UK needs more than ambition to become a sustainable finance hub

In July, chancellor Rachel Reeves delivered her second Mansion House speech. In an address about the critical role the financial services sector will play in delivering her ambition of “building a dynamic economy on strong and secure foundations”, she laid out reforms to boost the UK’s competitiveness and the next steps she plans to provide targeted support to the sectors where the UK enjoys comparative advantage.

The Mansion House speech coincided with the Treasury’s publication of the Financial Services Growth and Competitiveness Strategy, one of eight sector plans underpinning the government’s Industrial Strategy. The strategy had identified sustainable finance as one of the specialist areas which offered growth opportunities, linked to the benefits it is hoped will emerge from the clean energy transition and building a climate resilient and nature positive economy.   

Considering the chancellor’s intent, it was perhaps notable the most significant announcement relating to sustainable finance was about something the government will not do. A UK green taxonomy, one of the pillars of the sustainability disclosure regime planned by the Johnson government five years ago, was deemed unlikely to sufficiently boost green investment.

The fanfare around the initial announcement in the buildup to Glasgow hosting COP26, had included a promise to make the UK “the world’s first net zero-aligned financial centre”. It is an ambition which, with a little wordsmithing, the current government has maintained. At London Climate Action Week in June, the energy secretary said the government was “determined to make the UK the sustainable finance capital of the world”.

Cynical observers and supporters of the taxonomy asked if the decision to drop the initiative was consistent with this ambition. In her defence, the chancellor said she preferred to focus on policies that “matter most” and channel investment into the transition, while ensuring the UK remains globally competitive.  

The Investment Association, representing the views of our investment management members, welcomed the chancellor’s decision. In our response to the Treasury’s consultation, we questioned whether the taxonomy plan was the best route to stopping greenwashing and shifting capital to transition activity.

With many in the UK investment management industry already using the EU taxonomy and other international standards, the introduction of a UK-specific taxonomy risked adding cost and complexity without clear benefits.

Many investment managers, including those that support the principle behind a green taxonomy, have set out different demands for policymakers. At the top of the list has been a clearer sense of the UK’s decarbonisation plan, including the package of incentives and regulations it will adopt to get there. The fiduciary responsibility that goes with managing other people’s money requires a clear focus on the interdependencies, risks and opportunities that impact the long-term performance of investments.

We have also long advocated for government to focus on developing clear sectoral transition plans and pursuing policies, like reforms to the planning system, to ensure the supply of investible green energy projects can match demand.   

There continues to be a role for well targeted sustainability disclosure rules. Over the past five years we have championed the role of IFRS ISSB sustainability standards, alongside a considered approach to transition planning, as an important part of an information ecosystem that provides decision-useful and financially material information to investors.

The chancellor’s speech acknowledges that the government’s role in creating a world-leading sustainable finance centre is to foster an economy which advances sustainable growth, supports green growth opportunity industries, and attracts investment (and investment expertise) as a result.

The responsibility now rests on the government to make progress on the policies that it believes matter most. In its recent assessment of the government’s progress on reducing emissions, the Climate Change Committee found government policies to reduce emissions have improved since 2024 and, with more action, the UK can hit its legally binding climate targets.

By the end of October, the government must publish its latest decarbonisation strategy, now known as the Carbon Budget Growth Delivery Plan. It offers an opportunity to set out a plan for real economic change which is tailored to the needs of investors. With the right signals, it can build confidence in the UK and boost our sustainable finance sector.