Landmark report provides blueprint for developing UK transition finance market

The Transition Finance Market Review sets out a framework for public-private collaboration to support investment flows into decarbonising the economy

A UK government-commissioned review into how to scale up the market for transition finance has published wide-ranging proposals for government, the financial sector and businesses.

The Transition Finance Market Review’s recommendations aim to “unlock required levels of finance by creating the right policies, pathways and signals for investment”, said a statement accompanying the report.

The review, which was launched by the previous government in January 2024, says scaling up the UK’s transition finance market is crucial for the country to meet its decarbonisation targets. Additionally, it suggests that creating an international hub for transition finance could also be a significant economic opportunity for the UK.

The UK’s Climate Change Committee estimates that, between 2030 and 2050, around £50bn a year will need to be invested into economy-wide decarbonisation if the UK is to meet its net zero commitments.

And data provider BloombergNEF estimates that, globally, annual investment into transition must rise to $6.7tn per year to reach global net zero emissions by 2050.

The review broadly defines transition finance as investment (and associated services) that facilitates all areas of the economy to transition to net zero.

It outlines two overarching areas that require more capital — transition-focused activities such as renewable fuel generation, carbon capture and storage, and electrification of industrial processes — as well as general financing for firms with credible transition plans.

Lack of policy clarity and too much investment risk

The review identifies five main barriers limiting access to transition finance in the UK, including a lack of political and regulatory certainty over what transition means for different economic sectors. In particular, it cites a lack of “clear sectoral decarbonisation pathways and whole-of-economy national transition planning”.

The risk profile of investing in transition technologies versus status quo activities remains off-putting for investors, it suggests, and says measures will be needed to de-risk such investments. Institutions are also worried about reputational risk from “greenwashing” accusations if they finance high-emitting companies to transition.

The report makes around 25 recommendations, across seven areas. A key proposal is that the government should co-ordinate the production of detailed sectoral transition plans, with a recommendation that the Net Zero Council, formed by the previous government, leads on this work. The TFMR calls for the government to “reinstate” its own version of the Net Zero Council by the end of this year.

It recommends the formation of a transition finance lab, hosted by the Green Finance Institute to develop targeted public-private financial solutions that will offer catalytic capital and de-risk transition investments.

The TFMR also proposes: making it mandatory for businesses to adopt the recommendations of the Transition Plan Taskforce; establishing a “principles-based” set of guidelines for classifying transition finance activities; and creating a transition finance council, hosted by the City of London Corporation, which acted as secretariat to the review, to manage delivery of its recommendations. 

Bold action required

Matt Townsend, global co-head of environmental and sanctions at law firm A&O Shearman, which provided legal advice to the review, says delivering a net zero economy will “require the biggest level of state intervention and planning, probably since the second world war”. The TFMR sets out a “range of measures that require some very significant forward planning from government,” he says.

Townsend adds: “The question is whether the UK government is prepared to be bold enough and whether it can get the balance right between providing the right framework and policy signals without stifling innovation by interfering too much.”

His colleague James Roe, UK equity capital markets co-lead, adds that the public-private collaboration set out in the review could provide a replicable model for how to support other important areas of economic development.

Green Finance Institute executive director Ingrid Holmes welcomes the review’s acknowledgment that detailed work is necessary to identify the mechanisms required to drive investment into transition activities in individual industries.

“In our experience, you need to understand the issues bottom-up, sector by sector,” she says. “Some can be resolved by the market, some require a policy intervention, some need a capital deployment solution, and some need a combination. Being able to have all of the options on the table will give the market a really strong chance of success.”

She adds: “We’re heartened by this review, and the wider conversations that are taking place around public-private finance, including the formation of the National Wealth Fund. We talk about blended finance solutions a lot in emerging markets, but it’s a new way of working for the UK.”

On Monday the government launched its “modern industrial strategy”, confirming the UK Infrastructure Bank will be reformed into the rebranded National Wealth Fund. The NWF will now receive only £5.8bn in new public funding — compared to a previous Labour pledge of £7.3bn — but its total capitalisation will reach £27.8bn as it inherits £22bn from the UKIB.

“The review sets a blueprint for how to create an effective transition finance market,” TFMR chair Vanessa Havard-Williams, former head of law firm Linklaters’ global environmental and climate change practice, told Sustainable Views. “Now it’s time to crack on with it.”

Economic Secretary to the Treasury, Tulip Siddiq, said she would work with colleagues across government, regulators and industry to “consider” the review’s recommendations.