
a net zero, climate resilient built
environment. When launched, there
were only two green mortgages- now there are over 40 and the
CEEB has over 370 members.
Today, the GFI continues to identify
sector-specific financial solutions
to promote investment in the green
transition, for example, developing a“Green Finance Guarantee Facility”
to reduce the risk of investment ingreen infrastructure.

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The importance of
local authorities

3. Unleashing the opportunitiesof the green transition
The green transition is a once in a lifetime global investment opportunity worth over
£17trillion between 2016 and 2030.16 Ever growing amounts of private finance areflowing into sustainable investments: 2021 saw over $500bn in green bonds issued
alone.

82% of UK emissions are within the scope of local authorities’ influence, so they
have a vital role to play in achieving net zero. They have important levers to reduce
emissions, encourage green investment, prepare local communities for climatechange, and protect and increase accessible green space and other important
place-based assets. These levers include planning powers, enforcement of building
regulation and energy efficiency standards, and borrowing and investment powers.

Sustainable Bond Issuance (USD Trillion)
1,400
1,200

Green bond

1,000

Social bondTo deliver this, local authorities will, among many other things, need to explore
innovative green finance options. Some are already doing this. For instance, so farnine councils across the UK have pledged to introduce Local Climate Bonds as partof a campaign spearheaded by GFI. Local Climate Bonds enable investors to invest
as little as £5 in local green initiatives. This includes Cotswold District Council, which
launched Cotswold Climate Investment in April 2022. The scheme aims to raise£500,000 for improving energy efficiency, reducing emissions from the council’s
operations, and installing EV charge points.
Other examples include:
Bristol City Council’s City Leap, a public/private partnership with energy companies
Ameresco and Vattenfall, to stimulate up to £1 billion investment in a green energy
network for the city, including heat pumps, community heat networks, and energy
efficiency upgrades.
Plans by the Greater London Assembly and Mayor of London to raise £500 million
by issuing green bonds. An initial £90 million of GLA funds have been committed toencourage private investment.
A local authority-led, place-based approach to decarbonisation will also be cheaperand deliver greater value than a place-agnostic approach. A recent study by UKRI
showed that a place-based approach would require £58 billion in total investment
to 2035, and would generate £825 billion in wider social benefits over the next 30
years.15

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Sustainability
bondSustainabilitylinked bond

800
600
400
200
0
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Source: Environmental Finance

Combined global issuance of Green, Social, Sustainability and Sustainability-Linked Bonds passed$1tn in 2021 and is predicted to further grow and pass $1.2tn in 2022.
As a leader in the export of financial services and science and innovation, the UK has a competitiveedge in the green transition. London is also regarded as the leading green finance hub of the world,
ahead of major financial centres such as New York and Zurich.17
By greening finance and financing green, the UK can take advantage of the opportunities presented
by the green transition,•£1 trillion+ by 2030: Global market opportunity for UK companies producing goods and services
to feed the global green transition.

•

The UK’s net zero transition could create 1.7 million jobs across the economy by 2030•

Investment in local climate action alone in the UK would deliver 800,000 green jobs by 2030,
1.38 million by 2050•

Every year over 5,000 lives could be saved by cuts to air pollution in the UK through efforts totackle climate change.

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Creating clean growth and green
jobs across sectors

EnergyBuildings
Improving the energy efficiency of the
UK’s building stock is essential: 23% of the
UK’s emissions are generated by heating
and powering homes. The retrofit industry
must grow by ten times to decarbonise
housing in line with meeting the UK’s net
zero target. Green lending for SMEs will
be vital to ensure they have the finances
to grow, while a clear regulatory pathway
for energy performance standards will
also encourage greater investment.

Every £1 million invested in renewableenergy can create three times as manyjobs as the equivalent investment in fossil
fuels. Thanks to steady investment fromgovernment and the private sector, theUK’s offshore wind industry has becomea fast-growing industry. The North Eastand Humber in particular are set to reap
the rewards, with a new Siemens Gamesa
factory in Hull providing over 1,300 jobs.

Energy storage, such as batteries or
pumped hydroelectric energy storage,
is essential for providing a stable supply
of clean power. The pipeline of energy
storage projects in the UK doubled to
32GW in 2021 alone. However, accessto finance remains a key issue holdingback deployment and meeting theGovernment’s plans for 60GW of capacity
by 2030.

