WWF-UK                            FSUK0039

Written evidence submitted by WWF-UK

INTRODUCTION

1.       WWF is the world’s leading independent conservation organisation. Our mission is to create a world where people and wildlife can thrive together. To achieve our mission, we're finding ways to help transform the future for the world’s wildlife, rivers, forests and seas; pushing for a reduction in carbon emissions that will avoid catastrophic climate change; and pressing for measures to help people live sustainably, within the means of our one planet.

2.      Given the significant policy developments and changes in government that have occurred since we submitted evidence in July 2022, this further evidence seeks to expand on and clarify what action we now must see if the UK is to become a world leading net zero financial centre.

RECOMMENDATIONS FOR GOVERNMENT

1. ESTABLISH OR TASK AN INDEPENDENT BODY WITH TRACKING GREEN FINANCIAL FLOWS

• Markets and government must know whether and how we are unlocking the required levels of investment for the UK’s green transition.
• In the latest Green Finance Strategy the government made reference to work they are doing to track green financial flows.
• This is promising; without tracking financial flows, government cannot know whether they are succeeding in their promise to create a net zero aligned financial centre. In our view, a financial centre can only be “net zero aligned” if it is not continuing to finance environmentally harmful activities and instead financing the UK’s and the global net zero economic transition.
• Such analysis should also inform the Government’s Net Zero Investment Roadmaps, allowing Government to identify policy which specifically stimulate investment where it is most needed in order to meet the UK’s carbon budgets as outlined by the CCC.1 However, analysis of green financial flows (covering both net zero and nature finance) cannot be limited to an internal government analysis and should be carried out by an independent tracking function.2
• Regular and independent tracking of financial flows will ensure technically superior results. An independent body is more likely to be able to draw in best-in-class technical capability and coordinate information flows from across key institutions involved in financing the net zero transition (e.g. the UK Infrastructure Bank, British Business Bank, and local government).
• Given its independence, this analysis will provide additional credibility and inspire greater confidence in the markets. Businesses and government will be joint beneficiaries

1 https://www.theccc.org.uk/wp-content/uploads/2020/12/The-Sixth-Carbon-Budget-The-UKs-path-to-Net- Zero.pdf, Chapter 5, p239

2 https://www.e3g.org/wp-content/uploads/The-need-for-a-UK-Net-Zero-Investment-Plan_E3G-WWF- Briefing.pdf

WWF-UK                            FSUK0039

of credible analysis and opportunities presented by an independent body. The analysis could provide business with the insight needed to capitalise on net zero investment opportunities, and identify and inform industry-wide strategic areas where Government and business can work hand in hand to deliver results.

• Strategically working together on identified areas will be essential to creating green growth throughout the whole of the economy and UK Plc. For example, Natwest Group’s recently published transition plan flags in multiple areas that their ability to support a net zero transition relies on specific policy gaps being addressed by government. 3Through transparency and strategic identification of gaps, businesses will more likely support Government policies built off the back of the financial flow analysis.
• An independent body would also be able to interact nimbly with industry: becoming a home for market insight on barriers and incentives to unlock investment. This dynamic feedback loop between the Government and the market will ensure that the UK is the best in class when it comes to mobilising net zero investment.

2. COHERENTLY SET OUT HOW IT WILL LEVERAGE REAL ECONOMY MEASURES TO SET THE RIGHT INCENTIVES FOR FINANCE

• Unlocking the requisite level of private finance towards the UK’s decarbonisation cannot happen through financial regulation alone. Incentives in the real economy (tax, regulation, and strategic public spending) must set the right incentives for finance to support the UK’s net zero and nature positive transition. WWF, E3G and multiple businesses including investors managing £3 trillion in assets have called for the government to produce an overarching Net Zero Investment Plan,4 which systematically sets out how the government will incentivise the investment required for the UK’s decarbonisation pathways.
• While the government has produced a few “Net Zero Investment Roadmaps” in heat pumps, offshore wind, carbon capture and storage, and hydrogen, these do not equate to a holistic sectoral plan of critical high emitting sectors where the biggest investment gaps are (such as buildings or agriculture), nor an economy wide plan. Policy changes to make investment in a few isolated technologies attractive – while welcome – does not give the financial sector an indication of how the government will incentivise the financing of entire transition and therefore how the economy might transform.
• A Net Zero Investment Plan should be a core part of an economy wide transition plan produced by government. Companies and financial institutions have been asked to produce firm level transition plans – showing exactly how they will take action to reach company level GHG emissions targets and how their progress will be measured. Yet government departments, and government as a whole, has not published its own transition plan, showing a roadmap of how it will use all its strategic levers (regulation, public spending, policy) to meet the government’s net zero target.
• An economy wide transition plan, produced by government departments, will have to show how government will incentivise requisite levels of private investment (i.e. a Net Zero Investment Plan), but also what else government will be doing to align all of its other activities and functions with its net zero and nature targets.
• A requirement on departments to publish and be accountable to their own transition plan will also stop specific departments becoming blockers to reaching the UK’s net zero goals, because they prioritise other objectives above climate. In reality, the scale and depth of the impending climate and nature catastrophe under a business as usual scenario dwarfs any short term economic gain and therefore must be prioritised across all of the government’s activities.

