United Kingdom, Green Finance
The UK was an early adopter of green consciousness and was the first country to include emission reduction targets in legislation, with a "carbon budget system" setting a phased cap on total emissions and a "net-zero strategy" setting out sectoral decarbonisation pathways. In order to grasp the once-in-a-lifetime development opportunity under the global net-zero transition, the UK has vigorously developed green finance and promoted the "green industrial revolution". Overall, the UK's green financial system is based on the "Green Finance Strategy" as the top-level document, based on the two pillars of "aligning net-zero transition goals" and "green investment", forming a "government-led, market-led" development model.
In terms of green finance supervision and incentive and restraint policies, the UK government has actively played a leading role in forming multi-faceted green finance supervision on macro and micro prudential, behavior, corporate financial reporting, pensions, etc.; We are committed to formulating our own sustainability disclosure standards, gradually improving the sustainability information disclosure mechanism, and improving the awareness and ability of various institutions to prevent and resolve climate risks. In the green finance market, the government and the public sector are used to leverage private capital to play a leading role in market participants such as corporations and financial institutions. The UK green (sustainable) bond market attracts investors from all over the world due to its flexibility, transparency and good access environment. The Green Economy Mark of the UK green equity market provides the possibility for issuers to raise their profile and visibility among green economy investors and other stakeholders, thereby attracting a wider range of investment opportunities.
In terms of international cooperation on green finance, the UK, as a participant and leader in international green finance cooperation, actively explores investment opportunities in overseas markets, supports the green development of emerging markets and developing economies, seeks common development opportunities, and promotes the global net-zero transition.
1. UK climate goals and actions
1.1 Target: UK carbon budgeting system and net zero strategy
1.1.1 UK carbon budgeting system
In 2008, the UK Parliament passed the Climate Change Bill (hereinafter referred to as the "Act"), which committed to "reducing greenhouse gas emissions by 80% by 2050 compared to 1990 levels", marking the first country in the world to incorporate greenhouse gas emission reduction targets into legislation. As the core of the Act, the carbon budget system stipulates a cap on greenhouse gas emissions in the UK every five years, which is essentially a planning and control mechanism for greenhouse gas emissions. At the same time, the bill announced the establishment of a statutory advisory body, the Committee on Climate Change (CCC), to advise on the development of carbon budget targets and assess progress in reducing emissions and adapting to climate change.
In order to give the government sufficient time to set specific targets and supporting policies to ensure operation, each carbon budget should be formulated 12 years before the start of the budget. The process of formulating a carbon budget is divided into the following steps: First, the CCC submits a report on the carbon budget proposal, including the level of carbon budget at each stage, the emission reduction targets that should be achieved, and the actions taken to achieve the emission reduction targets. Second, the relevant departments assess and analyze the feasibility of the CCC recommendation report, form a coherent work plan and feed back to the Secretary of State for consideration, thirdly, the Secretary of State responds to Parliament to ensure the transparency of the carbon budget at each stage, and finally, the Parliament resolves to approve and formally introduce the Carbon Budget Decree.
The total amount of the UK's carbon budget is decreasing over the years. In May 2009, the UK government issued the Carbon Budget Order 2009, which stipulated that the carbon budget targets for the first three periods (2008-2012, 2013-2017 and 2018-2022) were 30.18, 27.82 and 2.544 billion tons of carbon dioxide equivalent (CO2e) respectively, and the Carbon Budget Order 2011 and Carbon Budget Order 2016 The total carbon budget for the fourth phase (2023-2027) and the fifth phase (2028-2032) is set at 1.95 billion tons and 1.765 billion tons, and the carbon budget target for the sixth phase (2033-2037) is set at 965 million tons of CO2e, less than one-third of the first phase.
In order to achieve the smooth delivery of the carbon budget, the UK has issued or plans to introduce a package of proposals and policies, which cover agriculture, forestry, energy, electricity, buildings, transportation, heating and other fields, involving equipment, technology, energy conservation and emission reduction plans, etc., providing financial support, stipulating industry standards, etc. According to the UK House of Commons briefing [1], the first and second carbon budgets are expected to exceed the targets by 1% and 14% respectively, and the third carbon budget is expected to exceed the target by about 3%, but the fourth and fifth carbon budgets may not be completed, with shortfalls of 6% and 10% respectively.
Although the carbon budget system has the force of law, its limitation is that it is not highly enforceable. The Bill stipulates that when actual emissions exceed the carbon budget in a budget period, the government only needs to explain the reasons to Parliament, submit a report on the measures to be taken to offset the excess emissions in the future, and give an estimated time for completion, with no other legal consequences. In addition, the carbon budget can be adjusted. Secretaries of State are required to consult other state agencies and carefully consider the recommendations of the CCC when adjusting their carbon budgets, and decisions on adjusted carbon budgets are made by 31 May of the year following the end of the previous budget period.
1.1.2 UK Net Zero Strategy
In 2016, the UK signed the Paris Agreement, pledging to "achieve net-zero greenhouse gas emissions by 2050". On June 27, 2019, the amended Climate Change Act came into effect, including the goal of achieving net-zero emissions by 2050. In 2020, the UK submitted its Nationally Determined Contribution (NDC) to the United Nations Framework Convention on Climate Change (UNFCC) to reduce UK carbon emissions by at least 68% from 1990 levels by 2030. In September 2021, the UK launched the Net Zero Strategy: Rebuilding a Green Environment (Net Zero Strategy) to chart a long-term decarbonisation pathway for all sectors of the economy to achieve the goal of net-zero emissions by 2050. Key measures include ending the sale of new petrol and diesel vehicles by 2030, being fully powered by clean electricity by 2035, investing in hydrogen capacity, achieving 10% sustainable aviation fuel by 2030, and subsidizing household heating upgrades. At the same time, the Net Zero Strategy will be presented to the UNFCC as the UK's second long-term GHG emissions strategy under the Paris Agreement.