The UK has introduced a ban on salesof petrol and diesel cars from 2030,
spurring demand for electric vehicles(EVs). With adequate investment andgovernment support to decarbonise andgrow domestic battery production, theUK vehicle industry could help meet thisdemand and create 40,000 green jobs thisdecade. It could also deliver 2.3 million EV
charge points across the UK.

The offshore wind industry alone could:

Innovations such as hydrogen andnext generation nuclear energy needinvestment to develop and scale up.
Hydrogen could create over 9,000 highquality jobs by 2030, and government
analysis suggests it could meet up to 35%of the UK’s energy needs by 2050, playing
a key role in cutting the UK’s dependence
on fossil fuels.18

Earlier this year, the Government invested£100 million alongside private investors
in a new car battery “gigafactory” inNorthumberland that will employ 3,000
workers by 2028, demonstrating the rolethat public and private finance can play innurturing green industries.19• Support over 69,800 jobs by 2026, up
from 26,000 today.
• Attract £60.8bn private investment
over the next five years

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Bankers for Net Zero, a group of financestakeholders committed to financing
the net zero transition, claim that withthe right level of investment, large-scale
retrofitting could create 150,000 new
skilled and semi-skilled jobs by 2030.20

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Manufacturing and construction

Nature-based solutions

Every £1 million invested in renewable
The manufacturing and construction
sectors together account for 16% of the
UK’s emissions. Investment in knowledge
and training, new technologies andprocesses, and renewable energy
supplies will be needed to ensure these
sectors keep up with the transition.
Around £1 billion of investment a year will
be needed to decarbonise the sectors by
2030, rising to £4 billion by the 2040s.21

At least £44 billion additional public andprivate finance is needed by 2030 tomeet the UK’s nature-related targets.
However, the potential return on
investment is high:• Every £1 invested in restoring habitats
such as saltmarsh, peatland, or
woodland delivers £3 in public benefits
including carbon sequestration,
natural flood protection, cleaner air
and water, recreation, and improved
health and wellbeing.
• The NHS could save over £2 billion ayear in treatment costs if everyone inEngland had access to good quality
green space.
The UK’s Natural Environment
Investment Readiness Fund aims todevelop investible projects in England
to attract private capital. GFI have alsoestablished the GFI Hive to bring together
experts in the field of nature-based
finance and develop solutions to unlock
private investment.22

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APPG on Sustainable Finance | UK100

174. Protecting against
economic risks
Without efforts to harness this momentum and foster a green financial sector
that supports resilient, clean growth, the UK could fall behind and face significant economic and social risks from climate change and the green transition. 1%of the UK’s GDP could by wiped out by climate change by 2045,23 and the global
economy could lose up to 18% of its value by 2050 if temperature rises continue
unabated.24

Physical risks
Climate change, biodiversity loss and other environmental challenges pose increasingly significant physical risks to the financial sector and wider economy.
Increasing risks like extreme heat, drought and sea-level rise create long-termcosts, while more frequent floods, wildfires, storms and other weather events
impact businesses and the value of assets like property and infrastructure.
Globally, up to $24 trillion worth of assets could be at risk from the physicalimpacts of climate change.25

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The cost of flooding

The cost of nature loss

Flooding poses a significant and growing
risk to businesses and the financial sector
in the UK. The winter floods of 201516 caused £1.6 billion in economic
damages. Impacts on businesses andresidential properties accounted for mostof the costs, at £513 million and £350
million respectively.

Biodiversity loss due to climate change
and other human drivers is a looming
risk for the financial sector. The WorldBank estimates that the global economy
could lose as much as $2.7 trillion (£1.7
billion) a year by 2030, due to the lossof important services like pollinators, fish
populations and timber.

