Barclays has called on the UK government to take action in three areas to meets decarbonisation goals and facilitate the delivery of the Transition Finance Market Review (TFMR).
Commissioned in 2023, the latest update from the Department for Energy Security and Net Zero and HM Treasury has found the decarbonisation of the UK is expected to require as much as £60bn of capital investment each year through the late 2020s and 2030s.
However, the growth of underlying capital required to support this – transition finance – is hampered by a number of strategic challenges including a lack of clear and consistent political and regulatory support for transition finance; evolving future transition needs and the high uncertainty associated with forward-looking transition planning; the lack of a common interpretation or definition; and reputation and legal risks associated with potential accusations of perceived greenwashing.
Transition financing also faces barriers similar to those present in wider green financing, including poor risk/return ratios when investing in climate technologies, infrastructure challenges, challenges with providing and accessing data to fully integrate into decision-making, and international fragmentation in approaches. Additionally, the capital intensity of transition technologies further complicates the financing landscape.
These challenges mean financial institutions remain cautious about allocating or facilitating capital into transition activities, or identifying such financing as transition-focused. Despite market-led efforts, there has not to date been consolidation around consistent definitions, frameworks or support mechanisms needed to enable the scale-up of transition finance to the levels needed to meet financial and decarbonisation targets.
Three focus areas
In response, Barclays has published Transition Finance: what is needed from UK public policy to support the scaling of high-integrity transition finance to achieve climate and decarbonisation goals?, a policy paper that spotlights three focus areas where policymakers should take action to facilitate the delivery of the TFMR’s recommendations.
First, policymakers are urged to create the economic conditions for transition finance to thrive by supporting real economy measures and incentives. This includes implementing a National Transition Plan with clarity on sector decarbonisation pathways, and developing a suite of strong incentives to enable the UK to compete with international jurisdictions. These could include new innovative financial products such as transition or ‘greening’ bonds, and financing mechanisms that de-risk and facilitate the growth of transition finance in the UK.
Second, policymakers should develop a supportive political and regulatory environment for transition finance to scale. The papers says they can achieve this by developing a balanced regulatory and policy framework that complements and is interoperable with existing green finance and sustainability-related frameworks in different jurisdictions.
Additionally, they should provide a flexible and broad definition of, or principles for, transition finance. This would bring much-needed clarity to the market, Barclays’ paper argues, while remaining sufficiently flexible to accommodate rapidly evolving industries and technologies.
Finally, the paper recommends that policymakers and standard setters should articulate clear principles for a just transition and provide detailed guidance on how this can be delivered in the real economy.
Daniel Hanna, group head of sustainable and transition finance, Barclays, said: ” We need ambition to credibly scale transition finance and today’s report from the Transition Finance Market Review is an important milestone in this discussion, and we welcome its publication.
“Scaling transition finance is a necessary step in mobilising sufficient capital to tackle the climate crisis and it presents an opportunity for the UK to show international leadership and unlock growth and economic opportunities. Transition finance needs a strong, supportive policy and regulatory environment, with the public and private sectors working together to help set the standard for, and develop the financial mechanisms required to scale it at pace. With a framework for progress published by the TFMR, our paper provides additional clarity on the areas where work is needed.”
Barclays has committed to facilitate $1trn in sustainable and transition finance between 2023 and the end of 2030, and introduced its Transition Finance Framework in early 2024.
Further reaction
Responding to the TFMR, the Financial Conduct Authority recognised the challenges and complexities for firms in structuring this kind of finance. Transition finance “remains a priority” for the FCA, who also acknowledged the TFMR’s call for more communication on how it views its role within its wider work and regulation.
Given this, the FCA said it would continue to support the market to scale with integrity, with the right standards and guardrails to help build trust. To ensure it can achieve this, the FCA said it would consider how best to embed the TFMR’s findings, working with the government on a new regime for ESG ratings providers and building on its engagement with the TFMR through the Climate Financial Risk Forum.
“Over the past year, we’ve had productive engagement with the TFMR, industry participants and international bodies. Our aim has been to explore ideas on how we can ensure this is an efficient market that works for both consumers and firms,” explained Alicia Kedzierski, the FCA’s head of department for its sustainable finance division, at the launch event for the TFMR.
“While there is an encouraging level of ambition to make progress, we recognise and echo the TFMR’s finding. Firstly, consensus and clarity are needed around the role that transition finance can play in achieving sustainability objectives. This includes how it should be raised and deployed to ensure credibility and integrity. Secondly, building trust in transition finance is a necessary component of enabling it to scale.
“It is therefore crucial to develop the right standards and guardrails. Together, this will help investors and stakeholders assess the attributes of products and activities categorised as sustainable.”
Meanwhile, Oscar Warwick Thompson, head of policy and regulatory affairs at UKSIF, commented: “UKSIF is pleased to see the Transition Finance Market Review’s robust recommendations, which address critical issues in the UK’s transition finance market, from greenwashing risks to market integrity. We have called for mandatory Transition Plans across the economy for some time, and to see them included in the report speaks to the robustness of this review’s recommendations. The recognition of the SDR ‘improvers’ category as a model for transition investment strategies is also a positive step towards more coherent regulatory approaches.
“The review’s focus on real economy action is another strength, particularly the recommendation for improved sector decarbonisation pathways through the Net Zero Council. The proposed Transition Finance Lab and Transition Finance Council show promise, but their effectiveness will ultimately require strong governmental backing and ministerial involvement. UKSIF urges the government to capitalize on this momentum and actively implement many of these recommendations to bolster the UK’s position in transition finance.”
