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Transition finance

How the UK can lead as transition finance reshapes investing and economies

18 February 2025 5 minute read
Author

As a member of the UK’s newly formed Transition Finance Council, Mark Versey explains why and how a transition finance lens can transform investing.

Important information

Read this article to understand:

  • The opportunity for the UK to lead on transition finance
  • The barriers and solutions identified by the Transition Finance Market Review
  • What it means for investors

To fully decarbonise the economy, beyond financing solutions like renewable energy (important as those are), investors need to support the decarbonisation of existing companies and assets. This is where transition finance comes in.

In 2024, HM Treasury and the Department of Energy Security and Net Zero jointly commissioned the Transition Finance Market Review (TFMR), to which we contributed. It was an independent review tasked with proposing solutions to industry, government and regulators to scale a robust transition finance market in the UK.

In its final report published on October 16, 2024, the Review defines transition finance as “financial products and services that facilitate an economy-wide transition to net zero in line with the Paris Agreement” and aims to position the UK as a global transition finance hub.1 As such, the UK government, the Bank of England and the FCA have welcomed the findings.2 And on February 10, one of the Review’s key recommendations was implemented with the launch of the Transition Finance Council, which I am excited to have joined.

Transition finance is an opportunity for the City commercially, and for the UK to demonstrate leadership in both financial services and the real-economy transition. Investing will require expertise in assessing the future risks and opportunities of each asset as they transition, and will require economic incentives that align profitability with decarbonisation.3 Both of these are central to our approach at Aviva Investors, which focuses on “micro” stewardship at asset level and holistic “macro” stewardship across the economy.4 It is also the mission of the Transition Finance Council.

Three workstreams will be set up within the Council to focus on: the credibility and integrity of transition finance; pathways and policies to transition; and scaling up transition finance. As those begin to shape regulation, data and incentives, investors will need to understand the impact on their strategies and ambitions.

As a starting point, I wanted to give a short overview of the Review’s core recommendations, their investment implications and next steps.

Recommendations of the Review

At COP26 in 2021, the UK government set up the Transition Plan Taskforce (TPT), co-chaired by Aviva CEO Amanda Blanc and the HM Treasury Lords Minister Baroness Joanna Penn. The TPT’s mission was to produce a gold-standard disclosure framework for corporate transition plans, which it launched in October 2023.5 The goal is to improve transparency, reduce greenwashing risk and help investors understand how their portfolios align to the transition.

The TPT disclosure framework aims to reduce greenwashing risk and help investors understand how their portfolios align to the transition

This is not to encourage investors to divest from high-emitting companies, but rather to help them invest in the companies making real efforts to avoid the risks – and benefit from opportunities – arising from a transition.

Building on this, the TFMR refined the definition of transition finance, and tried to understand the barriers at play and what it means for companies to have and implement a credible transition plan, which the government has committed to require. Alignment will also have to be tracked and measured, which will inform investment decisions as well as demonstrating compliance.

Core recommendations

The Review seeks to clarify what can be counted as transition finance by proposing a classification system that includes activity and entity-level financing as well as guidelines for credible transition finance.

It recommends clear national policy to align the economy with the transition, including national transition planning and sectoral pathways. There is an emphasis on the need to change economic incentives, including through macro levers such as subsidies, incentives and carbon pricing.

The Review recommends collaboration between the market and its regulators

The Review highlights the need for catalytic public finance to crowd in private investment. It recommends collaboration between the market and its regulators, and supporting stewardship, labelled debt products, and retail product development.

The Review also emphasises the importance of proactive engagement by all stakeholders, to improve knowledge and build confidence, as well as international collaboration and advocacy, to help scale transition finance globally.

And as I mentioned, the Review recommended the creation of a Transition Finance Council to support the implementation of its recommendations, which has now been done.

I welcome the recommendations, which align with those Aviva and Aviva Investors had made in previous years.6,7,8

Investment implications

In my 2023 letter to the chairs of the largest companies we invest in, I had asked them to start working on transition plans and strategies. The UK government has now promised to make corporate transition planning mandatory, and a consultation is expected soon. This will affect the whole finance ecosystem, including asset owners and their advisers. There will be increasing pressure on investors, particularly institutional investors like pension funds and insurers, to show how they are setting targets in their transition plans to invest in transition finance.

