UK: Transition Finance Market Review: Call for Evidence published | Hogan Lovells

Background to the Transition Finance Market Review (TFMR)

The updated 2023 Green Finance Strategy announced that the UK government would commission a review into how the UK can become the best place in the world for raising transition capital.

A key area of feedback to the Green Finance Strategy call for evidence in May 2022 was in relation to transition finance.  Financial institutions and markets raised the need for continued innovation to provide products and services that support higher emitting companies to decarbonise and reduce their environmental impact.  To support this, the government has commissioned an industry-led independent market review.  The TFMR terms of reference were published in December 2023 and  the TFMR was formally launched in January 2024. 

The TFMR will help companies to align investment with credible net zero pathways

The TFMR will consider what the UK financial and professional services ecosystem needs to do to become a leading hub and global centre of excellence for transition finance.  The TFMR  is intended to facilitate UK and international companies and investors to align investment with credible net zero pathways, respond to climate-related risks and opportunities and contribute to the net zero transition.

‘Transition finance’ refers to financial products and services that support higher emitting companies and activities to decarbonise over time. The TFMR focuses primarily on the specific challenges for hard-to-abate and high-emitting sectors.  

The TFMR aims to develop the transition finance market, identify opportunities and UK market share

The TFMR requests key stakeholders, including financial institutions, real economy companies, professional services firms, regulators, policymakers, and civil society, to:

• Research and develop ideas;
• identify opportunities and showcase best practice to signal UK financial services’ competitive edge internationally; and
• secure market share in relation to transition finance.

The TFMR focuses on the role of the private sector and will consider how market tools could be most impactful and explore the best ways to create the conditions to:

• Scale and grow the transition finance-focused capital raising.  Designing attractive, investible instruments to unlock long term capital, whilst maintaining the integrity of climate goals and helping to build trust in financial solutions.

• Maximise the opportunity for UK-based financial services to develop, structure and export high integrity transition finance services.

• Position the UK’s professional services ecosystem as a global hub  (legal, audit, consultancy, data and analytics, skills and education).

What is the focus of the  TFMR Call for Evidence?

The Call for Evidence published on 14 March 2024 sets out that whilst the UK has a significant opportunity to act as a global hub for financing transitional activities, in order to be successful it will need to strike the right balance between being:

• Ambitious – encouraging meaningful and credible progress that is consistent with the UK’s legally-binding net-zero by 2050 target and carbon budgets, as well as global climate and nature goals, including the Paris Agreement; and

• Fit-for-purpose – enabling uptake and the scaling of transition finance amongst market actors in a manner consistent with policy, regulatory and technology developments, while avoiding unintended consequences such as capital flight, the creation of social or systemic risks, or threatening environmental integrity.

The Call for Evidence focuses on the following key topics:

• Scope of transition finance – what are the scope and boundaries of transition finance?  How should transition finance be defined?  The Call for Evidence therefore includes considerations around which sectors of the economy are in scope, the types of activities that will fall within the definition and which specific financial investments, products and services will fall in scope.

• Ensuring the credibility and integrity of transition finance – what is the difference between integrity and credibility? The Call for Evidence asks for input on transition plans and the flexibility, taxonomies and interoperability of standards and frameworks.   Table 3.2 helpfully lists a non-exhaustive list of standards, frameworks, tools and guidance in relation to transition finance and asks respondents to detail which standards they are using to guide their approach to transition finance.

• Barriers to applications of transition finance – the TFMR is keen to understand specific barriers and risks in applying transition finance across the range of sectors, including finance.

• Opportunities for new innovative use cases for transition finance – the TFMR is looking to understand the types of investments, products and services that are currently used for transition finance and will also consider opportunities for innovative use cases for transition finance.  The review will also consider if certain labelled transition finance instruments, such as transition bonds and loans, need to adopt additional requirements to address concerns about potential greenwashing risks. 

• Building the UK as a global hub for transition finance – the TFMR considers how government and other public bodies, such as public finance institutions and local authorities, should collaborate with industry and the finance sector and investors to create a supportive ecosystem for transition finance. 

Respond to the TFMR Call for Evidence by 25 April 2024

The Call for Evidence is open until 25 April 2024.  You can respond here.. During spring 2024, the TFMR intends to participate in a programme of stakeholder engagement.  It will report to the UK government in Summer 2024.  We will be closely following developments in relation to this topic so please get in touch if you would like to discuss further.