After years of being a trailblazer in sustainable finance, the U.K.’s position is under threat amid stalled policy and a lack of certainty over regulation.

Research by the U.K. Sustainable Investment and Finance Association, known as UKSIF, showed that more favorable policies could see up to £100 billion ($125.5 billion) in assets shifting into U.K. sustainable finance. The U.K. remains the top market for sustainable finance activity among 83% of those surveyed — but a clear direction of travel away from the U.K. is emerging amid a lack of government clarity and supportive policy, the report said. Nearly two-thirds (65%) of respondents said they already have moved or plan to move investments out of the U.K. to a market that is more supportive of their sustainability goals. Green policies and greater harmonization of financial sustainability standards globally could help reverse that trend.

The Financing the Future: Financial Services Report outlined three key areas where supportive policies and regulation could strengthen the U.K.’s sustainable finance sector and make it a more attractive environment for investment:

• Deliver a clear and world-leading sustainability disclosure regime, with the adoption of the International Sustainability Standards Board standards, introduction of mandatory corporate transition plans and, crucially, a U.K. green taxonomy.
• Empower investors by clarifying the fiduciary duty of pension funds, with a call for The Pensions Regulator to clarify that factoring financially material environmental, social and governance issues into decisions and actively managing associated risks and impacts are consistent with fiduciary duties. Investment consultants should also be brought under formal regulatory scope by the Financial Conduct Authority, the report said.
• Embed biodiversity into the regulatory framework.

“We were a trailblazer on sustainable finance, and we were on sustainability more broadly,” said James Alexander, CEO of UKSIF, in an interview. “But I feel like we’ve stepped back from that. We put ourselves into this amazing leadership role and now, unfortunately, have sat on our laurels and stepped back” thanks to stalled policies on sustainability. “That’s changed and reduced confidence from investors in terms of investing in the sustainable future of the U.K., so (investors are) looking to the U.S. and EU (European Union) for opportunities.”

Rather than “bash” the government, the report and UKSIF is “trying to talk up the potential for the U.K.,” Alexander said, adding that the aim is “to make us (the U.K.) indisputably the place to put your capital … and (be) the leader in sustainable capital.”

It’s not just that the U.K. has stalled and in some cases walked back on sustainability-related policies — “other countries are absolutely charging ahead,” Alexander said.

And while the FCA’s Sustainability Disclosure Requirements are something to be positive about, “we have definitely failed to respond to the U.S. Inflation Reduction Act — that’s one of the biggest failures: To not recognize the extent that the Inflation Reduction Act is driving huge pools of capital across the Atlantic,” he said. If the U.K. wants to compete, it needs to build up frameworks for sustainable finance in the U.K., make sure there are “enabling conditions here, (and) make the U.K. a comparative and better investment destination than the U.S.”

UKSIF is not calling for lots of subsidies — “we’re saying there are some barriers that are stopping the development of sustainable finance in the U.K. — planning, rig connections, policy certainty — but also the financial services regulatory framework is not complete yet and that is also delaying the capital deployment that we want to see,” Alexander said.

The financial services report is the fourth in a series of policy research pieces released by UKSIF, outlining key recommendations to unlock billions in private investment for a sustainable future. The other reports cover the U.K.’s highest-emitting sectors — energy, housing and transportation.

UKSIF surveyed 100 financial services organizations representing about £1 trillion in annual revenue and more than £200 billion in green investments in the U.K.

The organization’s more than 320 members represent more than £19 trillion in assets under management.