Independent report

Transition Finance Market Review: terms of reference

Published 18 December 2023

Background

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

Transition finance definition

‘Transition finance’ refers to financial products and services that support higher emitting companies and activities to decarbonise over time. These instruments are generally used by companies seeking to reduce greenhouse gas emissions and should be part of a credible decarbonisation pathway that is consistent with global climate and nature goals.

Purpose

The Transition Finance Market Review will consider what the UK financial and professional services ecosystem needs to do to become a leading hub for and provider of transition financial services – by facilitating UK and international companies and investors to invest to align with credible net zero pathways.

Now is an opportune time to convene market experts to look systematically at how to ensure transition finance instruments are developed and structured with high integrity, leveraging UK based financial services expertise, including in a way that unlocks long-term capital. This will include understanding the best ways to stimulate innovative solutions and scale up financing mechanisms across the investment ecosystem – including private and publicly listed companies, and assurance of debt and loans.

Objectives

The review convenes real economy companies, financial institutions, professional services firms, regulators, policymakers, and civil society to research, develop ideas, identify opportunities, and showcase best practice to signal UK financial services’ competitive edge internationally and secure market share. The Review will use its convening power to drive further leadership on transition finance.

Its focus will be on the role of the private sector. It will consider what market tools would be most impactful, and explore how best to create the conditions for:

• scaling transition focused capital raising with integrity. We want to scale transition finance and grow the UK market for transition finance services, which should be designed as attractive, investible instruments to unlock long term capital (such as sustainability linked debt and transition bonds), while maintaining the integrity of climate goals and helping to build trust in financial solutions
• maximising the opportunity for UK based financial services to develop, structure and export high integrity transition finance services
• positioning the UK’s professional services ecosystem as a global hub - supporting this innovative activity and ensuring market confidence (legal, audit, consultancy, data and analytics, skills and education).

Priority areas of focus

The Review will organise its work into a number of workstreams. These could include, for instance, the role and definition of transition finance, financing instruments, credibility and integrity, frameworks and standards, global alignment and incentives to scale the market.

Precise outputs will be determined by the mid-point (see Duration), but the Review will produce recommendations and any appropriate tools for the market (for example, best practice guidelines, case studies) under the above mentioned workstreams in the first instance.

Leadership and structure

This is an independent Review commissioned by the Treasury Lords Minister and the Minister for Energy Efficiency and Green Finance and led by Vanessa Havard-Williams, who will be supported by a panel of advisors and a secretariat.

The panel should aim to incorporate representatives from across the financial services sector, including issuers, banks, advisory, investors and other market participants and experts from civil society and academia. It should also work with experts such as the City of London Corporation, Transition Plan Taskforce, Climate Financial Risk Forum, the CGFI Centre of Excellence for Transition Finance, and the London Stock Exchange Group.

Government and regulatory observers will include HM Treasury (HMT), the Department for Energy Security and Net Zero (DESNZ), the Financial Conduct Authority (FCA), the Bank of England, UK Export Finance (UKEF), and the Department for Business and Trade (DBT). The government should be able to observe and learn from the panel’s work on an ongoing basis.

The Review lead, panel and secretariat will embark on an outreach programme to engage extensively with stakeholders across industry, academia, the third sector and relevant parliamentary groups to inform the content of the Review and ensure a joined-up approach to UK action.

Roles and responsibilities

• Review lead: will take overall leadership of the Review, set the overarching strategy for achieving the Review’s objectives, oversee and agree workplans, drive the work of the Review, lead the expert panel, ensure alignment with related initiatives, convene and chair meetings, and deliver and have final editorial rights over the Review’s final report to Ministers and the market. The government will subsequently publish the report
• Expert panel: will provide evidence-based advice to the Review lead and may be asked to lead or join Review workstreams, or other avenues of inquiry set by the Review lead, attend and contribute to meetings, share the latest intelligence in particular from their areas of expertise to support delivery of the Review’s workplan; be ambassadors for the Review and report to the Review lead on their work
• Review Secretariat:  will support the Review lead and panel with coordination and facilitation, develop and execute workplans, track progress, write and circulate papers, agendas and readouts, organise meetings and ensure they are run effectively. The secretariat will also coordinate any research requirements of the Review
• Government working group (in HMT/ DESNZ): will monitor the effectiveness of the Review in meeting its intended objectives, ensure timely and ongoing updates for Ministers and regularly review whether there is a need to make changes to the ways of working; the working group will report to the HMT and DESNZ senior responsible owners (SROs)
• City of London Corporation: will second staff to the secretariat, physically host the working space for the secretariat, and will also provide external consultancy support and physical office / event / meeting space
• Ministers: will commission the Review, receive the Review’s final report, and judge if/ when the Review should wind down.

Duration

The Review will run for an initial 6 months, with a possibility to extend to 9 months. HMT and DESNZ Ministers will review the outputs and role of the Review during the initial period and decide whether it should continue, or submit its report.

Ways of working and governance

The Review will recommend what market tools and solutions are deemed to create the conditions for market expansion with high integrity. When discussing and identifying solutions, the Review will work within the parameters of existing government regulation, policy, and funding envelopes, including the need to meet our statutory net zero target, our energy security objectives, as well as the Public Sector Equality Duty.

Additionally, the review has the scope to make recommendations to government on how to galvanise further market innovation and growth, and on the longer-term direction of policy and regulation, so long as there is evidence to inform any recommendations and they support the Review objectives. The UK government will be solely responsible for making its own policy and spending decisions.

The secretariat, government working group and FCA will meet regularly and the secretariat will provide monthly written updates of the Review’s work, detailing activities, outputs and forward plans. These updates will coincide with regular meetings between the Review lead and the Review SROs. All meetings will be conducted as hybrid meetings.

Meeting agendas and papers will be circulated by the secretariat at least 2 working days in advance of meetings. Records of meetings will be circulated by the secretariat within 2 weeks of meetings.

Considerations

The Review will also take the following into account in carrying out its work:

• the Review will leverage and align with ongoing Transition Plan Taskforce work and have regard to HMG’s forthcoming transition plan consultation, as well as the FCA’s further work to implement TPT-aligned disclosures alongside its implementation of UK-endorsed International Sustainability Standards Board (ISSB) reporting standards. It will be important that any thinking the Review does on transition KPIs is consistent with HMG’s work on transition plan disclosures, as well as the forthcoming UK Green Taxonomy consultation
• it should consider international comparisons and prioritise international coherence and interoperability
• it will have regard to the UK Listing Review led by Lord Hill and its recommendations on how to encourage more high-quality UK equity listings and public offers, along with the government’s response
• it will have regard to the policy approaches in our 2023 Green Finance Strategy, Net Zero Growth Plan and the Energy Security Plan, the forthcoming Voluntary Carbon Markets guidance, our Net Zero Investment Roadmaps, and the FCA’s work on transition finance and investment labels. It may also wish to consider or take into account the independent reviews of Net Zero (led by Chris Skidmore MP) and Pro Innovation Regulation (led by Patrick Vallance)