Ministerial foreword

Finance is the lifeblood of growing economies. It flows through the arteries of trade and commerce, feeding enterprise and innovation, and turning great ideas into thriving businesses. But it is particularly critical during times of industrial and technological change – like now. Britain has just 27 years to become a net zero economy effectively ending our contribution to climate change by 2050. We also have to reverse the decline in nature and adapt to our changing climate. We must also protect ourselves from volatile international energy markets resulting from Putin’s illegal invasion of Ukraine. The environmental and economic rewards of this transformation will be immense – but the challenges involved will be great. We not only need pioneering firms and entrepreneurs to create green products and services. We also need the right support structure to propel them to commercial success. That is why the government’s new Green Finance Strategy is so crucial.

We have led the world on green finance. We were the first major country to publish a green finance strategy in 2019. In 2021, we placed finance at the heart of our COP26 Presidency and became the first G20 nation to require the largest companies and financial firms to make public how they are responding to financial risks and opportunities from climate change. We established a UK Infrastructure Bank with £22 billion of capital to level up and decarbonise our economy. And we have raised over £26 billion through selling green gilts. All these measures have given us a strong head start in the race to finance the green Industrial Revolution.

But to decarbonise in 27 years, and meet our environmental objectives as set out in our Environmental Improvement Plan, and deliver energy security, we will require a step-change in levels of investment. The global transition to a resilient, nature-positive, net zero economy will see trillions of pounds reallocated and invested into new technologies, services and infrastructure. There are huge opportunities for the UK’s financial and professional services industry in this transition. From venture capital supporting climate and nature tech solutions, to banks funding major renewables projects, we want our world-leading financial services sector to drive every step of the global transition.

We also need to tackle the risks from climate change and environmental degradation. From increasingly frequent and severe weather events causing damage to infrastructure and supply chains, to changing consumer expectations and preferences shifting demand for certain products and services, companies and their investors need the right policies in place to support them in managing these risks and avoiding stranded assets. Acting now is also important to minimise the fiscal risks of the transition and maximise the growth opportunities – the costs of inaction are significantly higher.

The Green Finance Strategy represents the latest policy blueprint – developed by HM Treasury, the new Department for Energy Security and Net Zero, and Department for Environment, Food and Rural Affairs – to seize this opportunity, mitigate those risks and ensure the necessary finance flows to our net zero, energy security and environmental industries. The Strategy sets out how the UK government will pursue its ambition to become the world’s first Net Zero-aligned Financial Centre – equipping the market with the information and tools necessary to drive the transition. We are setting out next steps on transition planning and the UK Green Taxonomy to ensure green finance markets are robust.

The Strategy also sets out how UK government is working with a range of public financing bodies to commercialise and finance the green technologies needed for the transition, complementing steps taken through Powering Up Britain, to deliver cheap, clean British energy sources to heat our homes and power our industries. Together, these steps will boost economic growth across the country, creating almost half a million new green jobs and opportunities for businesses to export their expertise around the world.

Nature sustains economies and livelihoods, and protecting and restoring nature is inseparable from addressing climate change. This Strategy incorporates both nature and climate adaptation into our green finance framework. We are also publishing a new nature markets framework alongside the Strategy, to explain how we will develop high-integrity markets enabling farmers and land managers to attract investment into natural capital.

Finally, the Strategy sets out how the UK will use our leadership and the expertise of our financial sector to accelerate the shift to a green global financial system and catalyse green financing globally, including in emerging and developing markets. These economies are crucial for tackling climate change and halting nature’s decline, as well as being key partners for the UK in generating shared prosperity from the global transition.

The next 3 decades will see the biggest changes to industry since the 19th century, as we move from a fossil-fuel driven economy to a decarbonised one that leaves our environment in a better state than we found it. Our ability to exploit the opportunities of this new Green Industrial Revolution will depend on our readiness to finance it. This document explains how we will achieve our objectives.

Rt Hon Grant Shapps MP

Secretary of State for Energy Security and Net Zero

Rt Hon Jeremy Hunt MP

Chancellor of the Exchequer

Rt Hon Thérèse Coffey MP

Secretary of State for Environment, Food and Rural Affairs

Executive summary

1. Climate change, biodiversity loss and environmental degradation are transforming the global economy. As countries, companies and individuals across the world respond to these challenges, finance and investment have a crucial role to play. The global transition to a net zero, resilient and nature positive economy will see trillions of pounds reallocated and invested in new projects, products and services. The UK’s world-renowned finance sector can put us at the forefront of this transition.

2. The UK’s COP26 Presidency in 2021 generated historic momentum in the numbers of businesses, regions and investors seeking to align with climate and environmental goals. Over 90% of global GDP is now covered by national net zero targets. In the financial services sector this was exemplified through the commitment of the Glasgow Financial Alliance for Net Zero ( GFANZ ), which unites over 550 members across the financial sector committed to align with a net zero future, spanning 50 countries and representing 40% of global private financial assets.[footnote 1] Now is the time for the UK to build on that leadership.

3. The transition is not only an environmental imperative, but a growth opportunity for the UK. Supplying the goods and services necessary to reach global net zero ambitions is estimated to be worth up to £1 trillion to UK businesses to 2030[footnote 2]. Furthermore, exports within low carbon and renewable energy industries are growing significantly faster than exports from the broader economy. Between 2020 and 2021, it is estimated exports from these sectors increased by 67%, compared to total exports which increased by 6%.[footnote 3]

4. The 2023 Green Finance Strategy (‘this Strategy’) is an update to the UK’s 2019 Green Finance Strategy and sets out how continued UK leadership on green finance will cement the UK’s place at the forefront of this growing global market, and how we will mobilise the investment needed to meet our climate and nature objectives. Published alongside this Strategy are the UK government’s Powering Up Britain, Nature Markets Framework, International Climate Finance Strategy and UK 2030 Strategic Framework for Climate and Nature. Collectively these publications confirm the UK’s ambition to address climate and environmental challenges, and the practical steps we are taking to drive progress.

What are our objectives?

5. This Strategy aims to reinforce and expand the UK’s position as a world leader on green finance and investment, delivering 5 key objectives: a. UK financial services growth and competitiveness – The UK can and will do more to support our financial services sector to prosper from a transitioning global economy. From venture capital supporting innovative climate tech solutions, to banks lending to major renewables projects and asset managers allocating capital to support the companies of the future – behind every step of our transition will be our world-leading financial services sector. b. Investment in the green economy – Private investment will be crucial to delivering net zero, building climate resilience and supporting nature’s recovery. We estimate that to deliver on the UK’s net zero ambitions, through the late 2020s and 2030s, an additional £50-60 billion capital investment will be required each year.[footnote 4] A 2021 report estimated that over the next 10 years, our domestic nature-related goals could require between £44-97 billion of investment[footnote 5]. This investment will support the sectors and technologies of the future, enable traditional sectors to adapt and thrive as part of the transition, and presents a significant opportunity to level up the UK, including those parts with an industrial heritage. c. Financial stability – Climate change and environmental degradation pose profound risks to the economy. The Bank of England projected £110 billion in additional losses for UK banks out to 2050 in their disorderly transition scenario, and 50-70% higher losses for UK insurers in their highest climate risk scenario.[footnote 6] Similarly, over half the world’s GDP is generated in sectors that depend on the goods and services nature provides.[footnote 7] An effective green finance framework will ensure the finance sector has the information it needs to manage risks from climate change and nature loss. d. Incorporation of nature and adaptation – There has been significant progress on nature finance both domestically and internationally since 2019, culminating in the commitments on finance made in the landmark Kunming-Montreal Global Biodiversity Framework agreed at the UN Convention on Biological Diversity COP 15 in December 2022. There is also increasing recognition of the government’s critical role in supporting private investment in climate resilience, as highlighted by the Climate Change Committee’s recent report.[footnote 8] To reflect these developments, as well as calls from industry for an integrated approach, this Strategy will explicitly incorporate both nature and climate adaptation into the government’s green finance policy framework. e. Alignment of global financial flows with climate and nature objectives – With our world leading expertise and outward looking financial sector, the UK is strategically placed to collaborate with international partners to support the alignment of global financial frameworks and stimulate investment towards emerging and developing markets where capital needs are highest. The UK can capture a huge economic opportunity by supporting the global transition, whilst building closer relationships with high growth emerging markets and developing economies as they seek to meet their own financing needs.

Chapter 1: Foundations – UK approach to green finance

6. The UK is recognised as a leading green finance centre internationally[footnote 9]. This is in large part due to the strength and innovation of UK industry, and has been supported by our strong policy framework. From the 2019 Green Finance Strategy to the 2021 Greening Finance Roadmap, the UK government has shown commitment to taking the required steps so industry can deliver. Through our call for evidence (early summer 2022), 134 leading stakeholders across the business and investment community provided clear feedback on where government action was needed.

7. A key area of feedback in the call for evidence was transition finance, where financial markets raised the need for continued innovation to provide products and services that support higher emitting companies to decarbonise and reduce their environmental impact. To support this, the UK government will commission an industry-led market review into how the UK can enhance our position and become the best place in the world for raising transition capital.

Chapter 2: Align – Enabling the market to align with UK climate and environmental goals

8. Mobilising private capital into the sectors and technologies needed to deliver net zero and our wider environmental targets requires market participants to have the right information and tools to assess opportunities and risks effectively. Stakeholders have been clear there is a role for the UK government to facilitate financial markets to deliver this, as well as to ensure green finance markets are robust and that protections against greenwashing are in place for consumers.

9. This Strategy outlines how the UK government will pursue its ambition to become the world’s first Net Zero-aligned Financial Centre. This Strategy will show how the UK government will provide transparency, support the development of market tools, and support transmission channels to allow the financial sector to align with net zero.

10. We will deliver on our commitments in ‘Greening Finance: A Roadmap to Sustainable Investing’, ensuring market participants have the information and data they need to manage risks and allocate capital where there are opportunities: a. Currently the Financial Conduct Authority requires listed companies, as well as large asset owners and managers to disclose transition plans on a ‘comply or explain’ basis. The government commits to consulting on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them. To ensure parity between listed and private companies, as well as to ensure requirements are consistent and comparable across the economy, we expect to consult on the basis that these requirements could align closely with those of the FCA , including the ‘comply or explain’ basis. This is supported by the UK government-convened Transition Plan Taskforce ( TPT ), currently developing best practice for companies and investors seeking to disclose transition plans, ensuring quality and consistency. The consultation will take place in Autumn / Winter 2023, once the TPT has finalised its framework. b. We will continue to support the work of the International Financial Reporting Standards ( IFRS ) Foundation’s new standard-setting board – the International Sustainability Standards Board ( ISSB ) – and will set up a framework to assess these standards for their suitability for adoption in the UK as soon as the final standards are published (expected summer 2023). c. We will launch a call for evidence on Scope 3 greenhouse gas ( GHG ) emissions reporting[footnote 10], to better understand the costs and benefits of producing and using this information. We will update the Environmental Reporting Guidelines, including for Streamlined Energy and Carbon Reporting[footnote 11], which provides voluntary guidance for UK organisations. d. In response to the Climate Change Committee’s report ‘Investment for a well-adapted UK’, we will work with industry partners to improve the approach to climate resilience assessment and disclosure through the development of adaptation metrics and guidance. Our final approach will be set out alongside our adaptation finance deliverables and action plan in 2024. 11. The UK government will also support industry as it develops the new market frameworks, associated tools and expertise required to expand green finance activity. a. We will deliver a UK Green Taxonomy – a tool to provide investors with definitions of which economic activities should be labelled as green. This will support the quality of standards, labels and disclosures used in the industry for green finance activity. We expect to consult on the Taxonomy in Autumn 2023. The government proposes that nuclear – as a key technology within our pathways to reach net zero – will be included within the UK’s Green Taxonomy, subject to consultation. After the Taxonomy has been finalised, we will initially expect companies to report voluntarily against it for a period of at least 2 reporting years after which we will explore mandating disclosures. Government does not wish to place undue burdens onto companies whose size or scale makes the disclosure of taxonomy-related information unreasonable. Therefore, we will develop proposals with proportionality in mind. b. We will address the growing Environmental, Social, Governance ( ESG ) investment trends to ensure this activity is robust and protects UK markets and, ultimately, consumers. Alongside this Strategy we have published a consultation on regulating ESG ratings providers to seek views on how regulation could help ensure better outcomes for these products.[footnote 12] We will continue to act as observers, alongside the Financial Conduct Authority, to the industry-led working group that is developing an ESG Data and Ratings Code of Conduct to promote best practice in the market. c. We will ensure the UK is the home of sustainable finance skills, expertise and professional development. We will re-launch the Green Finance Education Charter, which will expand to encompass more professional bodies, broaden its remit to include nature, and continue to work with counterparts globally to promote and replicate the successful Charter model. 12. The UK government will explore the actions it can take to enable key transmission channels through which financial markets can support businesses to grow as part of a net zero, resilient and nature positive economy. This will include: a. Access to liquidity: We will work closely with industry and the regulator to implement Solvency UK, creating the potential for over £100 billion of productive investments from insurers in the next 10 years, all while maintaining high standards of policyholder protection. b. Effective investor stewardship: We will work with the Financial Conduct Authority, Financial Reporting Council and the Pensions Regulator to review the regulatory framework for the effective stewardship that is crucial to climate and environmental oversight, including the operation of the UK Stewardship Code. c. Fiduciary duty: The Department for Work and Pensions will examine the extent their Stewardship Guidance is being followed in late 2023. Government will engage with interested stakeholders on how we can continue to clarify fiduciary duty through a series of roundtables and a working group of the Financial Markets and Law Committee. 13. We will work closely with financial regulators – such as the Bank of England, Financial Conduct Authority, Financial Reporting Council and The Pensions Regulator – and the environmental regulator in England, the Environment Agency, to ensure that the UK’s regulatory framework supports the growth of green finance. 14. We will collaborate with international partners to accelerate the alignment of global financial flows with a net zero, resilient and nature positive global economy through: a. Championing action to align the global financial system by supporting equal ambition by other countries and ensuring interoperable approaches. This includes leveraging our position and using our voice at key global negotiations and forums such as the G20 , G7 , Coalition of Finance Ministers for Climate Action and International Platform for Sustainable Finance. b. Driving the alignment of development finance, working with international financial institutions and the wider donor community. This includes fulfilling our commitment to align all new bilateral UK Official Development Assistance ( ODA ) with the Paris Agreement in 2023; delivering our 2021 commitment to ensure all bilateral ODA spending does no harm to nature, and stopping any new direct financial or promotional support for the fossil fuel energy sector overseas, other than in exceptional circumstances. c. Building partnerships with emerging markets and developing economies to support the growth and alignment of their finance sectors, including actions to enhance sharing of lessons from green finance implementation in the UK.