The transition to net-zero across the economy is the only way to achieve the goals of the carbon budget and the Net-Zero Strategy, which in turn must focus on the green sector and decarbonization technologies.
1.2 Opportunity: The UK is driving a "green industrial revolution"
The UK agrees that economic development and environmental improvement can go hand in hand, and highlights the huge opportunities that lie in the global transition to net zero. The UK government survey found that the sooner the transition to net zero, the more likely it is to deliver significant financial benefits[2], with the UK's major net-zero sectors contributing up to £60 billion in value added annually by 2050[3]. In order to pursue the forefront of global green economic development and empower low-carbon development, the United Kingdom has announced the "Ten Points Plan for the Green Industrial Revolution" (hereinafter referred to as the "Ten Point Plan"). The 10-Point Plan combines the UK's own industrial and technological advantages and sets out specific targets for the development of ten key areas: "offshore wind", "low-carbon hydrogen", "nuclear energy", "green public transport, cycling, walking", "zero-emission aircraft and green ships", "CCUS", "green buildings", "natural environment" and "green finance and innovation". For example, we will achieve the production of 1GW of hydrogen by 2025, the first SMR and AMR nuclear power plants in the early 2030s, and stop selling new diesel and gasoline lamps by 2030. For "green finance and innovation" in particular, the 10-point plan proposes to launch a £1 billion net-zero innovation portfolio, focusing on investing in green technology and commercialisation in the remaining nine areas. It also shows that green finance and its innovative forms provide important financial support for the development of key areas of net zero.
2. UK green finance strategy and policy
The UK's green finance development model is "government-led, market-led", and financial institutions play a key role in providing investment and financing support for the UK's net-zero transition. The following article will provide an in-depth analysis of how green finance has developed in the UK from the perspectives of government actions (top-level green finance strategies, green finance supervision, incentive and constraint policies, sustainability information disclosure systems, international cooperation, etc.) and financial industry actions (green finance markets and products).
2.1 Top-level strategy for green finance
In 2019, the UK government released the first version of its Green Finance Strategy. The strategy is one of the UK's landmark green finance top-level documents, focusing on the three core elements of "green finance", "green investment" and "seizing opportunities", and puts forward requirements for how the financial sector can promote net zero greenhouse emissions in the UK by 2050. On this basis, the UK has updated and released the Green Finance Strategy 2023 (hereinafter referred to as the "2023 Strategy"), reiterating that there are huge development opportunities in the global net-zero transition, and that the UK should consolidate and expand its position as a global leader in green finance and investment, and stimulate green investment and financing. With the two strategic pillars of 'alignment' and 'investment' at its core, Strategy 2023 outlines how the UK will achieve its goal of becoming the world's first net-zero financial centre.
For the "alignment" pillar, Strategy 2023 argues that mobilising private capital flows to sectors or technology areas needed for net zero requires market participants to have access to information and tools to effectively assess opportunities and risks, and the UK government to play a role in protecting consumers and preventing greenwashing. To this end, Strategy 2023 outlines how the UK can "increase transparency", "develop transformation tools" and "delivery channels".
In terms of "improving transparency", the 2023 Strategy ensures the smooth flow of information transmission links "real economy-> financial institutions-> end investors" to ensure that stakeholders have access to necessary information. The UK Government's approach includes developing a common framework for transition plans to ensure parity between public and private companies and consistency and comparability of transition plans, seeking advice on a Scope 3 GHG emissions report to understand the costs and benefits of producing the report, and updating environmental reporting guidelines, working with industry partners to develop adaptation metrics and guidance, and improving climate resilience assessment and disclosure methods.
In terms of "development transition tools", the UK government supports the development of transition tools and frameworks to assist green finance market participants in decision-making and monitoring. The main tools and frameworks include: developing its own green taxonomy to ensure and improve the quality of identification and disclosure of green finance activities, and plans to include nuclear power in the UK's green taxonomy, investing in and establishing a first-class data analysis institution, the UK Green Finance and Investment Centre CGFI[4], to provide a way for the global popularization, commercialization and export of climate and environmental science, promoting ESG investment and developing a code of conduct for ESG data and ratings in conjunction with the Financial Conduct Authority, and relaunching the Green Finance Education Charter", etc.
In terms of "transmission channels", in order to release long-term capital and improve the liquidity of green investments, the UK insurance industry supports the net-zero transition by investing in projects and companies that aim for sustainable business models, providing insurance products that support adaptation to the impact of climate change, and providing guarantees for key risks in project development UK) incentivizes insurers to increase investment in long-term productive assets such as innovative green assets and renewable energy infrastructure, and encourages defined contribution pension plans (DC-type pensions) to broaden investment methods, such as investing in illiquid assets (including investing in green projects). In addition, the UK government has launched innovative green bond products, green gilts and green savings bonds, to finance projects with clear climate or environmental benefits. The UK government is also working with regulators to improve the regulatory framework for climate and environment.
Measuring the effectiveness of the UK's net-zero financial transition requires the development and application of appropriate key performance indicators (KPIs). The KPIs set by the UK government are likely to cover areas such as the quantity and quality of sustainability reporting and transition plans, the alignment of financial flows with climate targets, the size of the green finance market, green finance employment and vocational skills, and the final KPI methodology framework is expected to be finalized in 2024. The UK government has stated that it will enhance its understanding of international transformation pathways by deepening international tracking, removing barriers to reporting, and improving interoperability. and regularly assess the effectiveness of policies for the net-zero transition through regular monitoring of KPIs to ensure transparency and accountability of governments in driving the net-zero transition in the financial sector.
