Transition Finance Market Review launches call for evidence to explore how the UK can become a global hub for transition finance

On 14 March 2024, the Transition Finance Market Review (TFMR) launched a call for evidence seeking views on how the UK can leverage its existing strengths as a leading financial and insurance market, legal centre and significant exporter of professional services to become a global hub for funding the global net zero transition (see press release). The scale of the investment opportunity is significant: additional investment needs are estimated as at least $4-5 trillion per year globally by the 2030s. 

The call for evidence closes on 25 April and the TFMR will report back to the UK government this Summer. The TFMR will be carrying out a programme of stakeholder engagement including roundtables. 

The TFMR is an independent market-led review commissioned by the Treasury and the Department for Energy Security and Net Zero. The Review is led by Vanessa Havard-Williams, former co-head of Linklaters’ sustainability practice, and a member of the UK Transition Plan Taskforce (TPT) delivery group. Although this review has been commissioned by the UK government, the intention is to look at how the UK financial market can support organisations globally to transition to net zero.

The Review proposes to take a broad view of what constitutes transition finance, focusing on how financing and financial services of any type, across all relevant asset classes, can be enabled to support a “credible net zero transition” (meaning an entity or organisation’s strategy or plan that is consistent with global climate and nature goals, including the Paris Agreement). 

It will focus in particular on what financial products and services are required to support hard-to-abate and high-emitting sectors (such as energy, real estate, transportation, cement, and mining) and the barriers to scaling transition finance in these areas. Transition finance, almost by definition, needs to include these sectors as they will have a significant impact on global decarbonisation pathways. 

Fundamental to the Review’s approach is the importance of demonstrating the credibility and integrity of transition finance and the contribution that credible transition plans can potentially make. One of the things the TFMR will consider is how the TPT Disclosure Framework (which was launched in October 2023, see our previous briefing) and other standards can be used to build confidence in the market by showing this can be done with credibility and integrity and what core transition principles (such as transition plan disclosures, science-based targets, and capital allocation plans) may be necessary for a plan or strategy to be credible. 

The proposed starting point is that transition finance includes the financing of all activities compatible with an entity or organisation’s credible net zero transition, which would encompass the four categories of transition-related activities capable of finance (climate solution, aligned, aligning and early retirement) originally described by the Glasgow Financial Alliance on Net Zero (GFANZ) in 2022. Although some consider that investment in the development, deployment or scaling of “solution” technologies (e.g. renewable energy infrastructure or nature-based solutions) should be classified separately as “green finance”, the TMFR expects creating a distinction between “green” and “transition” finance would be challenging in practice as these activities may be combined in ongoing transitions, especially in hard-to-abate sectors. 

The Review also proposes that the concept of transition finance should include all types of financial investments, products and services that support a credible net transition (including use-of-proceeds financing, general purpose financing, project finance, investment strategies and asset allocations in stocks and shares, insurance products, and related advisory services such as investment banking, legal and accounting). Which means the Review proposes to consider both “labelled” and “unlabelled” transition finance, although the TFMR accepts that each form of finance activity or service may raise different challenges. 

The TFMR also explores the role of taxonomies (such as the EU Taxonomy and those being developed in other countries including several in Asia) in the provision of transition finance. And asks for information on any barriers and disincentives (be they policy, political, technology, commercial, market, currency, or a combination) to the provision of, and access to, transition finance – and whether there could be better use of blended finance approaches to de-risk and scale up transition finance. 

As predicted in our ESG Outlook 2024, we expect transition finance and transition planning to be key themes this year, including at this year’s COP29 in Baku.