3 2022 Climate-related Disclosures Report (natwestgroup.com)

4 https://www.e3g.org/news/investors-managing-3-trillion-in-assets-call-on-uk-government-to-deliver-net- zero-investment-plan/

WWF-UK                            FSUK0039

• The more holistic a view the government can provide about its overall plan to reach its goals for a net zero and nature positive economy, the more certainty the financial sector and businesses will have about the trajectory of the UK economic transition. This is a prerequisite for them to have the confidence to invest, and play an active role in bringing it about.

3. ASK AN EXPERT BODY TO SET OUT THE UK’S SECTORAL NATURE POSITIVE PATHWAYS

• It was encouraging to see a renewed focus on nature in the latest Green Finance Strategy. However, we are still waiting for recognition that the UK needs to undergo a nature positive economic transition in the same way that there has been recognition of the net zero transition.
• Reaching net zero relies on nature: they are intimately interconnected. Science and business strategy dictates that the transitions cannot happen sequentially and will need to be done together.
• While carbon budgets and sectoral pathways exist for net zero5, we have only just now had anything close to resembling targets for nature through the Global Biodiversity Framework and the Environment Act.
• We need sectoral economic pathways to show the transformation that will be required of the economy. This is needed for companies to be able to understand what trajectory they should anticipate, and against which they can start to align their operations and assess their own and others’ transition plans. This will also highlight the potential opportunities for innovation and investment that can underpin future more sustainable patterns of growth.
• It is critical that we have a wider view of the nature positive transition rather than seeing nature as a set of isolated issues, like deforestation. For example, while stopping deforestation is critical to meeting our carbon and nature goals, the destruction of other carbon and biodiversity rich ecosystems is an equally urgent issue – such as grassland destruction in the Brazilian cerrado,6 or the drainage of UK peatland to make the land more productive for agriculture.7 Taking a narrow lens of deforestation without considering wider land conversion can protect forests but perversely displace land conversion activities to other critical landscapes. That’s why policy must consider a nature positive transition holistically rather than through a piecemeal approach.

4. MAKE TRANSITION PLANNING MANDATORY FOR LISTED AND LARGE COMPANIES AND EXTEND TRANSITION PLANNING TO COVER NATURE RECOVERY

• We were pleased to see the Green Finance Strategy reiterate the government’s commitment to the Green Taxonomy, transition planning (and the potential extension of this to large companies) and the TNFD.

5 In the UK, Chapter 3 of the CCC’s 6th carbon budget gives an indication of overall and sectoral decarbonisation pathways: https://www.theccc.org.uk/wp-content/uploads/2020/12/The-Sixth-Carbon-Budget-The-UKs-path- to-Net-Zero.pdf. Multiple sectoral bodies have taken this and provided more detail about how individual sectors might need to transform. At an international level, different bodies have produced decarbonisation pathways for their respective sectors, such as for example, the IEA’s Roadmap to Net Zero Emissions by 2050 for the energy sector: https://www.iea.org/reports/world-energy-outlook-2022/an-updated-roadmap-to-net- zero-emissions-by-2050

6 https://wwf.panda.org/wwf_news/?351590/saving-the-cerrado-how-savannahs-and-grasslands-may-tackle- climate-change

7 https://www.wildlifetrusts.org/natural-solutions-climate-change/peatland

WWF-UK                            FSUK0039

• The recent announcement in the 2023 Green Finance Strategy (p10)8 that “The Government commits to consulting on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them” is welcome. The FCA currently requires listed companies to disclose transition plans (on a comply or explain basis). It is important that there is parity between the requirements for listed companies and large private companies as the net zero transition is a whole of economy endeavour. Leaving out a huge swathe of large businesses with significant emissions from green regulatory requirements significantly weakens their efficacy.
• However, the FCA’s current rules on the disclosure of transition plans on a comply or explain basis does not amount to mandatory disclosure which is what the government committed to at COP26.9 Companies can easily not disclose a transition plan by simply not having one. It was disappointing that the latest Green Finance Strategy didn’t set out the steps government or the regulator would take to upgrade the current (weaker) FCA rule to a mandatory disclosure requirement, which should apply to both listed as well as large private companies.
• We cannot afford to wait for nature disclosures to take the same time to become mandatory as it has taken to establish mandatory climate related disclosures. Businesses and government need to think about the climate and nature transitions together given that nature can provide 37% of climate mitigation needs.
• We are losing nature at an alarming rate. Since 1970 global wildlife populations – which are key indicators of ecosystem health - have plummeted almost 70%.10 Yet we rely on nature for clean water, food, flood protection, carbon sequestration, and so much more. 50% of the global GDP is directly dependent on nature11, and ultimately nature underpins our whole economy and human civilisation.
• Given the urgency of addressing nature loss, Government must start planning now for how it will make TNFD disclosures mandatory.
• Furthermore, it should extend the Transition Plan Taskforce’s official mandate to be able to provide formal recommendations on nature recovery plans that should also be made mandatory as part of climate transition plans.