For the 'Investment' pillar, it focuses on key areas and technologies of how the UK government and public financial institutions are mobilising private capital inflows. Specifically:
In terms of "clarifying the future investment path", the main measures include, but are not limited to, clarifying the focus of investment in areas such as net zero and energy security, nature, climate adaptation and restoration, formulating green investment plans, such as providing £20 billion in funding for the early deployment of CCUS, launching a £160 million floating offshore wind manufacturing investment plan, etc., and formulating and publishing a net-zero investment roadmap to clarify the investment needs of various sectors and track the flow of green investment funds.
In terms of "government and public sector leverage", Strategy 2023 proposes to leverage private investment flows into emerging technologies, green industries, and transformation of traditional industries through government and other public levers, such as providing large funds for infrastructure projects (such as the £240 million Net Zero Hydrogen Fund to support the development and construction of new low-carbon hydrogen production plants that can be deployed between 2020 and 2030), Provide consumers with small incremental funding to encourage them to purchase low-carbon goods to gradually increase consumer demand for low-carbon products (e.g. £1 billion UK residential insulation projects), sub-sector design market support business models (e.g. CFD Renewable Energy Support Scheme), Deploy regulatory authorities to set standards and create supply-demand signals and market frameworks (e.g., the ZEV Directive for Zero-Emission Vehicles, which is planned to be implemented in 2024, will support the phasing out of the sale of new petrol and diesel cars and vans from 2030, and ensure that all new cars and vans have zero emissions from 2035). In addition, the UK government supports local governments to unleash green investment opportunities, improve the capital allowance system, and support the transformation of small and medium-sized enterprises to maintain an attractive business and investment environment.
On "Working with Industry and the Investment Community", the UK Government is working with the financial sector to build new partnerships to support the achievement of net-zero targets and build consensus for action, host a global investment summit to promote foreign direct investment, strengthen cooperation with public financial institutions and deepen cooperation with the Green Finance Institute.
Under Unlocking Honest Markets, the UK government will consult on interventions and concrete steps to support the development of highly honest carbon and natural markets and prevent greenwashing, and a new Natural Markets Framework will be published, outlining principles and priorities for honest markets, and a plan to develop a set of standards for investing in nature.
Under EMDEs Green Investment, the UK government supports the sustainable development of emerging and developing economies (EMDEs) and creates opportunities for shared development. These include deepening the partnership and building green financing capacity through the Just Energy Transition Partnership in South Africa, Vietnam and Indonesia, and scaling up strategic investments through the British International Investment Corporation, among others.
2.2 Green finance supervision and incentive policies
2.2.1 Green finance regulators have their own responsibilities
The financial regulators in the UK perform their own duties, from macro to micro, to achieve multi-dimensional and multi-level coverage.
The Prudential Regulation Authority (PRA) is part of the Bank of England (BOE) and is responsible for supervising the UK's largest financial institutions, including banks, credit unions, building societies, insurance companies and large investment companies, to prevent climate change risks from affecting the safety and soundness of regulated companies and the stability of the broader financial system. The work includes conducting climate stress tests, supporting governments and regulators to study transition finance and develop broader green finance strategies, and establishing a climate risk forum with the FCA.
The Financial Conduct Authority (FCA) is the conduct regulator of financial companies and financial markets, as well as the prudential regulator of some companies, with the aim of safeguarding consumer rights, protecting and enhancing the integrity of the financial system, and promoting effective competition for consumer interests. Efforts include convening multiple industry groups to advance the sustainable finance agenda, such as the Climate Finance Risk Forum with the PRA and the formation of a Disclosure and Labelling Advisory Group to advise on SDRs and investment labelling development.
The Financial Reporting Committee (FRC) is the regulator of accountants, actuaries, auditors, and others, and its goal on climate issues is to promote transparency in corporate reporting on risks and opportunities facing climate and sustainability, as well as related governance activities and actions. FRC is mainly responsible for corporate climate-related information disclosure and financial reporting, such as supporting companies to improve TCFD disclosure, issuing guidance to support companies in disclosing net-zero targets, issuing new strategic reporting guidance covering climate-related financial risks and opportunities, issuing guidance for audit firms to address climate risks, and establishing an ESG team to formulate ESG strategies and work plans.
The Pensions Regulatory Authority (TPR) is responsible for the regulation of climate change in pensions.
In 2021, the Bank of England (BoE) conducted the first climate risk stress test for large banks and insurance companies to strengthen the attention of financial institutions to climate-related risks and improve their ability to manage climate-related risks. The results found that while UK banks and insurers are making good progress on climate risk management, climate risks could weigh on their profitability. The timing of climate risk management measures and the degree of harm of the risks will have a significant impact on financial institutions, and the cost of climate management will be significantly reduced if climate risk management measures are taken early. The climate risk stress test not only helps financial institutions assess the degree of harm they face and improve their awareness and level of climate risk management, but also provides important information for UK regulators such as financial institutions' response to climate risk behavior and wider impacts, and provides reference for future regulatory policy formulation.
2.2.2 Incentives and constraints for green finance continue to be introduced
The first is to provide loan guarantees for environmentally friendly enterprises. In 2009, the UK government's Secured Loan Scheme set up a financing subsidy and guarantee mechanism for small and medium-sized enterprises to encourage the flow of funds to green industries, and the government provided guarantees for qualified environment-friendly enterprises with a certain loan amount, up to 75,000 pounds.