Investing in adaptation will help
businesses and communities adapt tothese changes, ensuring a more resilient
economy. For instance, under the Flood
Re scheme, insurers offering homeinsurance must contribute to a levy whichraises £180m annually to reimburse
insurers who pay out for flood damages– helping to keep insurance premiums
down and ensuring residents are properly
covered against the risk of flooding.2627

Investment in nature recovery andnature-based solutions will be essential
for halting and reversing biodiversity loss.
Healthier ecosystems can also adapt toclimate change more easily, while placebased investment in nature can provide
important services for communities
including cleaner air and water, flood
protection, and health and wellbeing
benefits from access to nature – while
also storing more carbon.28

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Litigation risks &greenwash
Transition risks
As the world begins to transition to a more sustainable, decarbonised economy,
countries and companies which are slow to keep up face transition risks. These include
failing to keep up with regulation and changing consumer preferences: 68% of UK savers
now want to invest sustainably, but barriers including limited availability of products
and a lack of information about sustainable investment means only 13% currently do.29
Investors and financial institutions who have investments in businesses like oil andgas or car companies could face significant risks and losses if these businesses failto transition quick enough, as well as legal action. Slow moving sectors could face job
losses as existing roles and industries become obsolete. Moreover, the longer action isdelayed, the more costly it will become to decarbonise in the future.
•$130 billion (£96 billion) could be lost annually: For every year that the world’s
power, oil and gas, coal, and automobile companies delay climate action, the global
financial sector faces growing costs.30•

3 million UK jobs will require significant change and upskilling to keep pace with thetransition.31•

660,000 jobs might move to other countries if the UK is slow to transition.32•

90,000 jobs in the automotive industry are at risk if the sector is not supported intransitioning to net zero and scaling up battery manufacturing.33

Stranded assets
Climate risks such as storms or
flooding and new regulation create“stranded assets”: assets that are nolonger able to earn an economic return,prior to the end of their economic life.
For instance, if governments aroundthe world introduce policies in linewith limiting warming to 1.5C, thiswould mean two thirds of all known
fossil fuel reserves cannot be burned.
Investment portfolios that are heavily
weighted towards assets in the fossil
fuel industry – such as oil extraction,refining and distribution – will besignificantly impacted: $900bn of fossil
fuel assets globally could be renderedworthless.34

Companies also face increasing scrutiny
and risks of legal action. These include
challenges over inaction on climatechange: in a 2020 landmark case, oneof Australia’s largest pension funds
was sued by an individual member for
failing to protect pensions against thefinancial risks of climate change. Under
the settlement the fund agreed toalign its investments with net zero by
2050.35
Other businesses face similar
challenges. For example, shareholders
are taking legal action against directors
at the oil company Shell for “failingto prepare the company for net zero”,
in breach of their duties under the
UK Companies Act to promote thecompany’s success and exercise
reasonable care and diligence.
Companies may also face accusationsof greenwashing: claims that firms areproviding misleading information orstatements about the environmental
benefits or sustainability of theirproducts or are mis-selling sustainablefinancial products. For instance,
Deutsche Bank Asset Management(DWS) is under investigation by the US
Securities and Exchange Commission
for allegedly overstating the green
credentials of its fund range.36• Over 1,000 cases of climatechange litigation have been filed
globally since the Paris Agreement
was signed in 2015.

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21

Guarding against
the risk ofgreenwashingLondon law firms including Bates
Wells and Pinsent Masons predictthat accusations of greenwash will
increase as the transition gathers
pace. To guard against this risk, theUK, EU and other governments aredeveloping “green taxonomies”
to clearly set out the economic
activities which count as green
and sustainable. Governments
are also introducing wider policies
to improve transparency in thefinancial sector (see below for
examples from the UK).
A supportive policy framework
can ensure that transparent andrigorous practices become thenorm, helping limit risk, green
the finance sector, and build on
existing leadership from firms inthe sector.37

