When the UK abandoned plans to pursue a green taxonomy last month, much of the introduction to the announcement was devoted to claims that the country is a leading hub of sustainable finance and reassuring market participants that the government aims to keep it that way.

The central pillar supporting the UK’s claim to be a leading centre, frequently cited by policymakers, is its first-place ranking in the Z/Yen Global Green Finance Index.

Z/Yen, a commercial think-tank whose name “combines Zen and Yen in a ratio, recognising that all decisions are trade-offs”, has placed London at the top in eight consecutive editions of its green finance centre rankings.

Frankfurt ranks a lowly 22nd, while New York sits at 16th and Brussels is 17th. Zurich, Singapore and Geneva lead the rankings behind London, followed by three Scandinavian capitals.

The index is based on qualitative ratings by financial professionals, as well as more than 100 data points ranging from whether the city’s stock exchange has a dedicated green bond segment to building energy efficiency and air pollution.

More qualitatively, the impressive turnout for this year’s London Climate Action Week – reportedly the largest since the initiative’s inception – was hailed by many as reinforcing the UK’s leadership in this space.

Yet while market participants agree that there is much to like about the UK as a centre for sustainable finance, many highlight gaps in both the policy framework and real economy progress that could put this status at risk.

As one investor told Responsible Investor, the UK government needs a “healthy dose of paranoia”.

Leading the way

As local investors and market participants note, the UK’s leadership in green finance is built on foundations unconnected to sustainability.

David Harris, who heads up sustainable finance strategic initiatives and partnerships at London Stock Exchange Group, highlights “not just the scale but the breadth and global interconnectivity of the UK’s financial ecosystem” across the investment chain and professional service providers.

He also points to the country’s leading universities, think-tanks and NGOs.

Notwithstanding the ongoing structural issues with UK equity markets, investors say the deep capital markets in the country and size of the asset management sector make it a good base for sustainable finance mobilisation.

And, as one investor points out, London is still consistently ranked as one of the best cities to live across the globe and as such can attract and retain talent better than other rivals for the crown of leading green finance hub.

Andy Howard, global head of sustainable investment at Schroders, says the UK’s “strong claim” to being a leader “stems from its heritage as a financial centre and the advantages of having a network of expertise across many areas of the sustainable finance landscape, as well as a strong network of service providers”.

“A significant proportion of the world’s sustainable investment funds and strategies are managed from the UK, many of which are provided to clients in other markets. That expertise in execution is a traditional strength for UK finance, providing global investors and issuers access to industry-leading capabilities,” he adds.

Market participants also cite the long list of regulatory and policy innovations put in place by successive governments to enable investors in the UK to better integrate sustainability.

From requiring pension funds to make their sustainable investment approach clear in statements of investment principles all the way back in 2000 to more recent developments such as climate risk disclosures in the updated prospectus regime, the UK has been at the forefront of policymaking.

Other initiatives mentioned by investors who spoke to RI include the Transition Plan Taskforce, the Competition and Markets Authority’s new anti-greenwashing powers, the Sustainability Disclosure Regime (SDR) and associated fund labels, the early adoption of mandatory Task Force on Climate-related Financial Disclosures reporting, the UK stewardship code and the country’s ambitious climate targets.

Maria Nazarova-Doyle, global head of sustainable finance at IFM Investors, also notes that UK initiatives including the stewardship code and Net Zero Investment Framework have served as exemplars for other jurisdictions.

The UK has another opportunity to set a global benchmark across its transition finance work, including through the Transition Finance Council, she says. Another investor notes that leadership in specialty insurance allows for climate-related innovation in that sector.

Joe Dabrowski, deputy director of policy at industry body Pensions UK, says the pensions sector has taken “big strides” in recent years, with the vast majority of savers now belonging to a scheme with a net-zero target and the country’s pension funds taking a leadership position on stewardship.

Similarly, two market observers flagged the UK’s ability to leverage its emerging markets expertise and links to help raise transition finance in the global south.

Stiff competition

London is far from alone in vying for the crown of leading sustainable finance centre, and some question whether it can currently lay claim to the title.

“The UK is hovering around the top of the league table, but the crown doesn’t quite fit anymore, with stiff competition from other countries,” says Nazarova-Doyle.

Stefan Marx, head of public affairs and regulatory strategy at DWS, agrees that while some jurisdictions are ahead in certain areas, there is “no single leader at this stage”.