Chapter 3: Invest – Mobilising and creating opportunities for green investment

15. The economic transformation required to meet our climate and nature objectives will create investment opportunities across the economy. The UK business and investment landscape is one of the most competitive, attractive and innovative in the world, and we will ensure we are using all levers available to mobilise private capital into the key sectors, projects and technologies needed to transition to a net zero, resilient and nature positive global economy. Since 2010, the UK has seen £198 billion of investment into low carbon energy, through a mixture of government funding, private investment and levies on consumer bills.

16. The UK government has already introduced a range of new measures to mobilise and attract private investment. We committed £30 billion of domestic investment for the green industrial revolution at Spending Review 2021, as well as £6 billion for energy efficiency at the Autumn Statement 2022 and up to £20 billion for CCUS announced at Spring Budget 2023. We are now seeing a step-change in the UK, with annual investment in low carbon sectors more than doubling in real terms over the past 5 years. Across 2021 and 2022 alone, over £50 billion of new investments were delivered in low carbon sectors in the UK.[footnote 13]

17. We are providing clarity on pathways for investment across our net zero, nature and adaptation in the UK: a. Alongside this Strategy, we are publishing Powering Up Britain which sets out how we are taking bold action to achieve our energy security and net zero objectives. Through our Environmental Improvement Plan we set out how we will work with land managers, communities and businesses to improve the natural environment. Together these communicate the UK’s plan to grow green investment across all parts of the UK, including by: i. Providing up to £20 billion funding for early deployment of Carbon Capture, Usage and Storage ( CCUS ). This unprecedented level of funding will unlock private investment and the creation of jobs across the UK, particularly in the East Coast, North West of England and North Wales, and kick-start the delivery of subsequent phases of this new sustainable industry in the UK; ii. Announcing a suite of developments aiming to increase deployment of low carbon hydrogen in the UK. These include confirming the first 15 winning projects from the £240 million Net Zero Hydrogen Fund and the 2 CCUS -enabled hydrogen projects moving forward on the Track-1 clusters, and publishing a shortlist of 20 projects we intend to enter due diligence with for the first electrolytic hydrogen allocation round; iii. Launching Great British Nuclear ( GBN ), which will be an arms-length body responsible for driving delivery of new nuclear projects. GBN will be backed with the funding it needs, and we will work with GBN to publish a roadmap later this year; iv. Announcing plans for the Great British Insulation Scheme, based on proposals announced last year as ECO+, which will deliver £1 billion additional investment by March 2026 in energy efficiency upgrades, such as loft and cavity wall insulation; and v. Launching the up to £160 million Floating Offshore Wind Manufacturing Investment Scheme to kick start investment in port infrastructure projects needed to deliver our floating offshore wind ambitions. b. Throughout 2023, we will develop and publish a series of net zero investment roadmaps. These will articulate investment needs by sector alongside summarising the relevant government policy and funding to make the sector investable. We will also publish a roadmap to guide nature positive investment in key sectors by 2024. We will engage with investors, across sectors, to ensure these contain the information and clarity that will support investment decisions. c. We are working with external partners to better track private investment into the net zero economy and building towards a fuller way of tracking green investment flows in the UK – including annual private finance flows into nature’s recovery in England. 18. We will use government and other public levers to mobilise private investment, providing investors with confidence to invest in green technologies at different stage of commercial maturity. In addition to measures set out in the ‘Powering Up Britain’ and ‘Environmental Improvement Plan’: a. We will intensify work with the public finance institutions and welcome the joint statement they have made today supporting the Strategy. The UK’s public finance institutions and UK’s export credit agency, UK Export Finance, play a key role in supporting sectors and technologies across to commercial maturity and scale: i. The UK Infrastructure Bank ( UKIB ) is a UK government-owned policy bank with £22 billion of financial capacity across its private and local authority lending arms. Its mission is to partner with the private sector and government to increase infrastructure investment to help to tackle climate change and promote economic growth across the UK. As of 27 March 2023, it has announced 12 deals, investing approximately £1.2 billion and unlocking over £5 billion of private capital. ii. The British Business Bank ( BBB ) is a government-owned economic development bank established by the UK government. BBB supports access to finance for smaller businesses to drive sustainable growth and prosperity across the UK, and also to enable the transition to a net zero economy. Between 2014 and end of August 2022, BBB supported £505 million of equity investment in clean technology companies. iii. UK Research and Innovation ( UKRI ) is a non-departmental public body of the UK government that directs research, innovation and skills funding. It brings together 7 disciplinary research councils, Research England which is focused on higher education institutions, and the UK’s innovation agency, Innovate UK. Between 2015 and 2020 Innovate UK supported 5,940 companies with £1.9 billion of net zero related grants. iv. The UK’s export credit agency, UK Export Finance’s ( UKEF ) mission is to advance prosperity by ensuring no viable UK export fails for lack of finance or insurance, doing that sustainably and at no net cost to the taxpayer. Alongside this Strategy the Chancellor has announced an increase in UKEF ’s capacity from £50 billion to £60 billion to support UK exporters and supply chains. UKEF is committed to increasing its support in clean growth and climate adaptation. b. We will also work with the Green Finance Institute to explore how blended finance models might be used to more strategically mobilise private finance to support our green objectives. This builds on the example we have set through the £30 million of seed capital we are investing into the Big Nature Impact Fund ( BNIF ), which will leverage private sector investment in a range of nature projects in England. 19. We are supporting the creation and promotion of investment opportunities throughout the economy: a. We will support local authorities to develop their ability to attract private investment through the work of the Local Net Zero Hubs and the UKIB , as well as through promotion of programmes such as the Local Investment in Natural Capital programme and Investment Zones. This is alongside plans to promote net zero investment in the 8 Freeports across England, 2 in Scotland and 2 in Wales. b. We have the joint most generous capital allowance regime in the OECD with a policy of full expensing from 1 April 2023 to 31 March 2026. From April 2023 we announced a higher rate of R&D Expenditure Credit – which means that the UK’s R&D tax relief for large companies has the joint highest uncapped headline rate in the G7 – and an increased rate of relief for loss-making R&D intensive SMEs . c. We will establish a new partnership with business and finance leaders to support the delivery of our net zero target, forming a shared view of the actions needed through a new Net Zero Business & Investment Group. d. We will host the Global Investment Summit in September 2023. This will build on the Global Investment Summit held in 2021, at which government announced nearly £10 billion of new foreign direct investments in the UK. 20. We will provide the clarity that stakeholders have called for to unlock voluntary markets for carbon and nature whilst ensuring environmental integrity – creating innovative new markets for green investment: a. We will consult on the specific steps and interventions needed to support the growth of high integrity voluntary markets and protect against greenwashing. This will position the UK to serve as a global hub for voluntary carbon trading. b. We have published alongside this Strategy a new Nature Markets Framework, which sets out principles and priorities for the development of high-integrity markets to enable farmers and land managers to attract investment in natural capital, and our plans to develop a comprehensive suite of nature investment standards. 21. Drawing lessons from our domestic leadership and expertise from our financial sector, the UK will support emerging and developing economies ( EMDEs ) to grow sustainably while creating opportunities for shared prosperity. Utilising a range of levers, including delivering on our commitment to provide £11.6 billion in International Climate Finance ( ICF ) between 2021/22 and 2025/26, the UK will: a. Deepen our country partnerships and build green finance capability, including by co-delivering the Just Energy Transition Partnerships in South Africa, Vietnam and Indonesia and supporting country plans to mobilise finance. b. Provide strategic investment and enhance the scale of investment opportunities, including through British International Investment, the UK’s development finance institution, which has invested over $1.7 billion of climate finance since 2018; and building on the £5.2 billion in private investment already mobilised through our ICF [footnote 14]. c. Develop innovative approaches to unlock private finance, such as through the new Climate Investment Funds Capital Market Mechanism, which is expected to issue green bonds in the region of $5-7 billion for climate projects in EMDEs using returns from previous UK investments. d. Achieve global impact through the reform of the international financial architecture by championing the Bridgetown Agenda, supporting the implementation of the IMF Resilience and Sustainability Trust, and promoting greater use of guarantees to allow scarce public finance to go further. e. Enable private investment in international climate adaptation, including tripling ICF funding for adaptation from £500 million in 2019 to £1.5 billion in 2025, and building our support for new approaches in Disaster Risk Financing.

Chapter 1: Foundations – UK approach to green finance

1.1 Meeting global climate and environmental challenges

1. The twin threats of climate change and biodiversity decline are increasingly being felt at home and abroad. From extreme summer heat in the UK, to devastating floods in Pakistan and the loss and fragmentation of habitats globally, all around us the imperative to transition to net zero, adapt to climate change and halt nature and biodiversity loss is becoming increasingly acute.

2. Addressing these challenges poses economic opportunity for early movers. Significant upfront public and private capital will be needed. Between 2023 and 2050, $150 trillion of total investment in the energy transition will be required for the world to align with a 1.5 degree pathway. This requires annual investments to quadruple from current levels.[footnote 15] Additionally, $275–400 billion per year will be required by 2030 for increased protection and restoration of nature.[footnote 16] However, these investments can unlock significant returns and economic opportunities: estimates suggest every dollar spent on transforming the global energy system provides a payoff of at least $3 and potentially more than $7[footnote 17], and every dollar spent on investing in more resilient infrastructure in low- and middle-income countries provides $4 in benefits.[footnote 18]

3. The economic growth potential of the UK and global transition is a key consideration behind this Strategy. From the growth of new technologies to investment in infrastructure and the increasing demand for nature-based solutions, there are major opportunities for early movers. To secure this economic growth potential, we have the joint most generous capital allowance regime in the OECD , as well as generous R&D and patent tax reliefs. The UK is also pioneering breakthrough technologies and investing in world class data and analytics, for example through the Centre for Greening Finance and Investment, a research consortium led by the University of Oxford and funded by UK Research & Innovation.

4. The UK has led by example by setting out world-leading climate and nature targets. To meet each of these commitments, private finance will be critical, and that is why the UK has placed it at the centre of our efforts. Using this strong domestic record, we’ve worked to ensure finance is equally central in global agreements, including by working with our international partners to ensure the alignment of financial flows was captured in the long-term goals of the Paris Agreement, and the targets in the Kunming-Montreal Global Biodiversity Framework.

5. This Strategy ensures that the UK is better equipped to meet our domestic and international climate and environmental targets (see Table 1 below), seizing the opportunity for UK growth in this expanding field and maximising the role of private finance to meet climate and nature commitments affordably.

Table 1: Our domestic and international climate and environmental commitments

UK commitments International commitments Climate mitigation Legally binding target to reach net zero by 2050, and stay within our carbon budgets. Delivery of our commitments under the Paris Agreement and Glasgow Climate Pact. This includes our Nationally Determined Contribution, working towards the $100 billion climate finance goal and the achievement of Article 2.1c, and agreeing a new post-2025 finance goal. Environment Legally binding targets for the natural environment, in England, including to halt the decline in species abundance by 2030. Delivery of Kunming-Montreal Global Biodiversity Framework ( GBF ), increasing investment in biodiversity from all sources to at least $200 billion a year by 2030, and fulfilling Target 15. Climate adaptation We will set out a 5 year strategy to build the UK’s climate resilience in the third National Adaptation Programme ( NAP3 ) in 2023. UK will double International Climate Finance ( ICF ) to £11.6 billion between 2021/22 and 2025/26, and as part of this triple our funding for adaptation from £500 million in 2019 to £1.5 billion in 2025.

1.2 The UK green finance growth opportunity

6. Green finance is any structured financial activity – a product or service – that has been created to ensure a better environmental outcome. It includes an array of loans, debt mechanisms and investments that are used to encourage the development of green projects or manage the impact of climate change on investments. Finance is a critical enabler for transitioning the real economy. As such, developing the right financial expertise and attracting the right capital to the UK is central to delivering our transition.

7. We estimate that in 2022 alone, £23 billion of new low carbon investment was delivered in the UK – ranging from renewables, hydrogen, carbon capture and storage, nuclear, sustainable materials, energy storage, electrified transport, to clean heat.[footnote 19]

8. Given the scale of the transition needed at home and abroad, there is a growing demand for green financial services. Global Environmental, Social and Governance ( ESG ) assets under management ( AUM ) have increased from $2.2 trillion in 2015 to $18.4 trillion in 2021 and are predicted to reach $34 trillion in 2026.[footnote 20] ESG -oriented AUM is set to grow much faster than the asset and wealth management market as a whole. Unlocking the potential of green finance is, therefore, integral to the vision set out in the Chancellor’s 2022 Autumn Statement – for both financial services and green industries to be key growth sectors for the UK.

Figure 1: Global ESG assets under management set to grow to $34 trillion by 2026 ( ESG AUM , $trillion)

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Source: PwC, Global ESG and AWM Market Research Centre analysis, Lipper, Preqin, ESG Global.

9. In practice, this translates into asset owners allocating capital to large-scale renewables projects to power homes and businesses; asset managers developing new funds to service clients’ growing demand for exposure to green and transition industries; green companies raising money through capital markets to finance their growth and expansion. Behind every transaction, sits a team of financial, legal, data and accountancy experts with the skills and expertise to move deals through to completion. This presents a huge opportunity for the UK financial sector. Not just for financial services firms themselves, but also the growing ecosystem of professional services, technical experts and businesses that support them. Adaptation finance is yet to achieve the same level of momentum. This Strategy sets out how we intend to create the conditions for more private money to flow into ensuring the UK’s climate action and resilience.

10. The growth opportunity of fulfilling our common climate and nature goals depends on international collaboration. For finance, this means developing common or aligned approaches to greening financial frameworks – to remove, not create barriers to cross-border investment. Bringing global green sectors and technologies to commercial viability will require coordination, the sharing of expertise, and frictionless flow of capital to the right companies and projects. Furthermore, the UK recognises the unique challenges and growth potential in emerging markets and developing economies ( EMDEs ), and we are committed to building strong partnerships which remove barriers to growth and generate mutual prosperity.

1.3 Foundations – UK green finance progress so far

11. The UK financial services industry has made significant progress in developing itself as a global green finance centre. The strength, maturity and international role of the UK’s financial sector is proven not just in volume but also in its global presence. This, combined with the UK’s leadership on climate and nature at a political and business level, has solidified its position as a leading centre for green finance, which continues to attract capital and talent. Given the scale of the opportunity available, it will be critical for the UK to maintain this position, and the publication of this Strategy sets out a number of steps government is taking to that end.

Box 1: UK ranked 1st on Global Green Finance Index London has been ranked on the Global Green Finance Index[footnote 21] as the leading green financial centre for a third consecutive year. The ranking considers 149 quantitative factors, as well as a worldwide survey of finance professionals, focusing on 4 broad areas of competitiveness: business environment, financial infrastructure, human capital talent, and overall sustainability factors.