5. What has the UK
already achieved?
The UK has already shown leadership on tackling climate change and nature loss, forinstance by introducing the Climate Change Act in 2008, enshrining a net zero target
in law, and establishing the independent Climate Change Committee (CCC) to advise
the government on progress reducing greenhouse gas emissions.
The Government has also delivered a Net Zero Strategy demonstrating how it willachieve net zero across the economy, as well as its 25 Year Environment Plan,
setting out the government’s ambitions to recover the natural environment.
Therefore, the UK is in a strong position to grow green finance, and the Governmentis already delivering a raft of measures to accelerate the transition and level up
communities, including:• Announcing in November 2021 that the UK will become the world’s first Net
Zero-aligned financial centre.
• Publishing a Greening Finance roadmap in 2021 setting out how the Treasury
will green the financial sector.
• Issuing a £10 billion Green Gilt, the largest inaugural green bond issued by agovernment, in September 2021; followed by a second issuance in October whichraised £6 billion. Both issuances were at least 10 times oversubscribed, due tohuge demand from prospective lenders. The money raised will be invested inprojects that align with the green taxonomy and its objectives where possible,
helping to deliver clean growth and achieve the UK’s net zero ambitions.38• Announcing that all large financial firms must report on climate change risks
in line with recommendations from the Taskforce on Climate-Related Financial
Disclosures (TCFD) from April 2022, rolling out to the whole economy by 2025.
• Launching the UK Infrastructure Bank (UKIB) in 2021. The bank has a maximum
financial capacity of £22 billion of public money, consisting of £12 billion for
lending and investment activities and £10 billion of guarantees, to ‘crowd in’
private finance into infrastructure. This aims to kick start new sectors and delivergreen jobs and local economic growth.
• Introducing economy-wide Sustainability Disclosure Requirements forcompanies, asset managers and owners and investment products. The new SDRs
will roll out from Q1 2023. They build on the UK’s TCFD implementation andbring together existing sustainability reporting requirements, aligned with the UK
Green Taxonomy.

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Key facts

Leadership at COP26• £200 billion+: Valueof the UK low carbon
economy in 2020/21,£70 billion greaterthan the construction
sectorAddressing greenwashing

As president of COP26, the UK
led the charge on green finance.
It made finance a key theme of
the conference and supported
the Glasgow Financial Alliancefor Net Zero, led by ex-Bank ofEngland governor Mark Carney,
which includes 450 financial firms
responsible for assets over $130
trillion. The alliance is raisingambition across the sector ondelivering net zero.

The Government’s Green Taxonomy will establish clear definitions of investments
and economic activities that can be considered green and sustainable, to guard
against greenwashing and channel finance into the net zero transition.

• £90 billion of new
private investment
in renewable energy
since 2012• £40 billion of
investment expected
to be unlocked by UK
Infrastructure Bank39

The Government also announced
at COP26 that all UK financial
institutions must disclose netzero transition plans, detailing
how they will work to deliver andadapt to net-zero and capture
the opportunities of the green
transition. These plans will ensure ajoined-up and transparent approachto the transition, supporting new
disclosure requirements by ensuring
companies show how they areplanning for the zero-carbon future.

The taxonomy will help companies across the economy support and adapt tothe transition to net zero by demonstrating how their activities fit with thetaxonomy. It will also help investors more easily select green activities that meet
the taxonomy’s criteria, helping develop a net-zero aligned financial sector. The
Government has set up an expert Green Technical Advisory Group (GTAG) to informthe development of the taxonomy and help set the bar for green finance. Chairedand convened by the GFI, members include the Committee on Climate Change, theConfederation of British Industry (CBI) and the Aldersgate Group. The taxonomy’s
first two environmental objectives, climate change mitigation and climate change
adaptation, are set to enter law in January 2023 (see timeline below).

Action on sustainable pensions
Greening pensions will be essential for harnessing the green transition andfinancing net zero innovation. The Government has introduced plans requiring
pension schemes with £5 billion or more in assets to report on climate risks
and how they are managing them, in line with the TCFD’s recommendations.
The UK is the first major economy to introduce these measures. By October
2022, more than 70% of assets managed by UK pensions schemes will be inschemes that must assess and report on the financial risks of climate change.

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What is the Taskforce on
Climate-related Financial
Disclosures (TCFD)?

What are the UK’s green gilts?

The TCFD is a taskforce for developing
more effective disclosures on climatechange. It aims to promote greater
clarity around investment andinsurance decisions and the climate
risks facing businesses. In 2017, theTaskforce published recommendations
on how companies should report on
climate-related financial risks. The
Government is making it mandatory for
UK companies and financial institutions
to publish climate disclosures alignedwith the TCFD’s recommendations.