Second, the Bank of England launched a "green" corporate bond purchase program. Since 2016, the Bank of England (BoE), an investor in the UK financial market, has introduced the Corporate Bond Purchase Scheme (CBPS) to purchase corporate bonds issued by companies deemed to have made a significant contribution to the UK economy. The program is an unconventional monetary policy tool, the size of which is determined by the Bank of England's Monetary Policy Committee on the basis of inflation levels. The implementation of the plan has played an active role in guiding enterprises to issue bonds and reducing the risk premium of corporate bonds[6]. In 2021, the Bank of England adjusted the investment composition of its CBPS to encourage the transition to net zero for companies and guide net zero investment in the public and private sectors, taking the lead in including climate factors and launching "green CBPS". The market share of "green CBPS" investment is small, but it provides a clear investment-oriented signal for the majority of investors, which can effectively increase the liquidity of "green" corporate bonds, reduce the financing cost of enterprises, and provide a longer-term and broader incentive for enterprises to transition to net zero.
The UK's green bond support policy continues to improve. In 2019, the London Stock Exchange issued the Terms and Conditions for Application for the Sustainable Bond Market, which set out detailed requirements for the eligibility criteria and access process of the sustainable bonds it included. In 2019, the UK government launched the UK Green Finance Scheme, an innovative green bond offering that will finance the transition to net zero through the trading of Green Gilt and Retail Green Savings Bonds. Green gilts[7] are a type of green bond issued by the UK government that specifically finance climate- or environment-related projects. The Green Savings Bond represents a three-year fixed savings account offered by the National Savings and Investment Corporation (NS&I) in the United Kingdom, which uses the cash of savers to finance green infrastructure projects.
2.3 Gradually improve the sustainability information disclosure mechanism
The UK is currently gathering the wishes and suggestions of all parties to gradually establish a sustainability disclosure mechanism. In November 2020, UK regulators and the TCFD Working Group released an interim report and a roadmap for mandatory climate-related disclosures. The roadmap announced plans to achieve economy-wide disclosure in accordance with TCFD requirements by 2025 and implement most of the mandatory requirements by 2023[8]. In March 2021, the UK's Department for Business, Energy and Industrial Strategy (BEIS) consulted with listed companies, large private companies and limited liability partnerships on proposals to introduce mandatory climate-related financial disclosures[9]. In 2022, the UK government introduced the Climate-related Financial Disclosure for Companies and Limited Liability Partnerships (LLPs)[10] regulation, which stipulates that "from 6 April 2022, more than 1,300 large companies and financial institutions registered in the UK must make climate-related financial information mandatory in accordance with the recommendations of the TCFD", marking the first country in the UK to make it mandatory for companies to report on climate-related risks and opportunities. The companies included include trading companies, banks, insurance companies, and private companies with more than 500 employees and a turnover of more than £500 million. In November 2023, the Financial Conduct Authority (FCA) of the United Kingdom issued the "PS23/16 - Sustainability Disclosure Requirements (SDRs) and Investment Labels" to improve market trust and transparency in sustainable investment products by formulating anti-"greenwashing" rules for all authorized companies, establishing four investment labels, and making recommendations for information disclosure at the product and entity levels.
Currently, the UK Government is working on the establishment of a Sustainability Disclosure Standards Framework (UK SDS) by July 2024. The UK SDS will be benchmarked against the IFRS sustainability disclosure standard, which aims to make corporate disclosures globally comparable to support investment decision-making[11].
3. The UK's green finance market and international cooperation
3.1 Green Investment Bank
In 2012, the UK government invested £3.8 billion to establish the Green Investment Bank (GIB), the world's first national-level green investment bank focused on financing green and low-carbon projects. The GIB was established as an investor and manager of the UK's green infrastructure assets, supporting green development with financial funds, leveraging financing to develop green industries, mobilizing private sector investment, and handing it over to the private sector in due course. GIB's investment approach is more flexible, and its main businesses include:
investing in green infrastructure assets, such as Belfast's waste-to-energy plant;
Acting as a limited partner in a third-party managed fund designated to invest in green infrastructure assets, a "fund of funds" business focused on small-scale green projects, such as GIB's investment in a combined heat and power plant in Sheffield through a fund managed by Equitix[12];
Acting as a general partner or fund manager in the fund management business to raise and manage funds from other investors, such as the management of the GIB offshore wind fund by GIB's subsidiary, Green Investment Bank Financial Services Ltd (GIBFS)[13];
Participate in the formation of joint ventures to invest in green infrastructure projects outside the UK, such as UK Climate Investments LLP (UKCI), a joint venture with the UK Department for Business, Energy and Industrial Strategy, with a focus on green projects in India, South Africa, Kenya, Tanzania and Rwanda.
Between 2012 and 2017, before the sale, GIB funded more than 100 green infrastructure projects in the UK, with a total transaction value of more than £12 billion [14].
In August 2017, GIB was officially acquired by Macquarie Group, a private investment institution, and changed its name to Green Investment Group (GIG), which also marked the completion of GIB's privatization. GIG is committed to exploring investment opportunities in green infrastructure projects around the world and providing solutions and other services. At the same time, GIG will remain one of the investors in green infrastructure in the UK and Europe, and Macquarie has committed to continue to use and maintain GIB's platform and brand, to retain its Edinburgh office as a location for new revenue-generating project delivery operations, to provide technical, risk, project management and advisory services for GIG and Macquarie Group's green infrastructure investments, to provide £3 billion in financing for green energy projects in the UK and Europe over three years following the acquisition of GIB, and to continue to work with commercial, Energy & Industrial Strategy has partnered with UKIC to fund the development, construction and operation of green energy infrastructure in areas with limited electricity supply (with a focus on India and Sub-Saharan Africa) through equity investments[15], and long-term infrastructure investors Macquarie European Infrastructure Fund 5 (MEIF5) and Universities (Universities). The Superannuation Scheme (USS) will invest in a new offshore wind investment vehicle to explore low-carbon investment opportunities globally and in the UK.