12. Leadership can be seen across the UK’s financial system, with each part of that system playing the necessary role to deliver as a world-leading green finance hub. Figure 2 articulates what that leadership looks like in practice across different parts of the system:

Figure 2: Finance industry action

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Data from figure 2: Savers: Pension holders and savers invested in ESG products

products NS&I Green Bond product

Green Bond product Green personal investment Asset owners and managers: Largest asset management centre outside of US

Responsible AUM grown to £89 billion

grown to £89 billion Close to 300 green, ethical and alternative energy funds were launched in the UK in 2021, the highest among all major financial centres Education and talent: Green Finance Education Charter launched in the UK in 2020 was the first of its kind

UK has the highest density of world-class universities globally, including 4 in the top 10, and leading sustainability research centres with close ties to the financial services sector Professional services: UK start-up ecosystem is ranked second globally, and is co-located alongside the financial services industry, catalysing a thriving ecosystem of Green FinTech and ESG Wealthtech solutions. Capital markets: Companies and funds on London Stock Exchange (LSE) with Green Economy Mark represent £156 billion

London Stock Exchange Group ( LSEG ) first exchange to launch green bond segment, raising £120 billion across 300 bonds

) first exchange to launch green bond segment, raising £120 billion across 300 bonds More than 125 Green Exchange-Traded Funds ( ETFs ) on the LSEG in 2021, a 75% increase on prior year

) on the in 2021, a 75% increase on prior year LSEG became first exchange to use a public carbon market framework to drive funding into climate mitigation projects under new VCM designation Banks: UK largest green loans centre with £33 billion issuance in 2022

More than 45 green mortgage products available in the UK

Green Financing Programme has so far raised around £26.6 billion in green gilts

UK Infrastructure Bank established in 2021, channelling £22 billion of financing into green projects and growth sectors Companies, projects, consumers: Better able to access the capital they need to continue on their transition to a net zero, nature positive and resilient economy

1.3.1 Action by UK government

13. UK leadership has largely been a function of the vision and innovation seen throughout industry. However, it is recognised that the UK’s strong green finance policy framework has been a core supporting pillar of success so far. From the first Green Finance Strategy in 2019, this government has been delivering on policy commitments and building a world-leading framework.

Box 2: UK policy and regulatory leadership since 2019 2019: UK government published the Green Finance Strategy (2019) and established the Green Finance Institute in partnership with the City of London Corporation. 2021: We published our Net Zero Strategy (2021) and Energy Security Strategy (2022), and have now built on these with our Powering Up Britain published alongside this Strategy, setting out policies and proposals for decarbonising all sectors of the UK economy to meet our energy security objectives and net zero target by 2050. 2021: We passed the landmark Environment Act 2021, putting environmental goals, such as reversing the decline in biodiversity, on a statutory footing. 2023: We published our Environmental Improvement Plan, setting out how we will work with land managers, communities and businesses to deliver our environmental goals. Greening the financial system 2019: Established a Joint Government-Regulator Taskforce to explore the most effective approach to implementing the recommendations of the Taskforce on Climate-related Financial Disclosures ( TCFD ). 2019: Co-funded the British Standards Institution ( BSI ) to design and roll out a programme of internationally relevant standards on Sustainable Finance.[footnote 22] 2020: UK government was the first G7 country to commit to mandatory TCFD reporting, and published a roadmap towards mandatory climate-related disclosure. 2021: Mainstreamed climate considerations into the work of the financial regulators – the Financial Conduct Authority, Prudential Regulation Authority and Financial Policy Committee – when carrying out their duties. 2021: The UK published Greening Finance: A Roadmap to Sustainable Investing focussing on ensuring that the information exists to enable every financial decision to factor in climate change and the environment. 2022: Climate-related disclosure requirements introduced for large companies and L L Ps. 2022: UK government launched the Transition Plan Taskforce, a group of industry experts tasked with developing guidance for gold standard transition plans. 2022: The UK signed up to a commitment in the Global Biodiversity Framework to ensure the largest companies regularly monitor and disclose their risks, dependencies and impacts on nature. Financing our green objectives 2021: Established the UK Infrastructure Bank with £12 billion in debt and equity and £10 billion guarantees. Since 2021: 2021 Spending Review confirmed £30 billion of spend on the green industries revolution. Since then, government has made new announcements that provide long-term certainty on our investment plans, including an additional £6 billion for energy efficiency and up to £20 billion for CCUS . 2021: In the 2021 Spending Review, government also set a goal to mobilise more than £1 billion per year, of private finance into nature’s recovery in England by 2030. This Strategy sets out the measures we are putting in place to mobilise that investment, including through our Nature Markets Framework, published alongside this Strategy. 2021-2022: We hosted the Global Investment Summit and the Green Trade and Investment Expo bringing together some of the world’s highest profile investors, CEOs and financiers. Since their launch in 2021: Raised more than £26 billion from the sale of green gilts issued by the UK Debt Management Office, and retail Green Savings Bonds sold via N S & I. International leadership We have committed to double the UK’s I C F to £11.6 billion between 2021/22 and 2025/26, including tripling our funding for adaptation to £1.5 billion in 2025, and ringfencing £3 billion to protect and restore nature. 2019: Committed to align all new bilateral Official Development Assistance ( ODA ) with the Paris Agreement, to be delivered in 2023. 2020: British International Investment launched its Climate Change Strategy, including a net zero 2050 target. 2021: The UK hosted COP 26 and launched GFANZ , the world’s largest coalition of financial institutions committed to net zero, which unites over 550 members across the financial sector committed to align with a net zero future, spanning 50 countries and representing 40% of global private financial assets.[footnote 23] Government also announced its ambition to become the world’s first Net Zero-aligned Financial Centre, including the intention to move towards makings it mandatory for firms to disclose their transition plans. 2021: UK G7 Presidency secured mandatory climate disclosure commitments from members. 2021: UK G7 Presidency secured support for launch of the Taskforce on Nature-related Financial Disclosures ( TNFD ), now an international market-led taskforce with over 900 members representing over $20 trillion AUM across geographies and sectors. 2021: UK Export Finance launched its Climate Change Strategy, including a net zero 2050 target. 2022: The International Development Strategy set out our commitment to ensure our bilateral ODA becomes ‘nature positive’, aligning with the Kunming-Montreal Global Biodiversity Framework and the international goal to halt and reverse biodiversity loss by 2030.

1.3.2 Action by devolved administrations

14. The UK government is working closely with devolved administration partners to achieve our greenhouse gas emission reduction targets. Our net zero target covers the whole of the UK, and all parts of the UK have an integral role to play in delivering the UK’s carbon budgets leading up to 2050.

15. While green finance policy in the UK is reserved, and applies across the UK, there are a number of initiatives underway across Scotland, Wales and Northern Ireland to catalyse investment into net zero and nature’s recovery.

Scottish Government

16. The Scottish Government will ensure that Scotland’s financial services industry, with Edinburgh the second largest financial centre in the UK, plays a key role in delivering the UK’s net zero targets. The financial sector is developing capacity in this space, including through transparent and effective financial reporting. Some key actions being taken include: a. Launching the Scottish Taskforce on Green and Sustainable Financial Services, which coordinates industry to secure Scotland’s place as a globally recognised green finance centre; b. supporting the Taskforce on Nature-related Financial Disclosures ( TNFD ) as members of the TNFD forum; c. Expansion of the Green Investment Portfolio, which will allow the Scottish Government to present new projects which demonstrate Scotland is a world leader in future innovative green industries supporting net zero. The Portfolio has a current value of approx. £3.7 billion, with around £300 million private investment already invested into projects and approx. £875 million currently under offer or in active discussions; d. Continuing to develop the Funding to Finance approach, which aims to secure consistent project pipeline, and to close the investment gap by 2030; e. Establishment of the Scottish National Investment Bank ( SNIB ) to deploy commercial, mission-focused investment. SNIB invests in projects, communities, and scaling businesses to deliver positive environmental, economic and social impacts for the people of Scotland, and has a particular focus on catalysing and crowding in private capital. SNIB engages regularly with UK-wide public finance institutions, particularly the UK Infrastructure Bank and British Business Bank, and works collaboratively with them where there is commonality between their remits. Since its launch S N I B has committed £227 million to net zero investments; f. Commitment to develop Scottish Government Interim Principles for Responsible Investment in Natural Capital, a values-led, high-integrity market for responsible private investment in natural capital. This commitment is supported by the Interim Principles for Responsible Investment in Natural Capital, which have been cited as illustrating good practice by the UK’s Finance Nature Recovery initiative, and by the launch of the Facility for Investment Ready Nature in Scotland ( FIRNS ), a £1.8 million investment readiness fund.

Welsh Government

17. The Welsh Government recognises the role of the financial services industry in supporting the investment required for Wales to play its role in delivering the UK’s Net Zero targets and biodiversity action. It is committed to ensuring that investment supports a just transition in Wales and as such is working in partnership to identify appropriate financing models, coordinate and deliver investment for Net Zero Wales and the 30×30 biodiversity target. Some key actions being taken include: a. Establishment of the Ministerial Portfolio for Climate Change in 2021, with an annual budget of over £2 billion to support Net Zero and tackle biodiversity loss in Wales. b. Supporting financial disclosures and accounting in Wales through the delivery of Innovation and Digital strategies. c. Continuing the Welsh Government Energy Service facilitating project financing for public sector, community energy and decarbonisation schemes. d. Establishment of Sector and Regional Funds and Boards examples including the Economy Futures Fund, Circular Economy Fund, City Region Deals, Net Zero Industry Wales and Woodland Financing Group. e. Contributing to the Global Biodiversity Framework by developing an action plan to deliver the 30×30 biodiversity target, including consideration of statutory biodiversity targets, ethical and transparent private investment in nature recovery. f. Commitment of the Development Bank of Wales to support Net Zero and climate adaptation targets. This includes the launch of the Bank’s Green Business Loan Scheme providing Welsh businesses with a package of support to help them reduce carbon emissions and save on future energy bills.

Northern Ireland Executive

18. The Northern Ireland Executive has a number of key growth and energy-related strategies in place focusing on energy decarbonisation and growth of the green economy – the Energy Strategy “Path to net zero”, the 10x Economic Vision (Department for the Economy) and the Green Growth Strategy (Department of Agriculture, Environment and Rural Affairs). These strategies focus on delivering self-sufficiency in affordable renewable energy whilst invigorating growth in the economy fuelled by green tech, skills and processes. Delivering decarbonisation at pace is in addition legislated by the Climate Change Act ( NI ) 2022 whilst the 10x Economic Vision paper delivers on the Energy Strategy target of doubling the size of Northern Ireland’s green economy to £2 billion by 2030 through 3 themes of Sustainability, Innovation and most crucially Inclusion – which is in line with Section 75 of the Northern Ireland Act regarding equality in public duties. A range of key enablers are proposed: a. Through the Green Innovation Challenge Fund, the Department for the Economy, in collaboration with DAERA, has developed key focus areas of Net Zero Utilities, Net Zero Future Fuels, Soil Nutrient Separation, and Advanced Gaseous Storage. It is anticipated that the program will be live by 2024 to at least £20 million range, subject to funding. b. Through the Green Growth Support Package, the Northern Ireland Executive is collaborating with UK government and Innovate UK to potentially launch a green growth support package during 2023 to deliver hydrogen generation hubs, biofuels / synthetics / eFuels options, and eco parks. It also supports novel use of existing renewables to generate new zero emission fuels and energy. Capital support remains subject to funding but is potentially up to £30 million. c. To support Energy and Resource Efficiency, Invest N I (economic delivery partner to the Department for the Economy) provides technical consultancy support to all Northern Ireland businesses with an annual energy and resource spend in excess of £30,000. This support offers fully funded technical audits, feasibility studies, and advice, complete with a report and recommendations to help businesses identify cost and carbon savings through energy and resource efficiency. The Resource Efficiency Capital Grant from Invest N I provides support to eligible Invest N I client companies to help with the cost of investing in resource efficient technologies that will drive savings and business productivity. Grants of up to £50,000 are available to help with the purchasing of new equipment. Invest N I also supports delivery of sustainability reports which are available to all Northern Ireland businesses with an annual energy and resource spend in excess of £30,000. The aim of such reports is to provide a holistic assessment and understanding of a business’s environmental performance across a number of areas, such as Raw Materials, Energy, Carbon, Packaging, Biodiversity and Waste.

1.4 Building on our foundations – pillars of strategic action for green finance

19. In 2022, we issued a call for evidence to support the development of this Strategy. The call for evidence asked stakeholders a range of questions to provide a) an evaluation of the existing policy framework and b) gather evidence on where future government policy could support industry to deliver on their ambitions. We received 134 responses from financial institutions, companies, trade associations, local authorities and NGOs . The call for evidence, and a series of associated stakeholder engagement roundtables and workshops, has provided an accurate and timely picture of the policy issues most pressing to market participants. A summary of the evidence and feedback is found in chapters 2 and 3.

1.4.1 The interaction between Align (greening finance) and Invest (financing green)

20. The remainder of this Strategy sets out 2 pillars of strategic action where the UK government will act to unlock green finance:

Chapter 2 – Align sets out the regulatory framework, tools and channels to enable the financial services sector to align activity with a pathway to a net zero, resilient and nature positive global economy – greening the financial system.

Chapter 3 – Invest outlines how government and public finance institutions are mobilising private capital into the sectors and technologies needed to deliver our targets – financing our green objectives.

21. The Strategy also sets out how we are leveraging UK leadership to forge the way to a truly global green financial system, thereby helping shift the trillions needed in private investment to meet global needs whilst building close relationships with international partners.

22. For both domestic and international action, the steps taken within each chapter will be highly complementary, with efforts to green the financial system facilitating investment at scale. To secure the objectives set out in the ‘Invest’ chapter, delivery of ‘Align’ will be essential.