5. GIVE REGULATORS A SECONDARY OBJECTIVE ON CLIMATE AND NATURE

• The government is currently legislating to reform the UK’s financial regulatory

architecture through the Financial Services and Markets Bill (FSM Bill).

• The government and regulators have so far stated repeatedly that climate policy is the responsibility of the government. However, the BoE and FCA control many of the levers necessary to deliver a net zero aligned financial system and economy, given that they set many of the incentives that determine behaviour in the financial markets.
• For example, the BoE determine what capital requirements apply to financial institutions which lend money, and how much capital those institutions must hold for different types of lending. The FCA will in future determine whether prospectuses are approved when private companies decide to list publicly (and therefore whether the environmental information provided in such documents is sufficient).
• While the financial regulators are taking some important action in relation to climate and nature – like increasing the level of disclosure around climate actions from firms - they are not using all their levers effectively.

8https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/114969

0/mobilising-green-investment-2023-green-finance-strategy.pdf

9 https://www.gov.uk/government/publications/fact-sheet-net-zero-aligned-financial-centre/fact-sheet-net- zero-aligned-financial-centre

10 https://livingplanet.panda.org/en-GB/

11 https://www.weforum.org/press/2020/01/half-of-world-s-gdp-moderately-or-highly-dependent-on-nature- says-new-report/

WWF-UK                            FSUK0039

• When the regulators do act on climate and nature issues, they do so indirectly, through considering issues like financial stability – for which they do have a clear objective. However, the regulators could be more proactive in dealing with risks to financial stability brought about by climate change and nature loss. Their current approach is to consider risks on too short a time horizon, often of 3-5 years – systemic climate and nature risks should of course be dealt with using much longer time horizons.
• Without ensuring that the regulators are utilising all levers effectively, through providing them with a clear and direct mandate, the government is preventing the UK from becoming a Net Zero-aligned Financial Centre.
• . The neatest and most effective way to enable the regulators to actively advance climate and nature targets in their activities (i.e. their policies, rulemaking, guidance and supervision), is to provide the UK’s financial regulators with an explicit (secondary) objective on climate and nature through the FSM Bill. This could, for example, point towards the Climate Change Act (for climate) and the Environment Act (for nature).
• This would elevate the government’s current proposal to provide the regulators with a ‘principle’ on net zero and give climate and nature alignment equal weight to the new

objective for the regulators on competitiveness and growth,. The regulatory principle on climate currently included in the FSM Bill would not provide a sufficient basis for the regulators to act to facilitate the transition to a Net Zero-aligned Financial Centre, to which government has committed. By the government’s own admission, “the regulators are not required to act to advance their regulatory principles; instead they must take them into account when pursuing their statutory objectives.”12

• Instead, a new objective on climate and nature would ensure that the regulators take a proactive approach with climate and nature issues when advancing their primary objectives and deliver on the government’s commitments.

6. COMBINE MINISTERIAL PORTFOLIOS ON CITY REGULATION AND GREEN FINANCE

• The split of remits between the City Minister (Andrew Griffith) who is responsible for financial services, and the Treasury Lords Minister (Baroness Penn) who is responsible for green finance makes it more challenging for the Treasury to integrate green considerations into its mainstream approach to financial services policy. This does not give green finance due priority within the Treasury and pits the competitiveness of the financial sector against greening the financial sector, whereas in fact the two need to be seen together. ESG investing is one of the fastest growing sectors in financial services13 and should be seen as a critical way in which the UK’s financial sector will remain leading globally.
• As an example of the risks inherent in such a split of responsibility, the Financial Services and Markets Bill has critical implications for green finance, but it has not been possible to meaningfully engage Andrew Griffith, the lead Minister responsible for the Bill, on green finance issues. Baroness Penn has made it clear that she does not have decision making autonomy over the Bill because it is owned by Andrew Griffith.

April 2023

12 FRF_Review_Consultation_2021_-_Final_.pdf (publishing.service.gov.uk)

13 https://www.edie.net/the-uk-must-become-the-world-leader-in-green- finance/#:~:text=There%20is%20fierce%20competition%20by,%241.6trn%20globally%20in%202021.