A ‘gilt’ refers to a bond issued by the
UK Government. The Government has
committed to invest the £16 billion
raised from its Green Gilts in activities
like clean transport, energy efficiency,
and pollution control and prevention,aligned with the Green Taxonomy. By
issuing green gilts, the Government
hopes to encourage the issuance ofprivate green bonds and stimulate
private investment.40

A similar Taskforce on Nature-related
Financial Disclosures (TNFD) has
also been set up to develop a risk
management and disclosure frameworkfor organisations to report and act onnature-related risks. In March 2022, the
TNFD published a draft framework andwill release a final version in Q3 2023.

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Greening Finance in 2022 and beyond
2022 is an important year for maintaining UK leadership. The year will see a policy
push to deliver on the ambition of creating a net zero financial hub and supporting
the wider transition across the economy. The government is set to publish a new
Green Finance Strategy later this year. There are also major opportunities on the
global stage for the UK to keep up the momentum of COP26.

The Greening Finance Timeline
New Green
Finance
Strategy
published

Treasury
consultation on UK
Green Taxonomy
criteria

Convention on Biological
Diversity COP15(December)
Roll-out of
mandatory Net
Zero Transition
Plans begins

UKIB
Strategic Planpublished

2022

2023

Consultation on
Sustainability
Disclosure
Requirements
Launch ofTransition Plan
Taskforce (April)
Financial Conduct
Authority (FCA)
consultation on
SDRs & investment
labels28

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2025

Introduction of
mandatory SDRs

COP27 in Egypt(November)

Green Taxonomy
starts to enter law(January)

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6. How can the UK
maintain its leadership?
While the UK’s progress has been widely welcomed, stakeholders in the sector havepointed to the need for action in several key areas:

Keeping up with the rest of the world
France has been a sustainable finance leader since 2015, when it hosted the COP21
climate summit. Last year it introduced new world-leading measures requiring
investors to report on how they are accounting for climate and sustainability risks.41
Law firm Travers Smith notes that the UK government also has “some catching up
to do” with the EU, which is ahead of the curve on developing its green taxonomy
and sustainability disclosure requirements. This will include ensuring the UK Green
Taxonomy is guided by scientific, expert advice.42 The UK also lags behind othermajor economies in the total issuance of green bonds.

Global green bond rankings
2021 in detail
US, Germany, china top green insurance table
Top Twenty Countries

Creating robust transition plans
In April 2022 the Treasury launched a Transition Plan Taskforce to help develop acommonly agreed ‘gold standard’ for net zero transition plans. The UK Sustainable
Investment and Finance Association (UKSIF), which represents firms managing
over £10trn in assets, has called for the standard to consider the important role ofstewardship in helping polluting firms shift to net zero, rather than simply focusing
on divestment.43 Client Earth adds that the Government must ensure this standard
is based on the latest science, and that firms are properly held to account for theseplans, so that the rules drive investment in green projects.44

Supporting enrolment in sustainable pensions
Aviva has committed to ensuring that the companies it invests in through its autoenrolment pensions funds are committed to delivering net zero by 2050. It is now
calling on the Government to go further by introducing a requirement that all autoenrolment default pension funds are net-zero aligned.45

Leading the way with public financeSeveral stakeholders have also called for more information over how government
spending will help deliver net zero. The UK Sustainable Investment and Finance
Association (UKSIF) says that greater clarity over how the UK’s future tax andspending plans align with net zero will be essential for promoting private green
investment. This will help support the development of green projects andprovide a clear signal to the private sector.46 The Institute for Government also
recommends a “net zero tax audit” to ensure the entire tax system supports thetransition.47

80
60
40
20

Ge USA
rm
an
Ch y
in
Fr a
an
ce
UK
Ne Sp
th ain
er
la
nd
s
Ita
Su Sw ly
pr ed
an e
n
So atio
ut na
h
Ko l
No rea
rw
ay
Ja
p
Ca an
n
Ch ad
in a
a
Ca HK
na
da
Lu In
xe diamb
Au urgst
De rali
nm a
ar
k

0

The UK currently ranks fifth behind the US, Germany, China and France for the total
value of sovereign and private green bonds issued.
Source: Climate Bonds Initiative
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Annex 1: Who governs
the financial sector?

HM Treasury
The Treasury oversees public
spending and sets the overall
direction of UK economic policy.
Its remit includes creatingstronger and safer banks,
spending taxpayers’ money
responsibly, improving financial
sector regulation and stability
to protect customers and theeconomy, and fostering economic
growth. The Treasury has set out
its plans to create a net zeroaligned financial sector in its
Greening Finance Roadmap and isintroducing new rules to help thesector transition.