Box 3: The role of green finance in the global response to climate change and biodiversity decline The greening of global financial systems is a pre-requisite for meeting financing needs in emerging markets and developing economies ( EMDEs ) where the bulk of investment to reach net zero, protect nature and adapt to climate impacts need to take place. This is why the UK COP 26 Presidency placed an emphasis on driving mobilisation of finance from both public and private sources, coupling unprecedented commitments from the private sector with a clear plan for delivering on the $100 billion climate finance mobilisation goal. This strategy represents a key part of our actions to facilitate the meeting of EMDE financing needs, building on the ICF Strategy and the ‘UK government’s strategy for international development. EMDEs face immense challenges and are critical partners in delivering effective solutions to our collective climate and nature crises. We want to share expertise with these markets to facilitate increased ambition, to generate shared prosperity and accelerate the global transition in a just and inclusive manner. This means working bilaterally to share UK financial sector expertise; as well as working in collaboration with other countries, philanthropy and the private sector, through initiatives like the Just Energy Transition Partnerships. It also means scaling innovative financing instruments which are capable of mobilising investment into harder to reach sectors and geographies, and developing sustainable capital markets to leverage both local and international sources of finance. Beyond our actions to further leverage the private sector, we will continue to strengthen international support to deliver on the priorities of EMDEs , especially to those most vulnerable. This includes continuing to scale up public finance through the delivery of our £11.6 billion I C F commitment between 2021/22 and 2025/26, including delivering a balanced split between support for adaptation and mitigation and investing at least £3 billion in the protection and restoration of nature. We will continue to ensure that climate finance reaches the communities who need it most, including through the UK-Fiji-led Taskforce on Access to Climate Finance and its country pilots in Bangladesh, Fiji, Jamaica, Rwanda and Uganda. Acknowledging that some impacts of climate change are now irreversible, we will build on the progress made on funding arrangements for loss and damage at recent COPs. In tandem with our direct support for EMDEs , reforming the international financial architecture will lay the groundwork for system-wide change. The UK is taking a leading role, including by supporting the Bridgetown Agenda and operationalisation of the IMF ’s Resilience and Sustainability Trust. The UK is calling for the Multilateral Development Banks ( MDBs ) to unlock billions of dollars in new lending by implementing the recommendations of the G20 Review of MDBs ’ Capital Adequacy Framework. We are championing the use of Climate Resilient Debt Clauses, with UK Export Finance becoming the first bilateral Export Credit Agency to offer these. And we are supporting the Canada-led Global Carbon Pricing Challenge and its aim to triple the coverage of carbon pricing globally, which is critical for greening finance flows. As the cost and difficulty of action increases, the world must seize the opportunity to invest for our common future. Moving forward to setting the new post-2025 goal on climate finance and implementing the Global Biodiversity Framework, it will be critical to use all forms of finance in delivery of our climate and nature goals. That is why the UK will continue to emphasise the importance of coherent international action to green the financial sector, of effective use of concessional finance to protect the most vulnerable and mobilise private finance, and of reaching scale through the international financial architecture.

1.4.2 Transition finance

23. Two areas stakeholders drew out in their feedback were a) the need for government to support industry to develop and deploy innovative financial products and services to continue to attract international business, and b) the need for government to work with industry to develop a high integrity approach to transition financing.

Box 4: Description of transition finance While green finance refers to the financing of activities that can already be deemed as ‘green’, ‘transition finance’ refers to financial products and services that support higher emitting companies and activities to become green. These instruments are generally used by companies seeking to reduce greenhouse gas emissions, and should be part of a credible decarbonisation pathway that is consistent with global climate goals. Many of the products and services being developed for decarbonisation also have the potential to be used in companies’ nature positive transition journeys.

24. Transition finance is especially relevant for heavy industries, which will need to undertake deep decarbonisation over a longer time period. Reaching net zero is going to require a whole economy transition, so decarbonising these industries will be critical, and as such it is vital they are able to maintain access to finance. In addition to investment into new green activities, we need to ensure that hard to abate sectors with a long-term role to play can also access the finance they need to transition.

25. Financial markets have been increasingly innovating to provide products and services that direct forward-looking capital to support higher emitters to finance genuine transition. New instruments such as sustainability-linked loans and bonds and transition bonds have grown rapidly, unlocking a broader scope of investment opportunities (see case study below). To uphold market integrity, transition finance should be consistent with global climate and nature goals and used by companies with clear transition plans and quantified targets.

Box 5: Case study – British Airways sustainability linked financing In 2021, British Airways was the first airline to receive a sustainability-linked loan tied to one of its sustainability targets. British Airways entered into a sustainability-linked asset-financing structure (through Enhanced Equipment Trust Certificates, commonly referred as EETCs ), with a total of $785 million raised to finance 7 new-generation fuel-efficient aircraft. The certificates mature between 2031 and 2035. The interest rate payable is subject to an increase of 0.25% points should British Airways fail to satisfy the Sustainability Performance Target for the financial year ending 31 December 2025. The Sustainability Performance Target selected for British Airways is to reduce CO2 intensity to 88.3 grams per passenger per kilometre flown in 2025, an 8% reduction compared to 2019. This target is a key milestone for the work towards the parent company, IAG Group’s, long term goal to achieve net zero carbon emissions by 2050, in line with the Paris Agreement. An independent second party opinion was obtained, which confirmed that the certificates align with the International Capital Market Association ( ICMA ) Sustainability-Linked Bond Principles. (View full size image) Source: IAG, British Airways, DNV, Department for Energy Security and Net Zero

26. It is vital that investor confidence is upheld in the ambition, additionality and comparability of the transition pathways that underpin transition finance instruments. There is a growing range of transition guidance and definitions available in the market. The UK government will continue to support and promote market development of high integrity and innovative new transition finance instruments that are consistent with a pathway to net zero and the Paris temperature goal.

27. In 2019 the UK government launched the UK Centre for Greening Finance and Investment ( CGFI ), a national centre established to accelerate the adoption and use of climate and environmental data and analytics by financial institutions internationally. Now, the University of Oxford, together with CGFI , is developing a new Transition Finance Centre of Excellence using funding from Banco Santander. The Centre will play a leading role in defining aspects of transition finance such as best practice sectoral transition plans and developing new capabilities for practitioners.

28. Disclosure of transition plans (see Chapter 2: Align) will also enhance the availability of reliable, comparable reporting on the transition pathways of UK corporates and financial institutions, and provide a robust evidence base for the transition finance market. This will provide a mechanism for organisations to demonstrate to investors their long-term transition strategy and unlock financial flows toward areas of the economy that need to transition.

1.4.3 Capturing the opportunity through a new Transition Finance Market Review

29. Innovations in transition finance are gathering pace. Now is an opportune time to convene market experts to look systematically at how to ensure new transition finance instruments are developed and structured with high integrity and using UK based financial services expertise.

30. The UK government is commissioning a review into how the UK can become the best place in the world for raising transition capital. The Transition Finance Market Review will consider what the UK financial and professional services ecosystem needs to do to become a leading provider of transition financial services and innovative instruments on the pathway to 2050. The review will research, develop ideas, identify opportunities, and showcase best practice. It will consider what market tools the private sector could provide that would be most impactful to create the conditions for: a. Scaling transition focused capital raising with integrity, and the market for new, innovative transition finance instruments (such as sustainability linked debt and transition bonds); b. Maximising the opportunity for UK based financial services to develop, structure and export transition finance services; and c. Positioning the UK’s professional services ecosystem as a global hub supporting this innovative activity (legal; accountancy; consultancy; data and analytics; skills and education). 31. The Review will be led by an external expert, who will be supported by a panel of advisors, and a small secretariat. The review will leverage and align with ongoing Transition Plan Taskforce work (see section 2.2.2). It should look at international comparisons, and prioritise international coherence and interoperability (consistent with our goals in section 2.6.1). This Review will have regard to the UK Listing Review led by Lord Hill and its recommendations on how to encourage more high-quality UK equity listings and public offers, along with the government’s response. We are acting on Lord Hill’s recommendations, for instance in our consultation on reforms to the UK’s prospectus regime to make regulation more agile and effective, and facilitate wider participation in the ownership of public companies.

Chapter 2: Align – Enabling the market to align with UK climate and environmental goals

1. The UK made a commitment at COP 26 to become the world’s first Net Zero-aligned Financial Centre. Meeting this ambition will better position the UK’s finance sector to seize the opportunity from the transition to a net zero, nature-positive and resilient economy, in line with the Paris Agreement[footnote 24] and Kunming-Montreal Global Biodiversity Framework[footnote 25].

2. This chapter sets out actions the UK government will take to achieve this ambition, building on Greening Finance: A Roadmap to Sustainable Investing (2021), and on stakeholder feedback received in our Call for Evidence. This includes improving the quality and quantity of sustainability-related information and data provided to the market, supporting the development of related tools and frameworks and using policy levers to shift and scale up the availability of finance for these goals. This will ensure we have the world-leading market frameworks in place to raise ambition on global standards and translate financial activity into real-world impact.

Box 6: Call for Evidence feedback – stakeholder views on UK next steps Ask 1 : Give clarity on the UK government’s expectations for the UK finance sector and the action they should take in response to the global transition to a net zero, resilient and nature positive economy. We address this in section 2.1.

: Give clarity on the UK government’s expectations for the UK finance sector and the action they should take in response to the global transition to a net zero, resilient and nature positive economy. We address this in section 2.1. Ask 2 : Implement a regulatory and disclosure framework that ensures investors and consumers receive the information they need from businesses and financial firms, and that new investment tools and market frameworks are robust and protect consumers. We address this in Sections 2.2 – 2.5.

: Implement a regulatory and disclosure framework that ensures investors and consumers receive the information they need from businesses and financial firms, and that new investment tools and market frameworks are robust and protect consumers. We address this in Sections 2.2 – 2.5. Ask 3: Maximise interoperability between the UK’s green finance regulatory framework and those of other major financial centres and raising global standards whilst enabling market participants to operate seamlessly between jurisdictions. We address this in section 2.6.

2.1 A pathway towards a UK Net Zero-aligned Financial Centre

2.1.1 What is a Net Zero-aligned Financial Centre?

3. Our aim is for UK financial firms’ activities to be consistent with the pathway towards our domestic and global net zero objectives, including our nationally determined contribution under the Paris Agreement, and our domestic carbon budgets. The key components of our strategy towards this pathway include:

UK financial institutions having a robust firm-level transition plan setting out how they will decarbonise as the UK meets its net zero targets

strong government oversight of the financial sector as a whole to ensure financial flows shift towards supporting net zero[footnote 26]

4. The creation and implementation of high quality transition plans provides the key vehicle for driving change, and companies themselves are well placed to design their transition pathway in line with their wider objectives and existing strengths. To support companies in their efforts and encourage quality and consistency, the Transition Plan Taskforce ( TPT ) is developing the gold standard for private sector transition plans. The government also has a role in overseeing their progress, and ensuring it adds up to progress against domestic and global net zero objectives.

5. Transition plans are important for joining up the strong domestic and international work on sustainability disclosures and the private sector leadership on net zero commitments made in the run up to COP 26. They help ensure these pledges turn into real action by companies that ultimately will drive the transition to net zero.

6. We are clear that there is no pathway to net zero without protecting and restoring nature. In the landmark Kunming-Montreal Global Biodiversity Framework, the UK signed up to international goals and targets to put nature on a path to recovery by 2030. As part of this, we committed to ensuring that large and transnational companies and financial institutions regularly monitor and disclose their risk, dependencies and impacts on nature.

7. As we transition to net zero, we will also take action to prepare for the physical impacts of the changing climate, seeking to align finance flows with a climate resilient economy and increase investment in adaptation.

8. The Net Zero-aligned Financial Centre framework sets out how the government’s green and sustainable finance policies work toward bringing about the net zero transition in the real economy and provide government oversight to ensure the shifting of financial flows. The framework brings together public and private sector action in 3 related areas: a. Transparency: We will ensure the right information and data flows from the real economy to financial firms, and from financial services to end investors, to inform stakeholders. This will support financial firms’ own disclosure and investors’ capital allocation. See section 2.2 for more detail on Transparency. Key policy levers include Sustainability Disclosure Requirements (see section 2.2.1), transition plans (see section 2.2.2), financial product labelling (see section 2.2.5) and support for initiatives seeking to improve global data coverage and tracking capability (section 2.6.1). b. Tools for transformation: We will support the development of tools and frameworks that all financial market participants will need to incorporate information into investment decisions and monitor their progress on sustainability so that financial markets can act upon the data provided. As part of this, we will continue to promote interoperability with other jurisdictions. See section 2.3 for more detail on Tools for transformation. Key policy levers include our work on benchmarks (see section 2.3.4) and ESG ratings (see section 2.3.3). c. Transmission channels: We will use government policy levers to shift and scale up the availability of finance for the transition to net zero by i) de-risking green investments and lowering their cost of capital, ii) broadening pools of capital and the investor base, and iii) enabling investors to influence corporate practice. See section 2.4 for more detail on transmission channels. Policies such as the UK Infrastructure Bank (see section 3.2.2), Solvency UK (see section 2.4.1), our Green Gilt programme (see section 2.4.2), and our work on investor stewardship (see section 2.4.3) will support delivery of the Net Zero-aligned Financial Centre framework.

Figure 3: Net Zero-aligned Financial Centre framework

(View full size image)

Data from figure 3: Financial Sector Transition Pathway (Government accountability) Transparency ( SDR ) Informing investors and consumers through the disclosure of information by corporates and in the financial sector. (Companies > KPIs ) Tools for Transformation Utilising financial markets and products of the financial system to support investors to act on the informationTransmission. (Financial Markets > KPIs ) Transmission Channels Building new markets and tools that link the financial sector to the real economy to shift financial flows. (Sector Markets > KPIs ) Cost of capital

Access to liquidity

Changing corporate practice Alignment with Net Zero Transition Pathways Our aim is for UK financial firms’ activities to be consistent with the pathway towards our domestic and global net zero objectives. For UK investments, this means sectoral pathways developed in line with the Net Zero Strategy. (Real Economy > KPIs ) KPIs Periodically reviewed with time-bound decision thresholds leading government to consider action for each policy lever. (Informed by International Comparisons)

9. The Paris Agreement aims to strengthen the response to climate change in a variety of ways, including through making financial flows consistent with a pathway towards low GHG emissions and climate-resilient development. Our aim is for UK financial firms’ activities to be consistent with the pathway towards our domestic and global net zero objectives, and many have already committed to aligning their activities with Net Zero through initiatives such as the Glasgow Financial Alliance for Net Zero ( GFANZ ) and Race to Zero, championed under the UK’s COP 26 Presidency. Sectoral pathways for the UK are being developed in line with the UK’s Net Zero Strategy, and we will continue working to strengthen understanding of international transition pathways, including by drawing on work to enhance international tracking, remove reporting barriers and improve interoperability.

2.1.2 Measuring progress

10. Key to ensuring that the UK’s Net Zero-aligned Financial Centre framework delivers the outcomes necessary, will be the development and application of appropriate key performance indicators ( KPIs ). These KPIs will help to target our policies and measure their outcomes, focusing not just on sustainable finance outcomes, but also on the impact on the UK’s growth and competitiveness. We intend to engage widely with stakeholders on our approach to these KPIs with a view to finalising our framework in 2024.

11. The areas we envisage these KPIs potentially covering include topics such as: the quantity and quality of sustainability reporting and transition plans; consistency of finance flows with climate goals; the size of green finance markets; jobs and skills in green finance; and the competitiveness of the UK as a global green finance centre.

