Comment: ‘Nimble and pragmatic regime’ needed to unlock transition finance

In the first instalment of RI's Transition Finance Focus, Vanessa Havard-Williams outlines the UK's plans to establish itself as a global transition hub.

Vanessa Havard-Williams headshot
Vanessa Havard-Williams, Linklaters

The transition to a net-zero world is now well underway. This offers enormous opportunities for countries as they optimise their relative positions on green trade and finance – and risk to those who move too slowly as the competition to build markets emerges. To meet nature and climate objectives, we must quickly scale up finance for the infrastructure and technologies needed to decarbonise the global economy.

Net zero needs significant investment but evidence suggests the benefits outweigh the costs. Capital must be directed thoughtfully to maximise its impact. If finance is only channelled towards established “green” sectors like renewables, there is a risk that other sectors such as heavy industry, and more diffuse high-emitting sectors like agriculture or real estate, will be starved of the investment they urgently need to build a credible path to net zero.

Transition finance – referring to financial products and services that support an organisation to credibly decarbonise its activities – can be controversial. But while the topic can stimulate negative reactions and greenwashing allegations, a credible transition finance market, supported by appropriate guardrails, has an essential role in creating a green, resilient future. What’s more, with the bulk of transition finance set to be raised on private markets, it presents a significant economic opportunity.

Take the steel industry: revenues from iron and steel are about $1.7 trillion today, with demand set to increase by close to 50 percent by 2050. Yet the steel industry alone already accounts for some 8 percent of global CO2 emissions. Supporting this industry to decarbonise is an important part of meeting our emissions reductions targets but will require careful collaboration between corporates, policymakers and financial institutions.

According to the Boston Consulting Group, eliminating emissions from the steel industry alone could require investment of up to $3 trillion by 2050. Structuring and executing these investments – including considering social, nature and resilience factors in transition and opportunities for blended finance – is one of many opportunities for financial centres with the right conditions, skills and expertise.

Building momentum with a dynamic approach

To build and scale a successful market for transition finance we need to provide guardrails to drive the integrity and credibility of transition financing decisions. This will require investors, issuers and other stakeholders to be aligned and act with confidence, supported by necessary market principles and frameworks, and underpinned by a nimble and pragmatic regulatory regime.

With climate impacts becoming more visible by the day, we are all working against the clock. A dynamic approach is essential to create momentum and encourage meaningful progress. We must balance ambition with being fit-for-purpose – enabling uptake of transition finance among market actors while avoiding unintended consequences such as capital flight, an unjust transition or threatening environmental integrity.

A UK review to unlock transition finance globally

As the leading net exporter of financial services across the world, the largest centre for cross-border banking and borrowing, and the largest market for global foreign exchange trading, the UK can play a significant role in financing the global transition and shaping a credible market globally.

The Transition Finance Market Review (TFMR) was launched this year and has been tasked with independently gathering and analysing evidence to assess how the UK can establish itself as a global hub for transition finance. As the leader of the TFMR, I am lucky to be supported in this work by an expert group and secretariat.

Our call-for-evidence ran for eight weeks and received over 50 responses from the financial and professional services sector, civil society and corporates. The TFMR will draw from these responses, extensive stakeholder engagement and further analysis to inform practical recommendations – primarily to industry – to unlock transition finance.

Driving innovation

We need new ways of thinking to ensure the industries of today are prepared for the future. From reshaping and scaling financial products to incentivise legitimate decarbonisation, to honing risk analysis and management processes, and developing a robust data and disclosure ecosystem, cross-sectoral collaboration and innovation will be key. The TFMR has received extensive feedback on how best to support this and it will be something we focus on throughout our review.

The UK’s financial services industry has always been a global centre of innovation. With our strength in financial and insurance markets, professional services and cutting-edge data and cleantech industries, we have a strong foundation from which to shape bankable strategies and create a dynamic and effective transition finance ecosystem.

We hope the TFMR will be an important signal in the UK’s journey, guiding the way for us all to work on implementing steps that should help to finance a greener, more resilient and more sustainable future.

Hear more from Vanessa during a panel session, From vision to action – transition finance in action, at the City of London Corporation’s Net Zero Delivery Summit on 4 June.

You can stay up to date with the TFMR’s progress, including the published review, via the TFMR website. If you would like to have your voice heard, please reach out to the secretariat.