A UK government-commissioned review into how to scale transition finance has said the government should set out how and when it will implement transition plan disclosure requirements aligned with the framework developed by the advisory body TPT.

The Transition Finance Market Review also said the government should consult in broad terms on what 1.5°C alignment means, and explore different means of incentivising the disclosure of good quality forward-looking data in transition plans.

The Review was commissioned by the previous UK government in December 2023 to deliver on a pledge in its green finance strategy. Delivering its final recommendations today, the Review called on the UK to “act now” so the UK to keep up with other markets that are rapidly building their capabilities in the area of transition finance.

“This Review comes at a critical moment, as industries and investors alike recognise the need for transparent and credible financing solutions that drive meaningful climate action,” said Vanessa Havard-Williams, chair of the Transition Finance Market Review.

In its manifesto, the now governing Labour party said it would set to work “mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement”.

Tulip Siddiq, economic secretary to the Treasury, said the government wanted to lead the world in sustainable finance and that growing the transition finance market was a critical part of this agenda.

“I thank Vanessa and her team for their hard work in completing this Review, which provides valuable insights into how we can channel funding into emerging transition sectors such as green hydrogen, carbon capture and gigafactories.

“I look forward to working with colleagues across government, the regulators and industry to consider these recommendations.”

Improve blended finance structures

Other recommendations issued by the Review relate to blended finance and UK investment in emerging markets. It said better use needed to be made of the UK’s public financial institutions (PFIs), for example by amending their investment mandates to enable greater risk appetite for transition activities and “to set targets and reporting relating to this”.

The Review separately also recommended that regulators provide further guidance on how to apply the prudent person principle in the context of emerging markets and developing economies (EMDE).

It said this guidance “could help pension funds consider whether and how to invest in these markets, for example where blended fund arrangements offer an improved risk profile”.

According to the Review’s final report, the UK’s principles-based regulation for pension fund investments determined the standard of care that applied to the firm managing investments, “but in practice some firms may apply it in a risk-averse way that constraints EMDE investment”.

Other recommendations put forward by the Transition Finance Market Review include reinstating a properly resourced Net Zero Council to develop granular real-economy sector decarbonisation pathways and establishing a Transition Finance Lab to focus on developing innovative financing structures in response to specific sectoral financing challenges.

A third governance body, meanwhile, dubbed the Transition Finance Council, should be set up to act as an accountability mechanism for the Review’s recommendations.

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