Sustainable Finance's Next Chapter: From Ambition to Implementation

Markets have spent a decade building the architecture and language of sustainable finance. The frameworks, the products and the capital are all there now. The next decade will be defined by how they are implemented. It is a recognition that the hard work of institution-building is largely done.

Sustainability has moved from the margins of financial markets to the mainstream, with climate risks widely recognised as drivers of financial risks and opportunities for firms and investors. The business case has been made.

Investors increasingly seek to understand the full range of factors that may influence long-term value creation and risk. In response, regulators, exchanges and standard setters have strengthened disclosure frameworks, while issuers have expanded sustainability-related reporting to meet growing demand for decision-useful information. Across global markets, sustainable investment products have proliferated in response to consumer demand. Market participants have developed more sophisticated approaches to assessing sustainability-related risks and opportunities.

Sustainable finance is now entering the next phase. We now need to make sure the system delivers what it promised. The question is no longer whether sustainability matters to capital markets, but whether markets have the tools and information needed to allocate capital efficiently and confidently in support of long-term resilience and transition.

The trust foundation

Well-functioning markets depend on trust and high-quality information. Sustainability, as well as financial, disclosures should therefore do more than satisfy reporting requirements: they should provide investors with information that is assured, reliable, comparable and decision-useful.

That is the ambition behind the FCA's recent consultation on UK Sustainability Reporting Standards, based on the International Sustainability Standards Board (ISSB) baseline. As around 40 major jurisdictions worldwide converge on the ISSB standards as the global baseline for sustainability reporting, markets have an opportunity to reduce unnecessary complexity, improve cross-border comparability and provide investors with information they can use with greater confidence.

But better information alone is not sufficient.

Innovation has an important role to play in building that capability – capital is being spent on new opportunities, adaptation and transition. This is why we are pleased to have accepted TREX into our Regulatory Sandbox, where it will test its non-linear climate risk model with financial sector partners, and we plan to launch a new Climate Scenarios Sandbox cohort later this year.

This provides firms with an opportunity to build stronger analytical capabilities, test new models and support better decisions in a controlled environment.

Sustainability-related opportunities are inherently forward-looking and depend on effective capital allocation. In a challenging political environment, it is especially important that companies can provide credible forward-looking information about future risks, opportunities and transition plans.

Our new rules for the Public Offers and Admissions to Trading Regime (POATR) confirmed that certain information within prospectuses, including disclosures on transition plans, is eligible to be designated as protected forward-looking statements (PFLS). This is an important measure, as PFLS can give issuers greater confidence to communicate credible transition plans without undue liability concerns, while providing investors with more decision-useful information on how companies expect to manage climate-related risks and opportunities over time.

We will be engaging with other regulators on this approach as part of wider efforts to strengthen the quality and usefulness of sustainability-related information across markets.

The deployment gap

The UK's Transition Finance Pilot set out to answer a very practical question: how effectively is the UK financial system supporting climate solutions, and where can it be improved? The findings point to an important challenge that should shape the next phase of our work. Capital is not the constraint, and neither is enthusiasm for transition finance. The barrier is connecting available finance to viable projects at the right scale, tenor and risk profile. Policy uncertainty, differing language and definitions, weak revenue visibility and mismatches between project structures and historical investor mandates are leaving opportunities unfunded.

This matters because it reframes the challenge. If capital exists but cannot be effectively deployed, the answer is not more disclosure. It is coordinated action across government, regulators and markets to remove the friction that is blocking it. Trustworthy, comparable, decision-useful information is part of that, but only part. Effective capital allocation at scale requires stakeholders across the system to work in the same direction, including through innovation in investor mandates.

Navigating the product landscape

Consumers need to be able to trust the products they buy. Sustainability labels that are not backed by quality disclosures and honest communication about what a product does and does not do undermine confidence across the market, not just in individual products.

The UK's Sustainability Disclosure Requirements (SDR), including its investment labels and naming and marketing rules, are designed to ensure that claims are evidence-based and that competition between products is fair. Eighty per cent of firms surveyed by the Investment Association (IA) said that SDR has successfully reduced or prevented greenwashing.

We welcomed the European Commission's proposals to reform the Sustainable Finance Disclosure Regulation (SFDR) along similar lines. Clearer product categorisation serves investors and supports cross-border confidence. We continue to engage closely with our European counterparts, sharing our experience of implementation in support of our shared objective that trust and integrity build confidence, enabling markets to grow.

ESG ratings: getting the foundations right

ESG ratings shape significant investment decisions yet, until recently, operated without regulatory oversight. That is changing. Following government legislation bringing ESG ratings providers within the FCA's regulatory perimeter, we are developing rules to improve transparency, governance and accountability in this market.

A policy statement is expected later this year. Like the upcoming EU ESG Ratings Regulation, the objective is straightforward: investors need to be able to trust the ratings they rely on. Ninety-five per cent of respondents supported HM Treasury's proposal to bring ESG ratings providers into regulation. This shows that new rules can be good for markets rather than a burden on them.

Working across borders

Sustainable finance is inherently international. Capital does not stop at borders, and neither do the environmental and social challenges and opportunities it needs to address.

Compatible approaches and common language are achievable and worth pursuing, such as through the ISSB. Stronger dialogue among us should enable us to share best practice and ensure our approaches are grounded in today's economic realities and evolving challenges.

The FCA works actively through the International Organization of Securities Commissions (IOSCO) and with counterparts to maximise interoperability, support implementation and reduce duplication, lowering the costs that fragmentation imposes on firms operating across multiple markets.

Looking ahead: closing the loop through openness

Sustainable finance success will not be measured by the number of disclosures filed or the volume of labelled products on the market. It will be judged by whether reliable, comparable information is being used to allocate capital more efficiently across borders. Success is capital reaching the projects and transitions that deserve it.

That requires all of us – exchanges, issuers, investors and regulators – to move from building the system to making it work in principle and in practice.