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Financial Conduct Authority(FCA)

Prudential Regulation Authority(PRA)

The FCA is an independent bodythat regulates the financial
sector. To protect consumers,
it sets standards for theindustry and authorises whichfirms can provide financial
products. The FCA works toensure firms in the financial
sector are managing the risks
and capture the opportunitiesof the net zero transition. For
instance, it is overseeing the
introduction of new rules forfirms around climate-related
disclosures in line with the
TCFD’s recommendations. It also
enforces sustainability disclosure
requirements.

The PRA is a subsidiary companyof the Bank of England that
regulates around 1,500 firms
including banks, insurers, building
societies and investment firms.
The PRA works to supervise
and promote the soundnessof financial firms by assessing
them against current and futurerisks and trying to contain theeffect of a firm’s failure on thestability of the sector. In 2019 the
PRA published climate-related
supervisory expectations of firms
and, from 2022, will embed these
expectations into its approach.
Together, the FCA and PRA run
the Climate Financial Risk Forum(CFRF) which brings together
representatives from the financial
sector to share best practice inmanaging climate-related risks
and opportunities.

Bank of England
The Bank of England is
responsible for ensuring thefinancial sector and wider
economy is stable, for instanceby setting the interest rate,
lending to banks, and controllingthe overall supply of money.
In 2021 the Bank of England
led its first climate stress test,
which assessed the resilience ofthe country’s 19 biggest banks
and insurers. The Bank has
committed to greening its bondportfolio and promotes adoptionof TCFD-aligned disclosure. It
is also helping to coordinate
international action on climatechange through the G7, G20 andother fora. The Bank recently ran
its first ever “climate stress test”
on the seven largest lenders,finding UK banks and insurers
could face up to £340bn inclimate related losses by 2050.

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Annex 2: Glossary ofgreen finance terms
Divestment: When companies sell off assets including stocks, investments orproperty for financial, political or other purposes, such as failing to meet sustainability
criteria. For instance, increasing numbers of financial institutions are divesting fromfossil fuel companies.

Department for Work andPensions (DWP) and The
Pensions Regulator (TPR)
The DWP and TPR are responsible forregulating the pensions sector. The
DWP has introduced plans requiring
pension schemes with £5 billion ormore in assets to report on climate
risks and how they are managing them,in line with the Paris climate agreement
and TCFD’s recommendations. TPR
regulates the sector by ensuring
employers enrol their staff into pension
schemes, ensuring pensions savings
are secure, improving the runningof pensions schemes, and ensuring
decisions made on behalf of pensions
savers are in their best interests. TPR
ensures pensions trustees comply
with DWP’s rules on climate-related
disclosure.

Financial Reporting Council(FRC)
The FRC works with BEIS and regulates
auditors, accountants, and actuaries.
It also sets the UK’s Corporate
Governance and Stewardship Codes.
The FRC has set out its expectations
and guidance for regulated actors toreport on and account for climaterelated and wider sustainability risks.
The FRC expects regulated actors toinclude material climate change policies,
risks and uncertainties in their reportingand financial statements.

Engagement and stewardship: When investors try to influence a company they are
invested in to improve their sustainability, for example by engaging their board of
directors.48
ESG criteria: Environmental, social, and governance criteria for measuring thesustainability of a company or other investment. Investors may screen potential
investments using these criteria, while investors themselves may be expectedby customers, regulators, or other stakeholders to account for such criteria wheninvesting.49
Green bonds: Green bonds are issued by companies or governments to raise money
for projects and activities that deliver a positive environmental impact, such asenergy efficiency improvements or renewables. Funds raised are typically invested
in line with the Green Bond Principles set out by the International Capital Markets
Association, which emphasise transparency and the need for robust reporting on
how proceeds are used.50
Green Finance: Finance that incorporates and addresses the risks and opportunities
of environmental issues, such as biodiversity conservation, pollution, and climatechange.51
Green Guarantees: Guarantees provide a contractual promise of repayment of debt.
Guarantors, such as the Government, banks, insurance companies or even individuals
provide assurance to lenders that all or part of the losses in the event of default of
payment from the borrower will be covered. Therefore, guarantees in effect provide
insurance on debt, “derisking” investment. Green guarantees could help overcome
barriers and crowd in private investment in green projects that are otherwise too
risky for many investors.
Green Taxonomy: A green taxonomy sets out which economic activities should beconsidered as “green” and contribute positively to the environment or environmental
objectives. The UK’s Green Taxonomy aims to help the economy transition to net zeroby providing clarity on what constitutes a sustainable investment.
Greenwashing: In finance, greenwashing refers to when a business or investor
overemphasizes or misrepresents how green or sustainable their practises are.