3.2 Innovate green financial products
3.2.1 Internationalization and innovation of green bonds
The UK green bond market is one of the world's leading green bond issuance venues. According to CBI data, the UK issued nearly US$20 billion in green bonds in 2022, ranking seventh in the world[16]. The history of green bonds in the UK can be traced back to 2009, when the World Bank issued its first green bond on the London Stock Exchange. In 2015, the London Stock Exchange officially launched the green bond sector, which is also the first stock exchange in the world to have a dedicated green bond sector. In 2019, the London Stock Exchange expanded its green bond segment to include a broader Sustainable Bond Market (SBM) market. According to the London Stock Exchange[17], more than 300 bonds have entered its SBM, raising a combined capital of more than £70 billion for companies.
The advantages of the SBM market are mainly reflected in the following aspects: 1) a wide range of services, SBM covers a relatively comprehensive range of products and instruments, and provides issuers and investors with sustainable supporting services in the primary and secondary markets, data and trading, etc.; 2) World-class peer groups, SBM issues bonds from supranational organizations, sovereign countries, local governments, enterprises and other different groups, such as the United Kingdom, China, India, the Middle East, Canada's first certified green bonds, as well as the first sovereign green bonds in the Asia-Pacific region and the Americas, 3) an international investor base that provides investors with access to a wide range of sophisticated and long-term investment opportunities, as well as an international pool of funds, 4) transparency and flexibility, with SBM-administered securities subject to relevant international standards and issuers subject to external review, The flexibility of important documents such as the annual sustainability report is reflected in the fact that the issuer can choose the appropriate primary market listing according to the characteristics of its own bonds, and 5) insight and guidance, institutions with rich experience in sustainable investment and data analysis such as FTSE Russell can provide issuers or investors with ratings, indexes, data analysis and other services.
Issuers applying for the issuance of sustainable bonds on the London Stock Exchange can choose a market access based on the regulatory, securities structure and bond situation. Applicants are required to submit a completed application form based on the selected market and to submit disclosures as required by the London Stock Exchange and to continue to perform their reporting obligations during the duration of the application (see Chart 8). The London Stock Exchange provides three ways to classify securities: one is classified according to the purpose of the raised funds, which are divided into green bonds, social bonds and sustainable bonds, and the other is classified according to the issuer-level classification, which is divided into green income (Green Revenues) and sustainability-linked bonds, where green income issuers should meet two requirements to be eligible to enter the issuer level category, namely: meeting the "Green Economy Label" of the London Stock Exchange and FTSE Russell certification (see Section 3.2.2) and proof that green income accounts for more than 90% of the revenue, and the third is transition bonds (see Chart 9).
The issuers of SBM bonds on the London Stock Exchange are diversified and internationalized, mainly including public institutions, local governments, enterprises and international investment institutions. On 17 April 2015, Transport for London issued a 10-year, £400 million green bond to promote green transport, the first green bond issued by a UK public body [18]. In 2020, the UK's first local government green bond was issued, raising a total of £1 million for West Berkshire District Council, 22% of which came from West Berkshire residents[19]. Mainland financial institutions are also actively cooperating with the London Stock Exchange. On 12 November 2021, Bank of China issued six sustainability-linked bonds with a total size of US$2.2 billion in London to raise funds to incentivize the real economy to improve carbon emission reduction performance[20], and on 6 December 2023, Agricultural Bank of China London Branch issued a three-year floating-rate green bond of US$300 million on the London Stock Exchange, all of which will be used for qualified green projects, which is also the first green bond of Agricultural Bank of China London Branch[21].
The UK green bond category is accelerating innovation. In June 2021, HM Treasury and DMO released the UK Government Financing Framework, detailing the UK government's plans to issue green gilts and sell NS&I's retail green savings bonds through the DMO to help tackle climate challenges and create green jobs. The first green gilt bond was issued on 21 September 2021 with a tenor of 12 years, with a total issuance amount of £10 billion, the largest single issuance in history, attracting more than £100 billion in subscriptions[22]. According to DMO data, the UK government raised £26 billion through green gilts at the end of February 2023, of which £16.1 billion was raised in 2021. The first green savings bond was launched in October 2021 with an interest rate of just 0.65% for the first three years, and has since changed the interest rate five times, peaking at 5.7% in August 2023. According to NS&I data, retail green savings bonds raised a total of more than £1 billion at the end of September 2023.
The funds raised by green bonds are mainly invested in clean transportation, renewable energy, energy efficiency, pollution prevention, livelihood and natural resources, climate change adaptation and other fields. In September 2023, the UK government released the first comprehensive allocation and impact report of the Green Finance Framework, noting that in the 2022-2023 financial year, £8.6 billion of funds raised from the sale of green gilts and green savings bonds were allocated to 51 projects in the above six sectors. In addition, transport-related green bonds dominate [23].
3.2.2 "Green Economy Marker" for Green Equity Market
The Green Finance Guidelines published by the London Stock Exchange in 2021 divide the financing entities of the green equity market into companies and funds, and companies or funds that plan to go public or have already been listed can apply for the "Green Economy Mark" as a recognition of their products and services helping to achieve environmental goals. The Green Economy Mark is aimed at London-listed companies and funds that contribute to environmental goals such as climate change mitigation and adaptation, waste and pollution reduction, circular economy, water and marine conservation, sustainable agriculture and more. The London Stock Exchange uses the FTSE Russell Green Income Classification System to assess the proportion of a company's green revenue, and a company must derive more than 50% of its revenue from green products and services to be considered a candidate[24]. The FTSE Russell Green Income Classification System is currently subdivided into 10 sectors, 64 sub-sectors and 133 micro-sectors to provide a nuanced and comprehensive picture of green activities and their material impact on income. Companies can submit the "Green Economy Label" application form to the London Stock Exchange before and after listing. The London Stock Exchange will jointly review the application information and verify the eligibility of the application with FTSE Russell, and give feedback on the final decision within 28 working days. In addition, the London Stock Exchange will conduct an annual review of the "Green Economy Label" company, and if it meets the requirements, it will continue to retain the logo, otherwise it will be revoked.
