The Transition Finance Market Review (TFMR) has published its final recommendations on how to scale a high-integrity transition finance market to support both UK and global decarbonisation ambitions. This is particularly relevant as industries around the world work toward decarbonising while maintaining economic stability.

The review was commissioned by the previous UK government, engaging with stakeholders from 200 organisations from the UK and internationally. It contains more than 50 recommendations, aimed at both the private sector and government. 

One of the recommendations from the TFMR was directed at ICAEW and the Institute of Chartered Accountants of Scotland (ICAS). It called for the bodies to produce a plan for the development of transition plan assurance skills and methodologies that aligns with the forward-looking roadmap recommended for the roll out of transition plan disclosures. 

ICAEW welcomes this recommendation and has been undertaking extensive work to map out sustainability competencies for professional accountants in 2024. This project aims to ensure sustainability competencies are addressed in all of its learning materials, from the ACA to a range of new CPD and guidance that will be available in early 2025.

The UK’s Climate Change Committee estimated that the UK will require around £50bn annually through the late 2020s and 2030s to meet its net-zero commitment, a five-fold growth of current investment levels. Global green finance flows have crept over the trillion mark for the first time this year at an estimated $1.3tn, but the figures required to transition are an eye-watering $8.4tn annually until 2030. McKinsey estimates that the global market opportunity for UK companies supporting the transition could be worth more than £1tn by 2030.

The Scaling Transition Finance Report outlines an ambitious roadmap to establish the UK as a centre for global transition finance, with actions for government, regulators and the market to enable this. The Review found there were three core pillars essential for scaling a robust transition finance market. Those were:

1. Establishing clarity and credibility – confirming scope and objectives of transition finance and creating the market from the top down.
2. Scaling finance for transition activities – making transition finance solutions commercially viable at deal level.
3. Scaling finance for transitioning entities – financing entities with a credible transition strategy.

Across the three pillars, improved communication, capacity building and governance were identified as necessary cross-cutting factors. 

The TFMR identifies key challenges and opportunities with the financial sector, professional services and corporates, specifically addressing the role they play in financing the transition to a low-carbon economy. 

A primary challenge raised in TFMR is the lack of clear definitions and boundaries for what constitutes transition finance. This was also noted in ICAEW’s response to the call for evidence. 

The TFMR has created a Transition Finance Classification System to help the market classify and understand transition finance. Coupled with this, the Review developed a set of Guidelines for Credible Transition Finance to support financial institutions in providing greater confidence to the market. 

Commerciality and sector pathways

It is vital for the net-zero transition to be financially viable for businesses. There is a need for clear sector-specific decarbonisation pathways, and the government needs to be explicit about how and when it will roll the measures out.

Additionally, the Review recommends reinstating the Net Zero Council to improve policy clarity around decarbonisation pathways and boost industry engagement.

Credibility and Integrity

There is also the risk of greenwashing. It is vital to encourage an environment of transparency and accountability in transition finance to maintain trust in the system. To aid in this, rigorous reporting and disclosure requirements are essential for corporates and financial institutions. 

For corporates, enhanced transparency in reporting on environmental, social and governance metrics will not only build investor confidence, but also protect them from reputational damage. This is especially important for high-emitting sectors, where transition pathways are complex and there is a greater risk of accusations of greenwashing. There is also a crucial role for the accountancy profession in verifying the accuracy of sustainability claims, thus mitigating greenwashing risks.

The TFMR calls for more attention to be given to hard-to-abate sectors – industries such as steel, cement and aviation that are traditionally heavy carbon emitters, but are essential to the global economy. These sectors are often excluded from green finance initiatives due to the complexity of their decarbonisation processes and fears of greenwashing. 

ICAEW’s input into the Review noted that financial institutions need to engage with companies in these sectors to support their transition. Rather than divesting from these industries, the focus should be on enabling their gradual shift towards cleaner technologies. 

For financial services, this presents an opportunity to innovate new financial products that can support these sectors’ unique decarbonisation challenges. For professional services firms, it opens up avenues to offer specialised advisory services to guide companies in hard-to-abate sectors on how to align their business models with transition finance frameworks. 

Companies must have clear and credible transition plans. These plans outline how businesses intend to reduce their carbon footprint over time, taking into account cross-cutting issues such as nature and communities, and align their operations with net-zero targets. Without such plans, it is difficult for investors to commit to financing transition activities. These plans need to be transparent, verifiable and aligned with international standards.

Developing and implementing credible transition plans will be crucial not only for attracting finance, but also for staying competitive in a rapidly changing economic landscape. For financial services, assessing the credibility of these plans will be critical for managing risk and ensuring that investments are aligned with long-term sustainability goals.

Alignment with ICAEW’s views

ICAEW broadly agrees with the key findings of the TFMR and adds further insights into how the financial sector can play a leading role in supporting the transition to net zero alongside other stakeholders. Some of the areas where ICAEW’s views align closely with the TFMR include:

• the need for clearer definitions and frameworks to guide transition finance, particularly in high-emitting sectors;
• the importance of addressing greenwashing by ensuring transparency and accountability in sustainability reporting;
• the role of robust data and reporting standards in scaling transition finance and ensuring that investments are aligned with genuine decarbonisation efforts; and
• the importance of transition plans in providing a roadmap for companies to reduce their emissions over time.

As the world works towards net zero, the financial sector must provide the necessary funding, advice and verification to ensure that transition efforts are credible and effective. For professional services, it means offering the guidance and assurance that companies need to navigate the complexities of the transition to a low-carbon economy. The report provides a clear call to action for leaders across government and industry to implement these recommendations as a framework for the transition to net zero.