12. The government will regularly assess the effectiveness of our policy within the Net Zero-aligned Financial Centre structure, through periodic monitoring of KPIs and appropriate policy adjustment, ensuring that government is transparent and accountable for driving the transition of the finance sector.

2.2 Transparency: Comparable and consistent information flows

13. The bedrock of financial markets is information. Market participants need consistent, comparable data and information to flow from the real economy into their decision-making. This allows asset owners to better understand which projects will have the greatest positive climate impact; it enables financial firms to lend or borrow money based on a timely and accurate assessment of climate and nature risks; and it empowers companies themselves to better tell their stakeholders how they will reach their climate and environmental objectives. Ultimately, more information should lead to more accurate pricing in markets.

14. The UK has already taken a number of steps to ensure market participants have the data they need. This includes: becoming the first G20 country to require Taskforce on Climate-related Financial Disclosure-aligned ( TCFD ) disclosures across the economy; setting out a comprehensive approach to disclosure in the 2021 ‘Greening Finance: A Roadmap to Sustainable Investing’, and being the first government to fund and fully support the creation and progress of the Taskforce on Nature-related Financial Disclosures ( TNFD ). The UK government is committed to continuing on this path, and is creating an effective disclosure framework for sustainability information. We know the importance of getting this right, balancing investor needs for information with the burdens of providing that information.

2.2.1 Sustainability Disclosure Requirements

15. ‘Greening Finance: A Roadmap to Sustainable Investing’ (2021) set out the UK government’s long-term strategy to ensure investors and consumers are able to access the sustainability information they need[footnote 27]. Our plan for Sustainability Disclosure Requirements ( SDR ), a streamlined disclosure framework for sustainability information, is central to this. The SDR framework brings together new and existing sustainability reporting requirements for business, the financial sector and investment products. This will enable market participants to identify investment opportunities, ensuring that sustainability claims stand up to scrutiny and protect against consumer harms such as ‘greenwashing’.

16. A key aspect of the UK’s disclosure framework has been the requirements aligned with TCFD recommendations. The TCFD is an industry-led group, set up in 2015, tasked with developing a disclosure framework which could apply to any company in any geography, supporting them to consider and report on their climate risks and opportunities in a uniform way.

17. Given the positive market reaction to the framework and subsequent voluntary reporting, in our 2019 Green Finance Strategy we set an expectation that all listed companies and large asset owners should disclose in line with TCFD by 2022. In addition, we set up a cross government and regulator taskforce to consider the appropriateness of mandatory disclosure requirements and coordinate thinking. The taskforce ultimately advised that mandatory disclosure requirements should be introduced to improve the quantity, quality and consistency of reporting, and in November 2020 the government set out a commitment to introduce economy-wide requirements by 2025.

18. We have delivered on this commitment, becoming the first G20 government to do so: a. New regulations on 28 October 2021, required listed companies with over 500 employees, alongside private companies and Limited Liability Partnerships ( LLPs ) with more than 500 employees and a turnover of over £500 million to disclose their governance, strategy, risk management and use of metrics and targets regarding climate risks and opportunities, within their annual Strategic Report. This must include the use of scenario analysis. These new requirements apply for accounting periods starting on or after 6 April 2022.[footnote 28] b. As of the end of December 2021, the the FCA introduced climate-related disclosure requirements aligned with the TCFD ’s recommendations for the following regulated firms: premium listed companies, issuers of standard listed shares and global depositary receipts, asset managers, life insurers and FCA -regulated pension providers. c. From 1 October 2021, the government introduced requirements relating to occupational pension schemes reporting in line with the TCFD recommendations, to improve both the quality and governance and the level of action by trustees in identifying, assessing and managing climate risk.[footnote 29] On 1 October 2022 updated requirements were introduced in relation to the calculation and reporting of a metric which gives the alignment of the scheme’s assets with the goal of limiting the increase in the global average temperature to 1.5˚C above pre-industrial levels.[footnote 30] 19. The UK is currently in the first full year of TCFD -aligned climate-related disclosure requirements cycle. TCFD requirements will be a central part of the SDR framework as well as the foundation for the IFRS Sustainability Disclosure Standards (see Section 2.2.3). This provides UK firms with a firm footing as the UK requirements evolve to take into account IFRS Sustainability Disclosure Standards. 20. Government has announced plans to implement TCFD recommendations in central government annual reports and accounts, with a 3-year phased implementation extending to 2025 to 2026. This will align central government climate-related disclosure with best practice in the private sector, improve climate-related risk reporting, and embed climate change into organisations’ decision-making processes. The UK’s export credit agency, UK Export Finance, and some public finance institutions are already reporting or committed to reporting in line with the TCFD recommendations.

Box 7: Case study on UK Export Finance TCFD disclosure In 2021, UK Export Finance made its first TCFD disclosure, delivering on a commitment made in the 2019 Green Finance Strategy and becoming the first UK government department to do so. The disclosure set out UKEF ’s approach to climate change (across TCFD ’s 4 key pillars (Governance; Strategy; Risk Management; and Metrics and Targets) and highlighted key progress in embedding it across the department. Last year, UK Export Finance published its second TCFD disclosure, significantly enhancing its approach:[footnote 31] Estimating, for the first time, UKEF ’s financed emissions across its full portfolio, using an approach aligned with industry best practice and developed specifically for export credit agencies;

’s financed emissions across its full portfolio, using an approach aligned with industry best practice and developed specifically for export credit agencies; Setting ambitious quantitative 2030 decarbonisation targets for the oil and gas, and power sectors, which will guide UKEF on its pathway to net zero by 2050.

on its pathway to net zero by 2050. Committing to set an emissions intensity-based decarbonisation target for its aviation sector exposure within 12 months. Implementing TCFD has allowed UK Export Finance to better identify, assess and manage climate-related risks across all its activities, as well as identifying actions to support decarbonisation of its portfolio on its path to net zero by 2050. This includes actions UK Export Finance can take to support its customers’ transitions. It has also enabled UK Export Finance to play a leadership role among export credit agencies globally, encouraging others to follow the UK’s lead.

21. Building on the experience of the TCFD , the UK government has been one of the largest supporters of the global, market-led Taskforce on Nature-related Financial Disclosures ( TNFD ) – in recognition of the increasingly financial material risks associated with biodiversity loss. The TNFD has been set up to create a risk management and disclosure framework for organisations to report and act on evolving nature-related risks and opportunities, with the ultimate aim of supporting a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.

22. The TNFD consists of 40 individual Taskforce Members representing financial institutions, corporates and market service providers with assets under management ( AUM ) exceeding $20 trillion.[footnote 32] It now has over 900 institutions from across sectors and geographies in its TNFD Forum. There are currently over 100 pilots being officially conducted by the TNFD , with 10 National Consultation Groups ( NCG ) across the world, to facilitate market engagement, capacity building and adoption.

Next steps

23. We remain committed to implementing SDR . In line with the recommendation of the independent Net Zero Review, we will look to ensure close coordination on this between the government and the relevant regulators. We will set out further detail on the implementation of SDR in the summer to reflect the rapid development of international standards.

24. SDR should be introduced in a way that complements the UK’s wider legal framework for non-financial reporting, gives companies sufficient opportunity to adjust to new requirements and minimises duplication with other forms of corporate reporting. This is why the government is conducting a broader review of the UK’s non-financial reporting framework, which will take a fresh look at the wider legal landscape in which sustainability disclosures and other planned reforms will be situated. The review will begin with a call for evidence and aims to ensure that this wider legal framework delivers decision-useful information in a cost-effective, streamlined, and proportionate manner. We encourage stakeholders to respond to this when published.

25. In the following sections we set out our plans to implement the components of the SDR regime. This will include next steps on:

disclosure of transition plans (see section 2.2.2)

IFRS Sustainability Disclosure Standards produced by the International Sustainability Standards Board (see section 2.2.3)

Sustainability Disclosure Standards produced by the International Sustainability Standards Board (see section 2.2.3) supporting companies to understand and report on their GHG emissions, nature-related financial risks and impacts, and physical climate risks (see section 2.2.4)

emissions, nature-related financial risks and impacts, and physical climate risks (see section 2.2.4) fund labels and FCA approach to SDR (see section 2.2.5)

2.2.2 Transition plans

What are transition plans?

26. Transition plans typically set out a) high-level targets organisations are using to mitigate climate risk, including greenhouse gas reduction targets, b) interim milestones, and c) actionable steps the organisation plans to take to hit those targets. This is crucial in setting out how organisations will both drive change and adapt as the world moves towards a net zero economy. Many organisations, especially those with public-facing climate and environmental targets, have already started using transition plans. For example, of the 1,448 UK organizations that disclosed through CDP , a global voluntary disclosure platform, in 2022, 404 reported having developed a 1.5°C-aligned climate transition plan.[footnote 33]

Work of the Transition Plan Taskforce

27. To address the need for a better understanding of best practice within the market, government launched the Transition Plan Taskforce ( TPT ), co-chaired by H M Treasury and Aviva, in April 2022. The TPT is expected to publish its Disclosure Framework and Implementation Guidance for transition plans in the summer 2023.

28. The Taskforce will continue to develop its ideas, seeking to build consensus and both drawing on and influencing international disclosure standards. By establishing robust expectations for transition plans, the TPT is informing the implementation of the UK’s SDR . It will also enable investors to exercise more effective stewardship, by using consistent and comparable transition plans to better allocate and oversee capital.

29. In its second phase of work, the TPT will consider in more detail how nature’s recovery, climate adaptation and social impacts can be incorporated into transition plans. The TPT will also begin work to develop sector-specific transition plan guidance and develop the TPT Sandbox to accelerate new capabilities to support preparers and users of transition plans.[footnote 34]

30. Transition plans have the potential to mobilise green and transition finance at a transformative scale globally, creating new economic opportunities. The TPT intends to raise international ambition for a global baseline standard on transition plans and has prioritised interoperability by working towards alignment with elements of the draft IFRS Sustainability Disclosure Standards. The TPT has proposed to align with ISSB guidance by encouraging company transition plans to use the same reporting boundary as their wider corporate reporting. This approach would enable integration of international financial flows within company transition reporting. The TPT is also working with initiatives such as GFANZ to align guidance and support transition planning across the sector.

UK support for transition plans

31. Given the important role of transition planning, the UK government committed to moving toward mandatory disclosure of transition plans during our COP26 Presidency. The FCA has now introduced and updated rules for asset managers/owners and listed companies with comply or explain requirements to publish transition plans.

32. The government commits to consulting on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them. This will complement existing requirements in place from the FCA , and as such will ensure parity between listed and private companies, and ensure requirements are consistent and comparable across the economy. This consultation will take place once the TPT has completed its work in autumn/winter 2023. It will look to align with the FCA ’s existing obligations for transition plans, which require plans to be produced on a ‘comply or explain’ basis.

33. The government wishes to encourage companies to plan for their transition but does not wish to place undue burdens onto companies whose size or scale makes mandatory disclosure unreasonable. Therefore, we will consult on proposals with proportionality in mind and within the context of the UK’s non-financial reporting review, which will consider the thresholds used to determine which companies must comply with reporting obligations under the Companies Act 2006. As a result, any future obligations will only apply to the UK’s most economically significant entities – the vast majority of companies will not have additional burdens placed on them by these proposals.

34. The government will also work with the FCA to ensure transition plan requirements are delivered across the financial services sector alongside requirements across listed and private companies.

35. The government will also take proactive steps to encourage other jurisdictions to mandate transition plan requirements. This will include encouraging consistency with the TPT ’s guidance, which will go beyond the baseline for transition plans set out under the ISSB . We will advocate for the importance of international alignment and best practice in transition planning- collaborating with our partners through key forums such as the G7 , G20 Sustainable Finance Working Group ( SFWG ) and our leadership of the private finance workstream at the Coalition of Finance Ministers for Climate Action.

2.2.3 IFRS Sustainability Disclosure Standards

36. Over the last decade, many voluntary sustainability reporting standards and frameworks have been created in the market, responding to the increased demand for climate and sustainability information from market participants. Between 2013 and 2016, the number of reporting frameworks that focus on sustainability in a broad sense doubled to nearly 400.[footnote 35]

37. Given the global nature of financial systems, harmonisation and interoperability between jurisdictions is a priority for the UK in developing our approach to greening the financial sector. This can help facilitate growth by reducing unnecessary regulatory burden for businesses and financial service providers working across jurisdictions and maximise efficient flow of capital.

38. Recognising the importance of international harmonisation, at COP26 the International Financial Reporting Standards ( IFRS ) Foundation announced the creation of the International Sustainability Standards Board ( ISSB ) to develop IFRS Sustainability Disclosure Standards, with the objective to set a global baseline for sustainability reporting. The final version of the first 2 standards – a general requirement standard and a climate-related standard – are expected to be published in June 2023.

39. At CBD COP15 in December 2022, the ISSB further announced that it would incorporate water, biodiversity and ecosystems into its development of future standards, drawing on the work of the Task Force for Nature-Related Financial Disclosures ( TNFD ) and other relevant initiatives.

40. The UK government, financial regulators and many market participants have strongly welcomed the initiative to create the IFRS Sustainability Disclosure Standards. This builds on the UKs long history of support for the IFRS Foundation’s financial reporting standards, which are used by the UK and approximately 125 other countries.

41. Establishing the IFRS Sustainability Disclosure Standards is a ground-breaking step which recognises that many businesses and financial firms are global and have activities that cross borders. Sustainability Disclosure Standards will provide these organisations with a high-quality reporting framework and ensure investors have access to globally consistent and comparable information.

42. The UK government will continue to show international leadership in its support for the IFRS Sustainability Disclosure Standards. Meeting the recommendation of the independent Net Zero Review, we intend to launch a formal assessment mechanism as soon as the first 2 standards are published (expected in June 2023). This assessment will aim to ensure that the standards endorsed by the government for use in the UK are appropriate for UK companies. These standards will provide the basis for future obligations within company law and FCA requirements for listed companies, ensuring a single set of standards is applied across the UK regulatory framework. Further standards will be similarly assessed as they are published.

43. The government remains committed to introducing mandatory reporting against the UK endorsed standards, subject to the conclusion of the assessment process. Decisions on incorporating the endorsed standards into company law will be taken alongside future reforms to the UK’s non-financial reporting framework, as they are developed within the UK’s Non-Financial Reporting Review. Implementation of FCA requirements for listed companies will be taken forward independently once the standards are endorsed for use in the UK.

44. To support government in its decision making, the government intends to establish 2 advisory committees, the first of which is expected to be government led and will have a remit covering matters of public policy. The second committee, which will be supported by the Financial Reporting Council ( FRC ) and independently chaired, will have a technical focus and – among other things – be responsible for considering how the standards fit alongside existing reporting requirements for UK companies in scope. These committees are expected to be established by the time the ISSB launches its first 2 standards and framework documents will be published shortly. The government’s aim is for an endorsement decision to be made within 12 months of the final standards being published, but a decision will be made sooner if possible.