The benefits of obtaining the "green economy label" include the added value of the benefits in addition to the income of the enterprise or fund listing itself. That is, to enhance the image and visibility of existing or new issuers among investors and other stakeholders who are concerned about the green economy, thereby providing a wide range of investment opportunities. There will be no additional costs to the acquisition of the Green Economy Mark and there will be no impact on the current listing rules. Companies that have been awarded the logo can use their profile page or marketing platform on the London Stock Exchange as promotional materials, and can also communicate regularly with other companies that have received the logo or be invited to participate in special business events.
According to the 2023 Green Economy Label Report, 112 issuers on the London Stock Exchange have been awarded the "Green Economy Label" on the main board market or alternative investment market. In 2023, 22% of international companies will receive the Green Economy Label, accounting for 63% of the total market capitalization, while finance and industrials will be the largest sector with 52% in 2023, and utilities will be the largest sector by market capitalization, accounting for 55%.
3.2.3 Green credit with a wide range of products
As the issuer of green credit, major commercial banks in the UK basically provide green credit projects [25]. The types of green credit products in the UK can be divided into two types: private green credit products and corporate credit. The main green credit products for private use are: 1) eco-friendly debit cards, such as the UK's first recyclable debit card launched by digital bank Starling Bank[26], and the biodegradable and recyclable eco-friendly debit card issued by Tridos Bank[27];2) green home mortgages, such as Barclays, NatWestminster Bank, Royal Bank of Scotland, etc., have all launched green home mortgages to provide lower mortgage rates for families who purchase energy-efficient homes[28]; 3) New energy vehicle loans, such as HSBC's different preferential activities for customers who purchase electric vehicles directly, purchase in installments, or lease them [29]. Corporate green credit products mainly provide basic green loans for green enterprises, such as the Royal Bank of Scotland and NatWest, which provide preferential green loans (e.g., fixed-rate borrowings of 5-10 million pounds, with no upper limit on floating interest rates) to eligible UK enterprises (such as clean buildings, clean energy, and clean energy enterprises) to support their sustainable development [30].
3.2.4 Towards an independent UK carbon market
The UK has a long history of running a carbon market, and its role has gradually changed from a participant to an independent. The UK's ETS began in 2002 with the establishment of the world's first emissions trading market, and it is also the first national-level multi-sector emissions trading market. In 2005, the UK officially joined the EU carbon market. Before the UK left the EU and the EU ETS at the end of 2020, around 1,000 power plants and industrial plants in the UK were included in the EU ETS. In accordance with the requirements of the Greenhouse Gas Trading Scheme Order 2020, the UK Emissions Trading Scheme (UK ETS) came into force on 1 January 2021, and the first allowance auction was held on 19 May 2021, replacing the previous participation in the EU ETS[31]. The UK ETS also follows the principle of "cap-and-trade", capping the greenhouse gas emissions of energy-intensive sectors, power generation and aviation (about one-third of the UK's GHG emissions) by 4.2 million tonnes per year, a 5% reduction from the EU ETS's cap[32]. The UK ETS targets to align with the UK's 2050 net-zero emissions target by 2024 at the latest.
Allowances in the UK ETS are mainly allocated by "auction", supplemented by "free distribution". For free allocations, the UK ETS provides for the right to free allowances to fixed facilities and air operators. In 2021, the total amount of free carbon allowances for fixed facilities was nearly 40 million tons. For auctions, the UK ETS auctions are held every two weeks, and the number of allowances auctioned in 2022-2024 is about 81 million tonnes, 79 million tonnes, and 69 million tonnes, showing a decreasing trend over time [33]. In addition, the UK carbon market has an auction reserve price mechanism, a cost control mechanism and a floor price mechanism (as of September 2023, 22 pounds, bids below this floor price will not be accepted) to maintain the rationality of carbon allowance prices and active trading. According to ICAP data, since the first allowance trading on May 19, 2021, the carbon price of the UK carbon market has basically shown a trend of first rising and then falling, and is currently at a historical low (nearly $40/ton). Compared with the carbon allowance price in the EU carbon market during the same period, the trend of carbon price change in the UK is similar to that of the EU, but it has declined sharply since 2023, and the gap with the EU carbon price has gradually widened.
3.3 International cooperation on green finance
The UK is committed to promoting global green finance actions, actively exploring investment opportunities in overseas markets, and seeking the coordinated development of global green finance.
3.3.1 Participants and Leaders of the League of Nations
The UK actively participates in and leads the international coalition on green finance. Since 2021, the UK has become more and more active on the international green finance stage. In November 2021, the UK hosted the 26th United Nations Conference of the Parties to Climate Change (COP26), which signed the Glasgow Climate Pact and announced the establishment of the net-zero financial alliance GFANZ. GFANZ brings together more than 550 financial institutions across 50 countries committed to achieving net-zero emissions, representing approximately 40% of global private financial capital. In 2021, the UK held the G7 presidency to promote member states' efforts to require companies to disclose climate-related information, and launched the Task Force on Nature-related Financial Disclosures (TNFD). At present, TNFD has become a market-led international working group, consisting of more than 900 supporters, with more than $20 trillion in assets under management across regions and industries [34].
