UK Treasury Proposes New Rules Requiring Major Firms to Demonstrate Climate Change Strategies for Net-Zero Transition

Posted on 02 March 2022

Proposed Treasury rules in the United Kingdom are set to bring about significant changes for major firms and financial institutions, compelling them to demonstrate their strategies for achieving climate change targets. By 2023, these entities will be required to publicly outline comprehensive plans that detail their transition to a low-carbon future, aligning with the UK's ambitious 2050 net-zero objective. To ensure these plans are not merely superficial gestures, an expert panel will establish the standards that must be met. However, it's important to note that these commitments will not be obligatory, a fact that environmental organisations argue falls short of what is necessary to drive effective change.

The concept of "net zero" revolves around achieving a balance between carbon emissions and carbon removal. The responsibility of adapting to this transition and decarbonizing lies with the companies themselves and their shareholders, while the government's intention is to enhance transparency and accountability through the publication of these plans. The Treasury emphasizes that the credibility of firms' strategies will ultimately be determined by the market. Chancellor Rishi Sunak, speaking at the COP26 climate summit, proudly proclaimed that the UK was leading the way in becoming the world's first net-zero-aligned global financial centre.

The proposed changes go beyond merely encouraging companies to develop transition plans. They also aim to improve climate data, introduce sovereign green bonds, mandate sustainability disclosures, establish proper climate risk surveillance, and implement global reporting standards. It is worth noting that approximately 450 firms, which control a staggering 40% of global financial assets amounting to $130 trillion (£95 trillion), have committed to limiting global warming to 1.5°C above pre-industrial levels.

Campaign group Global Witness argues that without robust regulations, these pledges are destined to fail. They assert that banks and financiers, who play a crucial role in supporting the fossil fuel and destructive agribusiness sectors, should face scrutiny at COP26. Global Witness contends that today's announcement by banks risks being mere greenwashing unless it carries legally binding obligations. Positive Money's senior economist, David Barmes, acknowledges the positive intent behind the plans but points out that financial institutions continue to invest billions in environmentally harmful projects. While the plans have garnered praise for their ambition, the specific implementation details remain unclear, as highlighted by Mark Campanale, founder and executive chair of the Carbon Tracker Initiative. Shaun Spiers, executive director of the environmental think tank Green Alliance, emphasises the need for increased funding from the UK public sector alongside private sector investment.

Despite these concerns, a coalition of finance groups led by former Bank of England governor Mark Carney asserts that sufficient finance has already been committed to limit global warming to 1.5°C. The Glasgow Financial Alliance for Net Zero (GFANZ) claims that over $130 trillion (£95 trillion) of private capital is now devoted to transforming the economy for net zero. This redirection of funds involves allocating bank loans away from investments in oil fields or coal mines and instead directing them towards renewable energy projects or mortgage products supporting highly efficient homes. Bank leaders are also prepared to engage in difficult conversations with customers seeking to build coal power stations, eventually withdrawing funding in both advanced and developing nations.

Under the proposed Treasury rules, financial institutions and companies listed on the London Stock Exchange must create net-zero transition plans that will be published starting in 2023. These strategies will include specific emissions reduction targets and outline the steps that firms intend to take to achieve them. To prevent greenwashing, where environmental initiatives prioritise marketing over substance, a task force comprising industry leaders, academics, regulators, and civil society groups will establish a science-based "gold standard" for these plans. However, the government acknowledges that a universally agreed standard for high-quality transition plans does not yet exist.

Chancellor Sunak has pledged to work towards achieving the target of developed countries providing $100 billion (£72 billion) annually to support less-developed nations in their transition to net zero by 2023. This commitment highlights the importance of global cooperation in addressing the urgent climate challenges we face.

Leaders from various financial institutions have expressed their views on the proposed changes. Alison Rose, chief executive of Natwest, emphasises the importance of measuring emissions on the bank's balance sheet to track progress and highlights the critical role of transparency. Natwest is actively collaborating with the oil and gas industry to develop credible transition plans and work with its customers. Kay Swinburne, vice-chairman of financial services at KPMG UK, welcomes the announcement, stating that it will provide the financial services industry with a valuable set of unified metrics to measure decarbonisation progress. She views the establishment of a gold standard for all companies raising funds as a courageous step. Dr Ben Caldecott, director of the UK Centre for Greening Finance and Investment, believes that these plans will stimulate demand for green finance and accelerate decarbonization not only in the UK but also in countries where UK firms operate.

The unveiled plan aims to redirect significant financial assets totalling $130 trillion, managed by banks, insurers, and pension funds, towards technologies that reduce and eliminate carbon emissions. Simultaneously, there will be a reduction in investments in coal, oil, and gas. However, a crucial question remains: can such transformative ecological, economic, and social change be achieved primarily through financial incentives, without the need for regulatory measures? This approach is favoured by politicians who may be hesitant to ask their constituents to consume less or travel less. By transforming the financial system and redirecting funds, the hope is that every sector of the economy, including energy, transportation, food, clothing, and lifestyle, will naturally decarbonize. The success of this approach will depend on the commitment and collaboration of all stakeholders, from governments and financial institutions to businesses and individuals.


Share this article