45. We would like to thank the ISSB for the excellent progress it has made to develop its initial standards and encourage its continued work to create a globally interoperable baseline on sustainability disclosures. The UK government and financial regulators, including the FCA and FRC , continue to support these efforts on the international stage. The government recognises that for the objectives of an international baseline to be met it is important that there is strong global take up of the standards, which we will support through our international engagement and development assistance.

2.2.4 Supporting businesses to understand and report on their greenhouse gas emissions, nature-related financial risks, dependencies and impacts, and physical climate risks

Emissions

46. For most businesses and investors, a key starting point to assessing climate risks and opportunities, or to setting a transition plan, is developing an understanding of energy use and greenhouse gas ( GHG ) emissions.

47. Disclosure of specified energy use and GHG emissions by the largest UK busi

Package of reforms and new initiatives across insurance, pensions and sustainable finance could add £2251 billion to the economy, according to new analysis by the City of London Corporation and Oliver Wyman.

The new report, Vision for Economic Growth – a roadmap to prosperity, is the result of months of collaboration with over 300 stakeholders across the financial and professional services industry and throughout the country designed to drive economic growth and jobs across the UK.

The roadmap identifies five key objectives to help the country escape from a low-growth trap, and allow the UK to play its part on the global stage, leading on the world’s key challenges ranging from artificial intelligence to climate change.

There is clear demand for a plan that addresses the needs of savers and consumers and unlocks growth for British businesses and the wider UK economy.

The roadmap, co-authored by eight leading industry experts from – Lloyd’s, Schroders, JP Morgan, EY, KPMG, Barclays, Glasswall and CIPL – offers concrete recommendations and outlines tangible economic benefit across key competitive advantages in UK FPS, sustainable finance and technological and data-driven industries whilst enhancing global policy and collaboration.

Chris Hayward, Policy Chairman at City of London Corporation, said:

“This is an industry shaped vision for what the financial and professional services could look like by 2030 and beyond and how we can help contribute an additional £225 billion of economic growth into the UK economy.

“This figure highlights not only the significance of UK financial and professional services to our economy, but also the urgency by which we must make these reforms to drive the country forward. In a time of mounting competition and economic headwinds, it’s time for a roadmap that future-proofs UK financial services and produces more investment, more jobs, new businesses and more funding for public services.

“Almost everyone in the UK interacts with financial services daily, from the smallest of transactions to life-changing events like taking out a mortgage to buying a new home. This is not a wish list of asks, this is about what the City could contribute, how we can help unlock a significant amount of investment into the system. We’re ready to do this and it’s paramount that industries, Government and regulators work together now to build a strong economy for the future.”

Nicholas Lyons, Lord Mayor of the City of London, said:

“The financial and professional services sector is the engine of our economy, but it needs regular maintenance checks. The UK’s productivity growth is low, GDP increases are sluggish, and wages aren’t keeping pace. The standard of living for many has been flat or declining and the prospects for the younger generation are uninspiring. But, given the right legislative and regulatory conditions, the financial and professional services sector can boost investment in our businesses and drive growth right across the country, financing our future.

“Delivering the far-reaching outcomes outlined in this report will depend on the public sector and private sector collaborating to boost our competitiveness, create great jobs nationwide, and secure a more sustainable future for all.

“It is vital that there is political consensus around these priorities too, so that there is a consistent effort, across the political spectrum, to get the UK back on a path to prosperity. This report is the roadmap. That work begins today.”

The roadmap has five key objectives:

Support the conditions for growth:

A financial and professional services council would provide urgency, direction, and impact as the sector looks to drive economic growth. Like the No10 Business Council, a Government FPS council will be able to support a new UK-focussed financial and professional services strategy that will drive economic growth across the entire country. The Council would represent an industry that that collectively employs over 2.5 million people across the UK and represents over 10% of UK GDP.

The Council would be tasked with advising Government on designing and implementing a long-term strategy for how financial and professional services can drive economic growth across the UK.

Raise investment levels:

We need a culture change across the pensions industry if we are to release the £75bn outlined in the Mansion House Compact. £50 billion from the defined contribution market by 2030 as agreed in the Mansion House Compact, including through a collective investment vehicle that benefits from greater skills and scale. With a further £25 billion to come from Local Government Pension Schemes.

Strategically deploying government investment will give better returns for taxpayers, leverage in far greater private capital and help transform the next generation of British start-ups.

Become a digital-first economy:

Adapting digital data verification across a range of products and services could benefit businesses and consumers up to £4.8 billion by 2030 , including by reducing fraud losses. Harnessing technology to provide a simpler, smoother, more secure system for customers and businesses will make our lives easier and our money safer.

Government should create a UK version of the US’s EDGAR system of machine-readable company filings to make it easier for investors to assess decision-useful information about public companies – such as revenue or emissions data – in real time. This will reduce the compliance burden on firms who can allocate more capital to innovation activities.

Anchor the UK as a leader in sustainable finance:

Sustainable finance markets are innovating rapidly. Making the UK a one-stop-shop for net zero by focussing on voluntary carbon markets, nature, and impact investing, would give us a competitive advantage in a market worth up to £97 billion for net zero transformation.

Develop world-class promotion and interconnectivity:

Creating a UK knowledge and support hub to showcase our offer to the world could attract an additional £24 billion of FPS exports, £700 million of FDI and 5,000 jobs from FDI by 2030. That means more jobs, more tax receipts, and better services for our country.

The UK is the 2nd largest services exporter in the world, therefore there should be a shift toward service-oriented trade partnerships. Services can be supported through nimble new agreements on data, digital or professional qualifications.

Looking ahead, the City of London Corporation will actively promote the roadmap’s outcomes to be realised in the upcoming UK Parliament and beyond, influencing global policymaking over the next decade. The City Corporation will establish key performance indicators (KPIs) to measure the roadmaps success and convene annually to track progress.

Lisa Quest, Partner and Head of UK & Ireland, Oliver Wyman, said: “The UK financial centre is a global magnet for not only the best and the brightest talents in a wide variety of professions, but also investment in innovative industries like fintech, making it an attractive place to do business and facilitate easy collaboration with the public.This ability to attract talent and money is an asset few rival centres can match.

“If we hope to revive Britain’s growth rate, extend prosperity across the UK, and build a sustainable economy that will deliver for future generations, we need to celebrate our financial centre and empower it to play a leading role in meeting the biggest global challenges of our time.”

Sheila Nicoll, Senior Public Policy Advisor at Schroders, said: “A long-term strategy for financial and professional services in the UK, which brings together, policymakers, government, industry and regulators, will provide a significant opportunity to help us build on our competitive advantages in the sector.

“The recommendations in this report highlight the urgent need for such a strategy to unlock the full potential of the sector in emerging areas, such as sustainable finance, including impact investment and natural capital and technology, including tokenisation. This, will in turn create greater prosperity for the UK economy, the job market and advancement of Britain as a global financial centre.”

Katharine Braddick, Group Head of Strategic Policy and Advisor to the Group CEO, Barclays said: “The UK has a long and successful track record as a key player in global markets. Industry collaboration with regulators and policymakers is crucial to ensure we have the right frameworks in place for the UK to continue to be a compelling and competitive place to do business. This roadmap will serve as an important tool for the public and private sector to elevate the UK on the international stage to achieve our shared ambition of driving economic growth and inclusive prosperity for the UK, its businesses and its people.”

Neylin Mutlu, Global Business Manager, Center for Carbon Transition and Sustainable Solutions, J.P. Morgan, said: “Sustainable finance can contribute significantly to growing the UK economy across all regions of the country while also helping to deliver better outcomes for the environment and society. This report gives balanced recommendations on creating the conditions to scale and accelerate finance for the transition and sets out steps to better enable financial institutions to facilitate capital and provide expertise to help clients realise and accelerate their transition objectives.”

Huw Evans, Partner at KPMG UK, said: “The UK is a world leader in financial and professional services but the last thing we can afford is complacency. This roadmap emphasises the importance of bolstering our credentials with international investors, maximising productive long-term investment and ensuring we are a natural home for emerging technologies.

“Making the roadmap a reality will require changes in policy, regulation and behaviours. Unlocking wider opportunities for the UK pensions market is just one of the ways that long-term investment can deliver better outcomes for savers and the economy alike. If all parts of the UK financial system work more closely together to support growth and investment, the roadmap can help make a lasting difference.”

Chris Woolard, Partner & Chair of the Global Regulatory Network, EY, said: “The UK’s financial services sector has a long history of supporting innovation, and as a result, it plays a vital role in driving domestic economic growth. However, with many traditional strengths being challenged by evolving macroeconomic factors and technological advancements, the financial services sector must ensure it too evolves accordingly.

“There is momentum for collaboration across high-growth sectors, and the recommendations announced today are important, tangible steps to ensure the financial services continue to support strong economic growth for the UK long-term.”

Rebekah Clement, Corporate Affairs Director at Lloyd’s, said: “This new report sets out a pathway that can ensure the UK economy maintains and strengthens its position as a leading global financial centre, driving future economic growth, investment and jobs across the country. The transition to a sustainable economy requires large-scale investment across multiple industries, and the UK’s insurance industry has a vital role to play in unlocking capital, as well as building societal resilience and protecting the vital progress being made.”

Claire Tunley, CEO of Financial Services Skills Commission, said: “This report shines a light on the critical areas the industry must strengthen to ensure the UK remains a world leader in financial services. A crucial part of this is ensuring our workforce is equipped with the right talent and expertise to build future skills, through upskilling, reskilling, and skills forecasting, which will boost productivity and innovation. This work is vital to tackle existing skills shortages and to ensure our sector remains globally competitive”.

Michael Spence, President and Provost of University College London, said: “London is one of the world’s great innovation-generating cities, with an incredible ecosystem of world-leading universities and research centres, renowned medical institutes, global companies and thriving SMEs. A long-term strategy for financial and professional services in the UK, which brings together policymakers, government, industry and regulators, is crucial to unlocking its full potential and will provide a significant opportunity to help us build on our competitive advantages on the global stage.

“The recommendations in this report highlight the urgent need for such a strategy to unlock the full potential of the sector in emerging areas, such as sustainable finance, including impact investment and natural capital and technology, including tokenisation. This, will in turn create greater prosperity for the UK economy, the job market and advancement of Britain as a global financial centre.”

Danny Lopez, CEO of Glasswall, said: “This roadmap underscores the importance of showcasing the UK’s financial and professional services like never before. Now, more than ever, efforts across the country can propel the sector to unprecedented heights. It is imperative that we continue to support an industry that is the very backbone of our economy and cement its position as a global leader for many decades to come.”

Michael Moore, CEO of British Private Equity & Venture Capital Association, said: “Private capital is making a growing contribution to the nations and regions of the UK. But it needs our strong financial and professional services sector to continue to develop so that the country reaps further benefits from the industry’s investment and long-term perspective.

“Our international competitors are not standing still, so as they continue to adapt, we must do likewise. These targeted reforms will help the UK to maintain its competitiveness and ensure that our investment in growth, innovation and people remains strong.”

Constantin Cotzias, European Director, Bloomberg, said: “The UK’s financial services sector is a key economic engine and competitive advantage for Britain but there is no room for complacency; this roadmap points the way to unlocking greater investment and innovation in order to drive sustainable, nationwide growth and prosperity.

Dan Watkins, BNY Mellon Head of Markets EMEA and Chair of EMEA Executive Committee, said: “With unique insights as the world’s largest custodian bank into how jurisdictions can put in place the right initiatives to deepen pools of capital to power economic growth, we were pleased to be involved in the development of this important report. We look forward to working with the City of London Corporation and the government to deliver on its recommendations.”

Stephen Bird, CEO, Abrdn, said: “How the City can better support the UK’s long-term prosperity is an urgent and critical debate. The good news is that momentum for positive reform appears to be building. This report from the CoLC is a substantial contribution that can help make sure that momentum is sustained – and abrdn is proud to have helped steer the outcomes of anchoring the UK as a leader in sustainable finance and showcasing the UK’s financial and professional services on the international stage.”

ENDS

Notes to editors

The Vision for Economic Growth: A Roadmap to Prosperity report can be accessed here 0001 Thurs 7th Sept: Vision For Economic Growth.

1 Implementing this Roadmap will unlock £225 billion of investment and economic growth into the UK. The £225 billion is made up of £100 billion in insurance reforms, £75 billion in Mansion House pension reforms, and £50 billion in net zero investments.

The City of London Corporation is the governing body of the Square Mile dedicated to a vibrant and thriving City, supporting a diverse and sustainable London within a globally-successful UK. www.cityoflondon.gov.uk

Secretary of State’s Foreword

The UK, along with the rest of the world, has faced exceptional challenges over the past 18 months. Our society, our economy, and our livelihoods have all been affected. In recovering from the pandemic, we must build on this country’s innovative foundations to create a robust and agile economy that works for everyone and is fit for future generations. Investment in innovation will be critical to achieving this, and to building a greener, healthier and more prosperous future for the UK.

Innovation is central to the largest challenges the world faces, from climate change and the ageing society to global pandemics. The UK must be in the vanguard of the response to these challenges. Now we have left the EU, we can move quickly to respond to these challenges, and other global opportunities, to cement the UK’s position as a world-leader in science, research and innovation. Furthermore, by supporting innovation in places, sectors, and businesses across the UK, we can level up the economy and create high-value new jobs and trading opportunities as we build back better.

The UK can look back on a proud history of changing the world through innovation. From the industrial revolution to the vaccine development of the past year, the impact on our everyday lives is undeniable. We want to rekindle this flame in all UK citizens, helping them to seize the opportunities that the innovation economy will bring.

The next decade will be one that features significant change. With the climate emergency and our net zero target – as well as the pace of technological innovation – the 2020s are a pivotal moment for the UK’s future prosperity. That is why Government has published “Build Back Better: our plan for growth” which focuses on infrastructure, skills and innovation as the foundation of recovery and growth across the economy.

To build on this foundation and seize this moment in history, this UK-wide Innovation Strategy sets out our long-term plan for delivering innovation-led growth. Its primary objective is to boost private sector investment across the whole of the UK, creating the right conditions for all businesses to innovate and giving them the confidence to do so. We will also show direct leadership and action – such as through new missions and backing technologies of the future – clearly signalling where the Government will focus in the future.

The Prime Minister recently reiterated our objective of making the UK a global science superpower, turning world-leading science and ideas into solutions for the public good. The Innovation Strategy contributes to that goal with an ambitious programme of work spanning the innovation landscape setting out our vision for the UK to be a global hub for innovation.