For some, the UK suffers by comparison with the European Union, where the sustainable finance framework is more comprehensive – although, as Marx acknowledges, that complexity is increasingly being seen as a concern.

The UK’s lack of a supply chain due diligence law has been flagged as a shortfall by lawmakers and other commentators, even as the EU looks to water down its own version, and the EU has a green taxonomy that will now be absent from the UK framework.

Not everyone in the market is lamenting the death of the UK taxonomy. Paul Scaping, public policy specialist at the Investment Association, welcomes the decision and a slim majority of consultation respondents opposed it.

But taxonomy proponents argue that the government’s decision to scrap it puts investors looking to identify investment opportunities at a disadvantage. Marx says the move has created uncertainty for the UK framework at a time when clear direction is needed.

Other jurisdictions singled out for praise include Australia, which Nazarova-Doyle says has impressed her with its “accelerating progress on sustainability”. In particular, she flags work on industry decarbonisation pathways and focus on Just Transition through the Net Zero Economy Authority.

Another observer points to the leadership increasingly shown by Asian countries such as China and Japan on the energy transition, particularly in areas such as sustainable debt markets.

James Fotherby, senior policy officer at the Aldersgate Group, also mentions work done by the Monetary Authority of Singapore to identify technical skills and competencies needed to help build out city-state’s sustainable finance sector.

Other market participants stress the need for collaboration between jurisdictions.

Scaping stresses that the UK “cannot drive meaningful action in isolation”, noting that alignment with international standards, both to build expertise and encourage global co-ordination, is important.

Similarly, he adds, local policymakers should aim to ensure that the UK’s SDR labels are broadly compatible with incoming fund-labelling regimes elsewhere.

Another observer says the UK could extend its leadership by actively co-ordinating regulatory alignment taskforces such as at the G20 and OECD.

Policy uncertainty

While the UK’s policy and regulatory framework on sustainable finance draws praise from investors, there are still gaps many would like to see filled.

According to Nazarova-Doyle, for the UK to retake the lead on green finance, policymakers will need to “follow through in much more detail on the country’s legislated net-zero targets, create a focused programme of work on adaptation and resilience, ensure Just Transition principles run through all net-zero work and continue to develop approaches on nature integration”.

A key gap identified by several market participants is the lack of sector-specific transition pathways.

Noting that “finance follows, it doesn’t lead”, one UK investor argues that without tools such as sector roadmaps that push companies to “surface capex requirements” for the energy transition, funding needs will not be sufficiently visible to investors.

Navarova-Doyle agrees that sectoral transition plans and investment guidelines would be useful.

“While we expect companies to have credible transition plans in place, we don’t currently have the same for the economy overall and it’s not as simple as adding up individual firms’ plans, even if we had all of those in place,” she says.

While the UK does have a strong green finance regulatory framework, a local investor notes that it has had nowhere near the success of the US in terms of mobilising capital.

Currently the risk-reward balance for climate investments is not stacking up for investors, the investor adds, and the government’s changes to environmental policy and deregulatory agenda mean there is currently no policy comfort for long-term investors.

This is echoed by Scaping, who says the Investment Association would like to see reforms to the planning system to ensure the supply of investable green energy projects can match demand.

According to DWS’s Marx, the UK currently lacks large-scale policy tools to mobilise capital and local policymakers are at risk of overpromising.

“Strong narratives about being a ‘sustainable finance powerhouse’ must be backed by concrete, investable frameworks,” he says. “Capital follows confidence – and that means frameworks must be investable, not just ambitious.”

Elsewhere, Nazarova-Doyle notes that the UK has yet to feel the worst physical impacts of climate change and as such lags behind other countries on adaptation, and that as one of the most biodiversity-depleted countries in the world, there is a lot to do in that space.

This is echoed by Aldersgate Group’s Fotherby, who says the UK’s biggest gap is measures to mobilise capital for adaptation and resilience. He points to the fact that 90 percent of tracked adaptation flows came from public actors in 2023. To be a leading centre for sustainable finance, he says, the UK needs to unlock private investment in adaptation across sectors.

Caroline Escott, head of investment stewardship at pension fund Railpen, says UK the government should give a greater voice to pension schemes in corporate governance discussions, an aspect she calls “an underappreciated part of ESG” in recent years.

Alongside a number of other UK schemes, Railpen recently established the Governance for Growth Investor Campaign to work with policymakers on improving corporate governance and ensuring capital markets reforms are investor-friendly.