3.3.2 Support the sustainable development of emerging market and developing economies
The UK's support for sustainable development in emerging market and developing economies can be summarized as capacity-building support and investment support. For capacity-building support, the UK supports knowledge sharing and deepening cooperation through international forums and partnerships. For example, the UK's Partnership to Accelerate the Climate Transition leverages national programmes, the Bank of England disseminates expertise to help central banks implement effective public financial management, and co-hosted climate scenario analysis workshops with central banks in Africa and Asia in 2022. When it comes to investment support, the UK sees public funding as important. As a result, the UK has worked with international partners to establish multilateral climate and environment funds, such as the Green Climate Fund (GCF), the Global Environment Facility (GEF) and the Climate Investment Facility (CIF), and is one of the largest contributors to these funds. At the same time, the UK is working closely with the private sector to promote innovation in capital market instruments, such as the introduction of a new climate investment fund, the Capital Markets Mechanism, CCMM, which is expected to issue US$5 billion to US$7 billion in green bonds through the London Stock Exchange for large-scale development of clean technologies in Europe, the Middle East and North Africa.
3.3.3 UK-China cooperation on green finance
China-UK green finance cooperation has a historical foundation, and the two countries have carried out in-depth cooperation in environmental information disclosure and green financial products. In terms of environmental information disclosure, in 2018, China and the UK jointly issued the Action Plan of the Pilot Working Group on Environmental Information Disclosure by Financial Institutions in China and the UK, encouraging pilot financial institutions to carry out environmental information disclosure with reference to a more consistent framework, methodology and tools, and based on the actual situation of their own countries and institutions. The pilot institutions include Aviva and Brunel Pension Management in the UK, as well as Industrial and Commercial Bank of China, Industrial Bank and E Fund. In terms of innovative green financial products, China and the UK have cooperated in the issuance of green bonds on a number of occasions, and the Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China have all issued sustainable bonds on the London Stock Exchange.
4. Characteristics and implications of the development of green finance in the UK
As the birthplace of the first industrial revolution, the UK urgently needs to seize the once-in-a-lifetime development opportunity of the "green industrial revolution". As a traditional financial power, the UK has inherent advantages in developing green finance, and at the same time, it also has distinctive "British" characteristics.
The UK has awakened its green consciousness early, actively implemented the legislative work of emission reduction targets, and planned the decarbonization path in stages and sectors. The UK is the first country to incorporate net-zero greenhouse gas emissions targets into legislation, and its carbon budget system provides for a phased (five-year period) total emission control strategy, making carbon reduction planning more scientific and reasonable. The UK's "Net Zero Strategy" and "Ten Points Plan for the Green Industrial Revolution" plan long-term decarbonisation pathways by sector, focusing on key areas to promote the achievement of net-zero goals across all sectors of the economy.
With the "Green Finance Strategy" as the top-level document, the UK Green Finance continues to improve the incentive and restraint policies and the construction of the sustainable information disclosure system based on the two pillars of "aligning the net-zero transition goal" and "green investment", so as to promote the effective and stable operation of the green finance market. The UK government's regulators have formed a multi-faceted green finance supervision and management coverage around macro and micro prudential, financial behavior, financial reporting, pensions, etc., have given full play to the government's guiding role and deployed a variety of incentive policies, such as the issuance of green treasury bonds and the unconventional central bank's monetary policy "greening" corporate bond purchase program, etc., have attached importance to the stress testing of climate-related risks to improve the ability of financial institutions to prevent and resolve climate risks, and are committed to formulating their own sustainability disclosure standards and gradually improving the sustainability information disclosure mechanism.
Mobilizing private capital to drive the net-zero transition. The UK leverages the government and the public sector to leverage private investment, and gives full play to the leading role of market participants such as enterprises and financial institutions, introducing new green financial products and attracting all kinds of investors to participate in green investment and financing activities. The UK green (sustainable) bond market is flexible, transparent, offers a wide range of services, and has a good access environment to attract international investors. The "Green Economy Label" of the green equity market has an added benefit of enhancing the issuer's image and visibility among investors and other stakeholders who are concerned about the green economy, thereby attracting a wider range of green investment opportunities.
Pay attention to the right to speak on international green finance. On the one hand, the UK actively participates in and leads the international coalition of green finance cooperation to explore trade and investment opportunities in overseas markets, and on the other hand, the UK supports the green development of emerging markets and developing economies, providing capacity building assistance and financial assistance to promote the global net-zero transition and strive for common development.
Annotation:
1. Source: UK Carbon Budget Briefing, [EB/OL], 2019/07/09. [2024/01/15]， https://commonslibrary.parliament.uk/research-briefings/ cbp-7555/
[2]资料来源:财政风险报告,[EB/OL],2021/07/06.[2023/12/13],https://obr.uk/frr/fiscal-risks-report-july-2021/
3. Source: Energy Innovation Needs Assessment, [EB/OL], 2019/11/08. [2023/12/13]， https://www.gov.uk/government/publications/energy-innovation-needs-assessments
[4] Born out of UKRI's £10 million climate and environmental risk analysis resilience finance programme, the CGFI was established in 2021 and is led by the University of Oxford and funded by UKRI. The CGFI aims to accelerate the adoption and use of climate and environmental data and analytics by financial institutions, enabling the financial sector to support the realization of a low-carbon economy and the restoration of the natural environment. Its scope of work includes hosting open tools and datasets, providing expertise to industry and policymakers, and supporting business innovation. Areas of focus include physical and transition climate issues, nature, and litigation.
[5] Solvency II is the prudential regulatory regime for insurance companies in the UK
[6] Source: A Brief Analysis of the Bank of England's "Green Corporate Bond Purchase Program" (Part I), [EB/OL], 2022/17/08. [2024/01/11]，https://mgflab.nsd.pku.edu.cn/yjly/hgjj/yjcg1/3d4d196cfa4c469db1c1099e0889e281.htm
[7] The so-called gilts refer to the public bonds issued by the government, because the public bonds issued by the British government in the past had gold edges, so it is so named.