Our partners in the innovation system will be critical to delivering our ambitions, and I have asked Innovate UK and UKRI to operationalise this Strategy in order to achieve our shared objectives. We will work alongside other partners to do this, including universities and other research organisations, charities, research translation organisations such as Catapults, public sector research establishments and research and innovation institutes who will all play a key role in implementation of the Strategy. But most importantly of all this Strategy sends a message to businesses: make innovation central to everything you do and tell us what further steps we can take to help you to do so. Together, we will create the future.

At a glance

The UK Innovation Strategy sets out the government’s vision to make the UK a global hub for innovation by 2035.

Our Key Actions

Pillar 1: Unleashing Business – We will fuel businesses who want to innovate.

Increase annual public investment on R&D to a record £22 billion.

to a record £22 billion. Reduce complexity for innovative companies by developing an online finance and innovation hub between Innovate UK and the British Business Bank.

Invest £200 million through the British Business Bank’s Life Sciences Investment Programme to target the growth-stage funding gap faced by UK life science companies.

Consult on how regulation can ensure that the UK is well-placed to extract the best value from innovation.

Form a new Business Innovation Forum to drive implementation of this Strategy.

Pillar 2: People – We will make the UK the most exciting place for innovation talent.

Introduce new High Potential Individual and Scale-up visa routes, and revitalise the Innovator route to attract and retain high-skilled, globally mobile innovation talent.

Support, through Help to Grow: Management, 30,000 senior managers of small and medium-sized firms to boost their business’ performance, resilience, and growth.

Pillar 3: Institutions & Places – We will ensure our research, development and innovation institutions serve the needs of businesses and places across the UK.

Undertake an independent review, led by Nobel Laureate Professor Sir Paul Nurse, Director of the Francis Crick Institute, looking across the landscape of UK organisations undertaking all forms of research, development and innovation.

Allocate £127 million through the Strength in Places Fund to develop R&D capacity and support local growth across the UK.

capacity and support local growth across the UK. Invest £25 million of funding to the Connecting Capability Fund to help drive economic growth through university-business innovation.

Pillar 4: Missions & Technologies – We will stimulate innovation to tackle major challenges faced by the UK and the world and drive capability in key technologies.

Establish a new Innovation Missions programme to tackle some of the most significant issues confronting the UK and the world in the coming years.

Identify the key seven technology families that will transform our economy in the future.

Launch new Prosperity Partnerships to establish business-led research projects to develop transformational new technologies, with £59 million of industry, university and government investment.

Introduction: Why do we need an Innovation Strategy?

“Some people see innovation as change, but we have never really seen it like that. It’s making things better.”

Tim Cook, Apple CEO

“Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less…. I am one of those who think like Nobel, that humanity will draw more good than evil from new discoveries.”

Marie Sklodowska Curie, Nobel Laureate in both physics and chemistry

Building Back Better through innovation

Innovation is crucial to the UK building back better. It is at the heart of ‘Build Back Better: our plan for growth’ and so much else we want to achieve, from fighting coronavirus ( COVID -19) to achieving net zero and building Global Britain. Boosting innovation in the private sector is an essential part of the UK’s future prosperity and key to achieving UK objectives to be a force for good on global challenges around climate, biodiversity, prosperity and security. We are calling on businesses to invest in innovation, getting British firms to the front of the pack.

The different elements that characterise innovation – discovery, invention, development, and adoption – cannot be readily and cleanly separated. We need the whole ecosystem of businesses, government, R&D -performing organisations, finance providers, funders, international partners and others to come together. The 2020 R&D Roadmap set out the importance of this broad system and how we will nurture it. This Strategy focuses on how we support private sector innovation by making the most of the UK’s research, development and innovation system.[footnote 1]

The Innovation Strategy comes at the most critical moment for the United Kingdom in the post-war period, due to four factors:

We have left the European Union. To deliver on our Global Britain vision and become an international leader in innovation we must create products and services that are successful in international markets, that provide solutions to the great challenges the world faces, and that promote our values. This international aspect is central to the entirety of this Strategy and all elements contain a global dimension. We are creating an immigration system based on individual merit to bring in the best talent globally, regardless of country of origin, and securing trade deals that allow us to share our innovations more freely with the world. This is the foundation from which we must grow against an increasingly competitive international backdrop.

To deliver on our Global Britain vision and become an international leader in innovation we must create products and services that are successful in international markets, that provide solutions to the great challenges the world faces, and that promote our values. This international aspect is central to the entirety of this Strategy and all elements contain a global dimension. We are creating an immigration system based on individual merit to bring in the best talent globally, regardless of country of origin, and securing trade deals that allow us to share our innovations more freely with the world. This is the foundation from which we must grow against an increasingly competitive international backdrop. We have experienced the largest economic disruption since the Second World War. We need to supercharge economic growth to recover our losses and build back better. From this disruption comes great opportunity. The pandemic has shown us that major challenges can be resolved by ambitious investment in, and bold pursuit of, science, technology, innovation and collective entrepreneurship, including with our international partners. It has also shown the public what UK innovators can deliver when given ambitious support, freedom, and risk tolerance. In short, COVID -19 is our Sputnik moment.

We need to supercharge economic growth to recover our losses and build back better. From this disruption comes great opportunity. The pandemic has shown us that major challenges can be resolved by ambitious investment in, and bold pursuit of, science, technology, innovation and collective entrepreneurship, including with our international partners. It has also shown the public what UK innovators can deliver when given ambitious support, freedom, and risk tolerance. In short, -19 is our Sputnik moment. We face rapidly increasing competition in the global innovation race. We cannot rest on our laurels. Other countries – in both the public and private sectors – are investing boldly in innovation. The ambitious approach of countries such as South Korea Israel and the USA require us to learn and adapt to be more focused on how we work with the private sector to support investment in innovation.

We cannot rest on our laurels. Other countries – in both the public and private sectors – are investing boldly in innovation. The ambitious approach of countries such as South Korea Israel and the USA require us to learn and adapt to be more focused on how we work with the private sector to support investment in innovation. We sit on the cusp of transformative industrial change unlike any the world has seen before. Artificial Intelligence ( AI ) is creating machines that exceed human intelligence, whilst quantum technology will one day compute the currently incomputable, but these are just two examples. The countries that secure leadership in such transformational technologies will lead the world, enjoying unrivalled growth, security and prosperity.

The UK government has therefore placed innovation at the heart of its commitments to the British people:

Our Science Superpower agenda. The Prime Minister has announced our intention to be a science superpower by 2030, placing science, innovation and technology at the heart of his vision for the UK. This involves being to science and technology what we are to finance: a central hub of the global economy, and the country that the world’s most innovative people and firms make their home.

The Prime Minister has announced our intention to be a science superpower by 2030, placing science, innovation and technology at the heart of his vision for the UK. This involves being to science and technology what we are to finance: a central hub of the global economy, and the country that the world’s most innovative people and firms make their home. The 2021 Integrated Review ( IR ) put science and technology at the centre of our overarching national and international strategy. The IR sees science and technology as a key arena of systemic competition, with both extraordinary opportunity and severe risk. It highlights that establishing leads in specific technologies such as engineering biology, quantum, and AI is fundamental to our security and prosperity. The Innovation Strategy provides a key path to achieving leadership in these high-tech innovations as well as more conventional technologies, whilst enabling the research and innovation sector to manage risks in international collaborations through adoption of the Trusted Research and Secure Innovation advice. [footnote 2] , [footnote 3]

The sees science and technology as a key arena of systemic competition, with both extraordinary opportunity and severe risk. It highlights that establishing leads in specific technologies such as engineering biology, quantum, and is fundamental to our security and prosperity. The Innovation Strategy provides a key path to achieving leadership in these high-tech innovations as well as more conventional technologies, whilst enabling the research and innovation sector to manage risks in international collaborations through adoption of the Trusted Research and Secure Innovation advice. , The Defence and Security Industrial Strategy ( DSIS ). The DSIS provides the framework for government to work with industry to achieve the ambitions set out in the IR ; driving innovation and improvements in productivity to ensure that the UK continues to have competitive, innovative and world-class defence and security industries that underpin our national security and drive prosperity and growth across the UK. The Innovation Strategy will support these ambitions by creating an innovation ecosystem in which defence and security businesses can thrive.

The provides the framework for government to work with industry to achieve the ambitions set out in the ; driving innovation and improvements in productivity to ensure that the UK continues to have competitive, innovative and world-class defence and security industries that underpin our national security and drive prosperity and growth across the UK. The Innovation Strategy will support these ambitions by creating an innovation ecosystem in which defence and security businesses can thrive. Build Back Better: our plan for growth places innovation as one of its three pillars of economic prosperity. The UK government places strong emphasis on innovation as the way we will produce economic prosperity and build back better. The plan for growth includes a range of critical measures to support start-ups, scale-ups, and attract global talent. The Innovation Strategy builds on these steps taken to unleash UK innovators and private sector investment in innovation.

We are in a race to the top. The UK government, therefore, has an overarching goal of making the UK a global hub for innovation, placing innovation at the centre of everything this nation does. Through this we seek to generate disruptive inventions, the most tech-centric industry and government in the world, more ‘unicorns’, and a nation of firms and people that all aspire to innovate. Beneath this overarching objective our action is organised under four pillars, which are set out in detail in Part 3:

Pillar 1: Unleashing Business – We will fuel businesses who want to innovate.

Pillar 2: People – We will make the UK the most exciting place for innovation talent.

Pillar 3: Institutions & Places – We will ensure our research, development & innovation institutions serve the needs of businesses and places across the UK.

Pillar 4: Missions & Technologies – We will stimulate innovation to tackle major challenges faced by the UK and the world and drive capability in key technologies.

In Part 1, we examine innovation and why it is important. In Part 2, we explain our vision for innovation in the UK in 2035 and the underlying pillars that will support this vision. Part 3 sets out the steps we will take to achieve our vision and boost innovation across the UK. Part 4 provides detail on how we will implement this Strategy, measure success and maintain progress.

Implementing our innovation vision

This Strategy is only the first step. In the coming months and years, we will maintain a laser-like focus on realising our ambitions for innovation. We will track a range of quantitative metrics to measure our progress, alongside in-depth intelligence from businesses and other innovation stakeholders.

While this Strategy applies to the whole of the UK, it also sits alongside important work being taken forward by the devolved administrations, including Northern Ireland’s Decade of Innovation, ‘a 10X Economy’, [footnote 4] and Scotland’s Innovation Action Plan. [footnote 5] It will be followed by other key strategies which will set out further detail on the UK government’s innovation agenda, including the Net Zero Strategy, the Digital Strategy, the National Cyber Strategy, and the National Space Strategy.

Innovate UK is the government’s innovation agency. As part of UKRI , which is led by Dame Ottoline Leyser, they are responsible for key programmes that drive innovation across the innovation system and fund businesses of all sizes, across all sectors. The programmes they deliver create £7 of economic benefit for every £1 of public investment, crowding in private spending. Innovate UK will work with the other UKRI councils, as well as the UK government, devolved administrations and their agencies, and businesses, to deliver on the government’s agenda. Under the leadership of its Chief Executive, Indro Mukerjee, Innovate UK will bring forward their plan for how they will help to deliver this Strategy with targeted action in the coming months.

Following publication of the R&D Roadmap in July 2020, we created the Innovation Expert Group ( IEG ), chaired by Dr Hayaatun Sillem, to provide expert advice to government. The group has been instrumental in shaping innovation policy and developing this Strategy. As we move into the implementation phase, our plan is to establish a new Business Innovation Forum to galvanise action from the business community, drive implementation of the Strategy, and to hold government to account on the actions contained within the Strategy. Dr Hayaatun Sillem has agreed to act as chair of this new group. We are very grateful to members of the IEG who have supported our innovation policy development over the last year.

We are also grateful for the advice of the Prime Minister’s Council for Science and Technology ( CST ) which has informed this Strategy. [footnote 6] We will continue to consult the CST to draw on its expertise as we take forward our innovation agenda.

Part 1: Innovation today

What is innovation?

We define innovation as ‘the creation and application of new knowledge to improve the world’. It is this process which drives human progress. It is the process that brought televisions to our homes, put planes in the sky, and created the vaccines crucial to ending the COVID -19 pandemic. Innovation turns great ideas into value, prosperity, productivity and wellbeing. [footnote 7] It is the mechanism by which we adapt to new opportunities and challenges.

The UK has a long history of world-leading, and world-changing, innovation. From the industrial revolution onwards, British innovators and innovations have driven forward the engine of global progress. From Ada Lovelace, the first computer programmer, and steam pioneers like James Watt and Thomas Newcomen, to the foundational work of Tim Berners-Lee on the world wide web, which paved the way for the information age; from Edward Jenner creating the first vaccine in the 1790s to Dorothy Hodgkin advancing X-ray crystallography to visualise biomolecules and Anne McLaren leading developmental biology to pave the way for in vitro fertilisation. In recent years we have seen businesses such as Ocado use technology to revolutionise retail. And we have all seen the impact of the researchers and businesses who have created vaccines, diagnostics and treatments in response to the COVID -19 pandemic. The UK has a rich innovation legacy on which to build: the whole world has benefitted from UK innovations and our contributions to human progress.

Why is innovation important?

When we look around us in our daily life, everything we see can be considered a product of innovation. Computers, candles, televisions, satellites, kettles, cars, medicines, and even handwriting – all the products of past human innovation. Innovation does not just happen in physical products: software, designs, art and a wide range of other less tangible innovations are also central to the modern economy.

Innovation is the lifeblood of businesses. It allows firms to compete in the market, creating exciting new products and services for their customers and bringing down their costs by improving their efficiency. Innovative firms are more likely to win a greater share of existing markets and create new markets: many popular products that are highly valued today, such as smart phones or television streaming services, were conceived less than a generation ago. Innovative firms grow twice as fast as firms that fail to innovate. [footnote 8]

Innovation also creates huge value for society. It is at the heart of promoting wellbeing and quality of life for UK citizens, ensuring our security, and our global contribution to help solve the world’s biggest challenges. It is central to the UK’s international reputation and influence.

Case Studies: Achieving Net Zero and the Axis Energy Projects and Future Offshore Wind The UK set a world-leading net zero target to end our contribution to greenhouse gas emissions by 2050. Innovation, essential to achieving this target, has facilitated the rapid development and deployment of a wide range of low-carbon technologies, many of which have become drastically cheaper as they have been put to broad use. Continued innovation will be crucial to tackling climate change, from early-stage R&D to deployment of technology at scale. We will continue to support R&D and innovation to tackle climate change, including through our £1 billion Net Zero Innovation Portfolio, announced in the Prime Minister’s Ten Point Plan for a Green Industrial Revolution, as well as our forthcoming Net Zero Strategy. The Axis Energy Project, a project made possible through the Energy Entrepreneurs Fund, provided by the UK government. Based in Aberdeen, Scotland, Axis Energy developed a novel mooring system and foundation capable of accommodating the largest offshore floating wind turbines with excellent stability even under severe loading conditions contributing to our decarbonisation efforts. So far, the innovation has increased Technology Readiness Levels from research to deployment stage, and has shown that it is able to achieve a 30% reduction in levelised cost of energy and reduced operating costs.

