17 October 2023

EU-UK Forum's Hall: The UK’s ambitions to provide global leadership in green finance face uncertainty

In one of the main areas that has been identified as a source of growth for UK finance post Brexit – green and sustainable finance - important uncertainties and a relatively slow pace of regulatory change remains.

2023 has seen some important changes in UK-EU relations in financial services as part of broader improvements in UK-EU relations following the agreement of the Windsor Framework at the end of February. However, despite this, in one of the main areas that has been identified as a source of growth for UK finance post Brexit – green and sustainable finance -  important uncertainties and a relatively slow pace of regulatory change remains.

June saw the UK and EU sign a Memorandum of Understanding (MoU) on regulatory cooperation. Both parties committed to sign this agreement through a joint declaration which was published alongside the TCA and was planned to be concluded by March 2021. However, due to wider political disputes, signing was delayed until this year.

The MoU creates a Forum for structured dialogue on regulation, similar to that that the EU already has in place with the US. The Forum can be used to discuss a range of issues such as how both parties intend to implement new global regulatory standards or to discuss new regulatory proposals.

However, whilst having a clear platform for regulatory cooperation has been welcomed by businesses, the impact of the MoU will depend in large part to the political will of both sides. This is particularly because there are already a number of technical MoU’s in place which are largely seen as having been working well.

One of the areas that is widely seen as being likely to be discussed through the forum are the respective approaches of both the UK and the EU to sustainable finance. This is an area where both parties see clear opportunities to provide global leadership, particularly around regulation and green standards.

For example, the Government’s 2023 Green Finance Strategy states that the UK has ‘led the world on green finance’. It notes that the UK was the first large economy to publish a green finance strategy in 2019 and the UK Infrastructure Bank was founded with £22 billion of capital to be used to level up and decarbonise the economy.

Green and sustainable finance is also an area of finance where alignment in regulatory standards across borders is of significant benefit to market participants. Put simply, if companies have to comply with different reporting requirements in different jurisdictions, it adds costs.

As a result, tracking the approach of the UK and the EU to green finance, and signs of regulatory divergence and/or convergence is important, both in terms of understanding international financial services regulation post Brexit but also in understanding the implications for businesses.

It is when comparing the approaches of the EU and the UK that the challenges for the UK’s global leadership in this area emerge. Broadly speaking, the EU is moving faster than the UK on green finance regulation. It has recently published an extension to its ‘EU Taxonomy’ which defines what counts as ‘environmentally sustainable activities’ within financial instruments. Furthermore, in order to improve the transparency of Environmental, Social and Governance (ESG) ratings, it has developed proposals aimed at making the methodologies used by ESG rating agencies more rigorous as well as regulating ESG rating agencies. ESG ratings are used by investors to provide information on the impacts societally and environmentally of investments....

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