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Sustainability Disclosure Requirements (SDRs): New requirements underdevelopment by the Treasury. The new requirements will apply to businesses, aswell as pension schemes, investment products and asset managers and owners.
The SDRs will bring together new and existing reporting requirements under one
reporting framework to provide greater consistency and clarity.52
Sustainable Finance: Provision of finance, either public or private, that takes accountof the environmental, social and governance (ESG) factors of a particular business,
activity, or project.53
Sustainable portfolio: A portfolio is a collection of investments such as stocks orbonds. Portfolios may be managed on behalf of organisations or individuals by aninvestment manager. Sustainable portfolios aim to invest in companies that perform
well on ESG criteria.
Sustainability-linked bonds: These bonds do not have restrictions on where
proceeds can be spent. Those issuing sustainability-linked bonds pledge to improvetheir ESG performance, which is linked to the interest (or “coupon”) they pay toinvestors.54
TCFD: The Taskforce for Climate-related Financial Disclosures, composed of financial
and sustainability experts. In 2017, the TCFD published recommendations to
help companies improve their climate disclosures. The Treasury plans for climate
disclosures aligned with these recommendations (TCFD-aligned disclosures) to
become mandatory across the economy by 2025.
TNFD: Taskforce for Nature-related Financial Disclosures. Like the TCFD, the TNFD
is developing a recommended framework for businesses to report on nature-relatedrisks, to help finance move away from nature-harming activities.

A sustainability-linked bond for energy efficiency
In January 2022, UK housing association L&Q issued a £300 million sustainabilitylinked bond to improve the energy efficiency of its housing stock. Under the bond’s
terms, L&Q committed to reduce its Scope 1 and 2 emissions by 20% and ensure
50% of its new houses are affordable, among other targets. If L&Q misses its targets,the interest rate on its repayments of the bond increases. (Inside Housing)55

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References
1 https://www.wwf.org.uk/sites/default/files/2021-05/uk_financed_emissions_v11.pdf
2 https://kmatrix.co/uk-lcegs/
3 https://www.ukonward.com/reports/greening-the-giants/
4 https://www.gfanzero.com/about/
5 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/1033990/net-zero-strategy-beis.pdf
6 https://www.theccc.org.uk/wp-content/uploads/2020/12/The-Sixth-Carbon-Budget-The-UKs-pathto-Net-Zero.pdf
7 https://www.wwf.org.uk/sites/default/files/2021-05/uk_financed_emissions_v11.pdf
8 https://www.climatebonds.net/2022/01/500bn-green-issuance-2021-social-and-sustainableacceleration-annual-green-1tn-sight-market
9 https://www.natwest.com/business/loans-and-finance/sustainable-finance/green-loans.html; https://www.barclays.co.uk/business-banking/borrow/green-loan/
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11 https://www.nationwide.co.uk/mortgages/borrowing-more/green-additional-borrowing/
12 https://www.greenfinanceinstitute.co.uk/programmes/ceeb/lcbs/
13 https://www.pensionsage.com/pa/UK-overtaken-by-Japan-to-become-3rd-largest-pension-marketWTW.php
14 Source: UKIB,UKIB
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16 https://makemymoneymatter.co.uk/whats-the-issue/
17 https://makemymoneymatter.co.uk/whats-the-issue/
18 UKERC; OWIC; Renewable UK; BEIS
19SMMT; Guardian
20 GFI; Energy Voice
21 HM Government; CCC
22 https://www.ey.com/en_uk/sustainability/green-money-flows
23 https://www.climatebonds.net/2022/01/500bn-green-issuance-2021-social-and-sustainableacceleration-annual-green-1tn-sight-market
24 https://www.longfinance.net/publications/long-finance-reports/global-green-finance-index-9/25 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/1047003/climate-change-risk-assessment-2022.pdf
26 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/672088/costs_of_the_winter_floods_2015_to_2016_summary.pdf
27 Flood Re
28 https://www.worldbank.org/en/news/press-release/2021/07/01/protecting-nature-could-avertglobal-economic-losses-of-usd2-7-trillion-per-year29
30 https://www.weforum.org/agenda/2021/06/impact-climate-change-global-gdp/
31 https://www.lse.ac.uk/GranthamInstitute/news/us2-5-trillion-of-the-worlds-financial-assets-wouldbe-at-risk-from-the-impacts-of-climate-change-if-global-mean-surface-temperature-rises-by-2-5c/