Investors and asset managers must understand what a credible transition plan is and what risk and opportunity indicators to look for

It is therefore important to understand the TFMR recommendations, so transition – as well as green – finance can be integrated into plans.

Investors and asset managers must become used to conducting forward-looking assessments of companies’ transition strategies, understanding what a credible transition plan is and what risk and opportunity indicators to look for. It will be a critical evolution of the way we assess the prospects of investments.

We need to move from understanding transition at an activity or instrument level (for instance, green bonds) to an entity level. Clear guidance on what is credible transition activity and simple metrics will allow investment to become much more mainstream, lowering education barriers for asset owners who don’t wish to become detailed sustainability experts. With clarity on which entities are committed to – and able to implement – their transition plans, investors will benefit in two areas.  

Firstly, the risk of greenwashing must be recognised. Economic history tells us many incumbent businesses will not successfully transition. Different stakeholder groups may have competing interests, as some will want cash flows from the old business model and others will want to invest those cash flows into the transition. Identifying where companies are putting their capex and changing their business can give investors confidence when allocating long-term capital.

Transition finance is needed to fund the deployment of low-carbon activities

Secondly, transition finance is needed to provide general-purpose financing to small solutions companies; to fund the deployment of low-carbon activities and to businesses in priority sectors, from steel to agriculture; and to support the early retirement of high-emitting activities. Clarity (if based on enough depth and sophistication) could encourage investment in smaller corporates and harder to abate sectors.

While this shift will create investment opportunities into transition-focused and growth assets, it will also be complex. Credible transition pathways following the creation of a national transition plan may affect high-emitting investment-grade credit maturing in the next five years. And the interplay between transition finance and the FCA’s labelling regime will need to be considered as transition finance scales.

Given the complexity and interconnections, collaboration will be essential. The Transition Finance Council therefore involves representatives of government, the financial services industry and the real economy.

Next steps

To meet the UK’s commitments to the Paris Agreement, Global Biodiversity Framework and Sustainable Development Goals in time, the government needs to understand how it will shift the country’s economic systems, sector by sector. The Review – which echoes our engagement with governments in the UK and around the world – recommends adopting a national transition plan to deliver this.

Investors’ understanding of their own transition targets and plans will be critical

Having a top-level transition plan with detailed sectoral pathways can give the consistency needed to set out corporate plans. It will also give investors a framework to analyse corporate plans’ credibility – both in terms of whether they can be implemented and whether they are contributing a company’s fair share to the economic transition. That will only happen as transition plans are not only published but implemented and reported on, so it will take time.

We are hoping to see the creation of a positive feedback loop between companies’ transition plans, investor engagement on the credibility of those plans, and engagement with the government to communicate what is needed to allow and incentivise implementation.

Investors’ understanding of their own transition targets and plans will be critical in shaping their company engagement and policy advocacy. But I would urge everyone to participate in what is a huge opportunity, in terms of investments and for the UK economy.

References

  1. “Scaling Transition Finance: Findings of the Transition Finance Market Review”, The City of London Corporation, October 16, 2024.
  2. “FCA responds to market review on delivering finance for global decarbonisation and UK growth”, Financial Conduct Authority, October 17, 2024.
  3. Thomas Tayler, Steve Waygood, and Riona Bowhay, “The tipping point for climate finance: Making financial flows consistent with the Paris Agreement”, Aviva Investors, November 29, 2023.
  4. Louise Piffaut et al., “Only Connect: How a holistic approach to investment stewardship can enhance client outcomes”, Aviva Investors, September 27, 2024.
  5. “TPT disclosure framework”, Transition Plan Taskforce, October 2023.
  6. “Aligning the UK financial system to net zero: a WWF-Aviva position paper,” WWF and Aviva, May 2022.
  7. Mark Manning, et. al., “Taking the lead on climate action and sustainable development”, CETEx, Grantham Institute, The London School of Economics and Political Science, September 25, 2024.
  8. Nick Molho, “Boosting low-carbon investment in the UK: A policy roadmap”, Aviva Investors, July 16, 2024.

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