[8]资料来源:中期报告和路线图,[EB/OL],2020/11/09. [2023/12/14],https://www.gov.uk/government/publications/uk-joint-regulator-and-government-tcfd-taskforce-interim-report-and-roadmap
[9]资料来源：强制要求上市公司、大型私营公司和有限责任合伙企业披露与气候相关的财务信息，[EB/OL]，2021/03/24. [2023/12/14]，https://www.gov.uk/government/consultations/mandatory-climate-related-financial-disclosures-by-publicly-quoted-companies-large-private-companies-and-llps
[10]资料来源：公司和有限责任合伙企业 (LLP) 与气候相关的财务披露，[EB/OL]，2022/02/21. [2024/01/14]，https://www.gov.uk/government/publications/climate-related-financial-disclosures-for-companies-and-limited-liability-partnerships-llps
[11]资料来源：英国可持续发展信息披露标准，[EB/OL]，2023/08/02. [2023/12/14]，https://www.gov.uk/guidance/uk-sustainability-disclosure-standards
[12] Equitix is an international infrastructure investor, developer, and fund manager.
[13] The GIB Offshore Wind Fund aims to provide long-term institutional investors with the opportunity to invest in unlevered offshore wind in the UK.
14. Source: Macquarie confirms £3 billion in financing for UK green projects, [EB/OL], 2021/01/04. [2023/1/14]，https://www.ft.com/content/b17eb030-7943-4fc3-94ff-8f9a04663484
15. Source: UK Government Confirms Sale to Macquarie, Green Investment Bank to Increase Support for Low-Carbon Projects, [EB/OL], 2017/04/20. [2023/01/14]，https://www.gov.uk/government/news/green-investment-bank-to-boost-support-for-low-carbon-projects-as-government-confirms-sale-to-macquarie
[16]资料来源：CBI：Global State of the Market Report 2022.
[17]资料来源：伦敦证券交易所可持续债券市场板块，[EB/OL]，2023/12/14. [2023/12/14]，https://www2.lseg.com/sustainablefinance/sustainablebondmarket
18. Source: Case Study: Transport for London Green Bond, [EB/OL], 2015/04/17. [2023/12/14]，https://www.climatebonds.net/files/files/Case%20study%20-%20TfL%20final%281%29.pdf
19. Source: UK's first local government green bond raises £1 million for West Berkshire District Council, [EB/OL], 14/10/2020. [2023/12/14]，https://www.businessgreen.com/news/4021677/uk-local-government-green-bond-raises-gbp-west-berkshire-district-council
20. Source: Xinhuanet: Bank of China Lists US$2.2 Billion Sustainable Development Bonds in London, [EB/OL], 2021/11/12. [2024/1/14]，http://www.xinhuanet.com/2021-11/12/c_1128059679.htm.
[21] Source: China News Network: Agricultural Bank of China London Branch's first green bond listed on the London Stock Exchange, [EB/OL], 2023/12/07. [2023/12/14]，https://www.chinanews.com.cn/gj/2023/12-07/10124309.shtml
[22]资料来源：DMO绿色金边债券板块，[EB/OL]，2023/12/06. [2023/12/14]，https://www.dmo.gov.uk/responsibilities/green-gilts/
[23] Source: Yuan Lilan.Research on the development of green finance in the United Kingdom[D].Jilin University,2018.
[24] Source: FTSE Russell Green Income Data Model official website, [EB/OL], 2024/01/19. [2024/01/19]， https://www.lseg.com/en/ftse-russell/green-revenues-data-model
25. Source: Dong Fangran. Chinese Financier,2023,(09):106-107.)
[26] Source: Starling launches UK's first recycled debit card, [EB/OL], 2021/03/25. [2023/12/12]，https://sifted.eu/articles/starling-recycled-debit-card
[27]资料来源:这是英国最环保的银行卡吗?[EB/OL],2018/12/26. [2023/12/12],https://www.triodos.co.uk/articles/2018/pca-eco-debit-card-faqs
[28]资料来源:巴克莱银行官网,[EB/OL],2023/12/12. [2023/12/12],https://www.barclays.co.uk/mortgages/green-home-mortgage/,
苏格兰皇家银行官网,[EB/OL],2023/12/12. [2023/12/12],https://www.rbs.co.uk/mortgages/mortgage-types-and-rates/green-mortgages.html,
国民西敏寺银行官网，[EB/OL]，2023/12/12. [2023/12/12]，https://www.natwest.com/mortgages/mortgage-comparison/green-mortgages.html
[29]资料来源：汇丰银行官网，[EB/OL]，2023/12/12. [2023/12/12]，https://www.hsbc.co.uk/electric-vehicles/financing-electric-cars/
[30]资料来源：苏格兰皇家银行官网，[EB/OL]，2023/12/12. [2023/12/12]，https://www.rbs.co.uk/business/loans-and-finance/sustainable-finance/green-loans.html
国民西敏寺银行官网，[EB/OL]，2023/12/12. [2023/12/12]，https://www.natwest.com/business/loans-and-finance/sustainable-finance/green-loans.html
[31]资料来源:参与英国排放交易计划指南,[EB/OL],2023/11/30. [2023/12/14],https://www.gov.uk/government/publications/participating-in-the-uk-ets/participating-in-the-uk-ets
32. Source: Participation in the UK Emissions Trading Scheme (UK ETS), [EB/OL], 2020/12/17. [2023/12/14]，https://www.gov.uk/government/publications/participating-in-the-uk-ets
[33]资料来源:UK排放交易计划市场,[EB/OL],2023/09/05. [2023/12/14]，https://www.gov.uk/government/publications/uk-emissions-trading-scheme-markets/uk-emissions-trading-scheme-markets
34. Source: UK Green Finance Strategy 2023
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