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32 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/834207/Investing-in-a-better-wold-full-report.pdf
33 https://2degrees-investing.org/wp-content/uploads/2021/11/The-Cost-for-the-Financial-Sector-if-Firms-Delay-Climate-Action.pdf
34 https://www.lse.ac.uk/granthaminstitute/news/green-economy-how-the-transition-to-net-zero-could-affect-uk-jobs-across-the-country/
35 https://www.tuc.org.uk/news/600000-jobs-risk-government-inaction-reaching-net-zero
36 https://smmt.publicfirst.co.uk/
37 Sources: FT; Pinsent Masons;
38 https://www.reuters.com/article/us-australia-climatechange-pensions-laws-idUKKBN27I0DT
39 Kmatrix; BEIS Net Zero Strategy
40 https://www.gov.uk/government/news/second-uk-green-gilt-raises-further-6-billion-for-greenprojects
41 https://www.internationalinvestment.net/news/4036306/dws-rocked-usd1trillion-sec-greenwashing-probe-reports
42 https://www.lse.ac.uk/granthaminstitute/publication/global-trends-in-climate-litigation-2021-snapshot/
43 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/1002578/20210630_UK_Government_Green_Financing_Framework.pdf
44 https://www.frenchsif.org/isr-esg/wp-content/uploads/Understanding_article173-French_SIF_
Handbook.pdf
45 https://www.traverssmith.com/knowledge/knowledge-container/travers-smiths-sustainability-insights-the-uks-green-taxonomy/
46 https://www.uksif.org/uksif-policy-briefing-defining-a-net-zero-financial-centre-in-the-uk/
47 https://www.thetimes.co.uk/article/ministers-need-better-transition-plans-to-decarbonise-the-economy-9krmb3ctt
48 https://www.aviva.com/newsroom/news-releases/2020/10/our-call-for-pension-funds-to-benet-zero-by-2050/
49 https://www.uksif.org/wp-content/uploads/2021/12/UKSIF-Policy-Briefing-Initial-views-on-defining-a-net-zero-financial-services-sector-in-the-UK.pdf
50 https://www.uksif.org/wp-content/uploads/2021/12/UKSIF-Policy-Briefing-Initial-views-on-defining-a-net-zero-financial-services-sector-in-the-UK.pdf
51 https://www.simmons-simmons.com/en/features/sustainable-financing-and-esg-investment/
ck1681ntg2eyu0b4971qekjh0/glossary-of-key-sustainable-finance-and-esg-concepts
52 https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
53 https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/
green-bond-principles-gbp/
54 https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Sustainable-Finance-High-Level-Definitions-May-2020-051020.pdf
https://www.gov.uk/government/news/new-independent-group-to-help-tackle-greenwashinghttps://extension.harvard.edu/blog/what-is-sustainable-finance-and-why-is-it-important/
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/sustainability-linked-bonds-in-rapid-growth-as-more-firms-tap-esg-debt-market-65049789
55 https://www.insidehousing.co.uk/news/news/lq-issues-300m-bond-with-sustainability-linked-targets-73943

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The APPG supports parliamentarians to understand more about sustainable finance.
It brings together policy makers, industry players, academics and practitioners to build
political consensus for the changes required in the finance sector to help reach net zero.
The right financial policies can help develop markets, build a resilient economy andensure finance can flow away from polluting fossil fuels, such as those invested in ourpension funds, towards the job-creating, zero carbon sectors of the future.