The challenge: Innovation created the modern world, but progress is slowing

Innovation is vital for economic growth and increased productivity, creating more and better-paid jobs [footnote 9]. It enables businesses to grow and improves UK competitiveness. [footnote 10] In the last 100 years alone, GDP per person in the UK has increased by 340% – largely thanks to innovations enabled by technological developments like electrification and transportation advances.

Figure 1 shows regions and leading prosperous nations GDP per person since 1000 AD.

GDP per capita adjusted for price changes over time (inflation) and price differences between countries – it is measured in international $ in 2011 prices.

Source: Maddison project Database 2020 (Bold and van Zanden 2020)

Growth itself has been falling for several decades, from 4% per year in the 1950s and 1960s to 2% in the 2010s. In the UK, our productivity has fallen behind comparator countries, and is now around a fifth lower than Germany, France, and the US.

Figure 2: UK Productivity and total labour compensation, 2000-2019

Source: HM Treasury Calculations

This trend is broadly visible across the western world, [footnote 11] suggesting a systemic problem that, if addressed, could unlock a path to greater prosperity.

It has been argued that the major cause of slowing growth and productivity over recent decades is the slowing rate of innovation. [footnote 12] One key marker of this in the UK is our decline in the rate of growth in R&D spending – both public and private. In the UK, R&D investment declined steadily between 1990 and 2004, from 1.7% to 1.5% of GDP , then gradually returned to be 1.7% in 2018. [footnote 13] This has been constantly below the 2.2% OECD average over that period.

But it is not only that the amount of R&D investment that has declined in the UK.

A growing view also suggests that transformative research has slowed, or at least become far less efficient, suggesting broader problems with the way that we innovate. For example, the cost of every new drug has doubled every nine years since 1950. [footnote 14] Bloom et al report that ‘The number of researchers required today to achieve the famous doubling of computer chip density is more than 18 times larger than the number required in the early 1970s’. [footnote 15] It has been argued there is a sharp decline in the number of new ‘platform’ technologies, like computing, being created. [footnote 16]

This is not to say that contemporary innovation does not add value – there are several reasons transformative innovation requires greater input today than it did in 1950 – but it is clear that a bold approach that backs innovators will allow for greater returns on our efforts.

The opportunity: The UK is ideally placed to lead a renewed global spirit of innovation.

Addressing this challenge requires substantial and ambitious change within our innovation ecosystem focused on a number of fundamental issues, many of which are shared by other nations:

Business investment in R&D has fallen relative to our international peers.

has fallen relative to our international peers. There are low rates of technology adoption by firms that lead to underutilised knowledge.

We are at risk of a ‘brain drain’, the UK being a net exporter of talent.

Our workforce has skills gaps in some key areas which are at risk of growing in the coming years.

Our regulatory system often favours incumbent businesses over innovative new ones.

Growth is increasingly due to consumption, not due to investment.

Data, research and IP must be safeguarded to maintain competitiveness.

This Strategy aims to address these problems. We believe the UK is in a unique position to lead a renewed global spirit of innovation. To do this, we can build on our remarkable existing innovation system, ranked fourth in the world on the Global Innovation Index. We have world-leading assets:

We have one of the greatest innovation heritages in the world, having birthed modern science in the 17th century and transformed it in the 20th.

We are a global home to a number of key sectors likely to transform our world in future decades, such as life sciences, AI , and quantum.

, and quantum. We are also home to high-employment, high R&D investment sectors such as automotive and aerospace, who are key players in new technology development. We will publish the ‘Jet Zero Strategy’ this year.

investment sectors such as automotive and aerospace, who are key players in new technology development. We will publish the ‘Jet Zero Strategy’ this year. We have Europe’s best venture capital markets, with the highest volume of investment into tech companies in 2020 at $14.9 billion, and one of the leading centres of global finance.

We are the birthplace of 100 ‘unicorns’ – innovative companies valued at $1 billion or more. This is more than France, Germany and the Netherlands combined.

We have the world’s leading university system by size, with four of the top ten universities in the world and 18 in the Top 100.

We have the global scientific language and an inclusive culture, meaning talent from anywhere in the world should make the UK their home.

We have a rich diversity of funding sources for R&D , including a wealth of research charities such as the Wellcome Trust, Cancer Research UK, and the British Heart Foundation. Our national academies complement these sources by providing grants, prizes and fellowships to support and celebrate research, development and innovation activities.

, including a wealth of research charities such as the Wellcome Trust, Cancer Research UK, and the British Heart Foundation. Our national academies complement these sources by providing grants, prizes and fellowships to support and celebrate research, development and innovation activities. We have a global reputation for R&D excellence and leadership, which puts us in a strong position to capitalise on the interconnectedness of global innovation.

excellence and leadership, which puts us in a strong position to capitalise on the interconnectedness of global innovation. We have a global network that supports collaboration between researchers and innovative businesses, expanding the potential for UK innovation.

Each of these are major pulls for global talent, catalysts for global connectivity, and key tools for international influence. Many comparatively wealthy countries lack all these assets, suggesting we have tremendous potential both to go further and to collaborate with partners in the pursuit of mutual advantage. We will leverage these strengths whilst building on them and creating more. Together they make us ideally placed to be the hub of a new global innovation economy.

Case Study: Kick-starting the mobile money revolution in East Africa Over 2003-05 UK aid R&D and other support enabled Vodafone to launch a mobile currency service to support micro-finance. It led ultimately to services like M-Pesa, which is now used by over 28 million people in East Africa. In Kenya before M-Pesa, only 26% of the population had access to formal financial services. The typical way for workers to send money to their families was by hand or by sending heavily disguised packages on public transport, both highly risky methods. A survey of Kenyan women found that of the 37 per cent of women who owned a business, 96 per cent said that M-Pesa helped them scale their venture. In Kenya, mobile money has helped an estimated 185,000 women move from farming to business or retail occupations.

Source for ‘Kick-starting the mobile money revolution in East Africa’ case study. [footnote 17], [footnote 18]

The Innovation System

Innovation does not flow neatly in one direction from research to application; it is unpredictable and serendipitous, involving constant cycles of learning, testing, refining and discovery. The innovation process features innovators, businesses and researchers at the cutting edge, doing applied research or generating new products and services. But it also involves those businesses seeking to effectively adopt and implement existing innovations to improve their productivity, boost their profit margins and provide better value goods and services for consumers.

The research that universities and other publicly funded institutions do is also a crucial part of the innovation process, from basic research through to applied and translational research. Universities often work closely with businesses, charities and others to support research, and facilitate its commercialisation to meet a huge variety of social and economic goals. The interaction between universities and business is therefore vitally important for innovation.

More broadly, the innovation process occurs in an ecosystem in which companies, public research institutions, further education providers, financial institutions, charities, government bodies and many other players interact through the exchange of skills, knowledge and ideas, both domestically and internationally.

Figure 3: Innovation Ecosystem

Source: Graphic based on Luke Georgiou (Improving the Framework Conditions for R&D , 2015)

Part 2: Innovation tomorrow – Learning from the pandemic to create the world’s best innovation ecosystem

Innovation created the path out of the pandemic

For the past 18 months, an object 10,000 times smaller than the width of a human hair has had an unprecedented impact on our lives – the damage done by COVID -19 has affected all of us.

Yet during this COVID -19 pandemic, our innovation ecosystem has come to the rescue. The response to the pandemic is arguably the finest moment in the history of UK innovation. Our ability to understand COVID -19, and our path out of it, relied on innovation past and present and our ability to coalesce global innovation and international partners under a shared vision.

The COVID -19 pandemic shows how UK innovation can achieve amazing things. UK clinical trials identified the first effective COVID -19 drug, Dexamethasone, as a way to significantly cut mortality in patients with severe and critical COVID -19, saving hundreds of thousands of lives globally. [footnote 19] This built on long-term investment in our clinical research infrastructure through the National Institute for Health Research ( NIHR ) and the NHS. Testing technologies, such as PCR , LAMP and Lateral Flow, protected our hospitals, care homes, and broke chains of transmission to reduce R. Our ability to rapidly deploy this built on our deep pool of genetic expertise, growing in part from our post-war public investment in the Cambridge Laboratory of Molecular Biology, and from private companies like Oxford Nanopore and Optigene. Our world leading ability to track the evolving threat of new variants likewise relies on our innovation ecosystem’s strength in this area.

The UK government and its partners helped facilitate this, including through the RECOVERY trial funded by UK Research and Innovation ( UKRI ) along with the NIHR , and enacted by our brilliant science base. The government also established the Vaccine Taskforce, working with the team led by Dame Kate Bingham to expedite and co-ordinate research efforts in order to secure access to the most promising vaccines for the UK population and make provision for international distribution. The Vaccine Taskforce, leveraging a wide range of UK and international public & private expertise, laid the foundation of our path out of COVID -19.

The Vaccine Taskforce successfully brought together the collective effort of government, industry and academia behind a single innovation mission which contributed to the UK deploying the most ambitious vaccination programme in history. Funding through the NIHR and UKRI to the University of Oxford’s vaccine research built the foundations for its success, along with subsequent funding from the Vaccine Taskforce to enable clinical trials and early manufacturing. The UK Government invested over £300 million to scale up the UK’s manufacturing capabilities for vaccines now and for future pandemics. Nurturing and retaining this eco-system to continue to deliver innovative technologies, and respond quickly to future emergencies, is an essential legacy of the work of the Vaccine Taskforce.

Our innovation success during COVID -19 also sets us a clear challenge: to learn from it in order to improve how government departments, public organisations and industry can work together and deliver a step-change in innovation across the country.

We will base our plan to build back better on key lessons from COVID -19

We have identified ten core innovation lessons from the pandemic:

Prioritise innovation: We must place innovation at the heart of government, as we did in our COVID -19 response. This involves viewing and valuing our research, development and innovation system as a critical national asset that will more than pay for itself. We spent more on our government response to COVID -19 than we did on all innovation in at least the last thirty years combined. In the pandemic, our long-term investment in R&D came to fruition in ways we could not foresee, with many blue-skies investments in genetics and synthetic biology quickly finding new uses, and applied investments finding utility in ways not previously envisaged. When the next unexpected opportunity or pandemic comes, our innovation ecosystem must be even more prepared to meet it.

We must place innovation at the heart of government, as we did in our -19 response. This involves viewing and valuing our research, development and innovation system as a critical national asset that will more than pay for itself. We spent more on our government response to -19 than we did on all innovation in at least the last thirty years combined. In the pandemic, our long-term investment in came to fruition in ways we could not foresee, with many blue-skies investments in genetics and synthetic biology quickly finding new uses, and applied investments finding utility in ways not previously envisaged. When the next unexpected opportunity or pandemic comes, our innovation ecosystem must be even more prepared to meet it. Place bold portfolios of bets: We must be prepared to invest at risk, with a portfolio mindset. With the Vaccine Taskforce, we took a portfolio approach with the knowledge that value for money could not be assessed at the individual spending decision level. At present, value for money is too often assessed on a piece-by-piece basis, which prioritises low risk approaches and also increases bureaucracy by requiring greater oversight. A portfolio mindset in innovation means creating major successes by accepting that some failure is inevitable. Such failure is not ‘waste’, but rather the overhead for success.

We must be prepared to invest at risk, with a portfolio mindset. With the Vaccine Taskforce, we took a portfolio approach with the knowledge that value for money could not be assessed at the individual spending decision level. At present, value for money is too often assessed on a piece-by-piece basis, which prioritises low risk approaches and also increases bureaucracy by requiring greater oversight. A portfolio mindset in innovation means creating major successes by accepting that some failure is inevitable. Such failure is not ‘waste’, but rather the overhead for success. Use the weight of public sector procurement to drive innovation: We must build procurement in from the outset where possible. In the Vaccine Taskforce, UK government made clear its intent and process to purchase the outcome of the innovation pipeline, allowing industry to make the necessary investments by helping to manage risks and providing confidence. We will ensure that government procurement is proactive and long-term, signalling to industry our direction of travel and providing a route to market for innovative new products and services. This will be aided by ongoing government procurement reform post-EU Exit that aims to simplify the process, increase flexibility and enable public bodies to procure more innovative solutions from industry.

We must build procurement in from the outset where possible. In the Vaccine Taskforce, UK government made clear its intent and process to purchase the outcome of the innovation pipeline, allowing industry to make the necessary investments by helping to manage risks and providing confidence. We will ensure that government procurement is proactive and long-term, signalling to industry our direction of travel and providing a route to market for innovative new products and services. This will be aided by ongoing government procurement reform post-EU Exit that aims to simplify the process, increase flexibility and enable public bodies to procure more innovative solutions from industry. Embrace empowered teams: At its core, the Vaccine Taskforce was a small, empowered team with a clear expert Senior Responsible Officer ( SRO ). This allowed swift decisions, agility, and the ability to take risks in a way that lengthy committee-based decision-making struggles to provide. The focus on a clear SRO is also a common feature of other great innovation successes such as the Manhattan Project and Apollo Program, and of US ARPA agency programs.

At its core, the Vaccine Taskforce was a small, empowered team with a clear expert Senior Responsible Officer ( ). This allowed swift decisions, agility, and the ability to take risks in a way that lengthy committee-based decision-making struggles to provide. The focus on a clear is also a common feature of other great innovation successes such as the Manhattan Project and Apollo Program, and of US agency programs. Pursue speed: The RECOVERY trial and Vaccine Taskforce achieved success in historically unprecedented time. We need to consider how we can learn from this in how we support innovation, so that we can realise the enormous benefits at speed, as well as avoid the costs of delay in losing the race to create breakthrough products.

The RECOVERY trial and Vaccine Taskforce achieved success in historically unprecedented time. We need to consider how we can learn from this in how we support innovation, so that we can realise the enormous benefits at speed, as well as avoid the costs of delay in losing the race to create breakthrough products. Pursue public-private partnership: In the Vaccine Taskforce, the private sector was fully engaged from the beginning and throughout, and the UK government was able to leverage their enormous experience and capability. It allowed the private sector to deliver for government, and vice versa, providing the essence of effective partnership.

In the Vaccine Taskforce, the private sector was fully engaged from the beginning and throughout, and the UK government was able to leverage their enormous experience and capability. It allowed the private sector to deliver for government, and vice versa, providing the essence of effective partnership. Innovation is international: Without international cooperation and collaboration, the rapid development of COVID -19 vaccines would not have been possible. For example, the UK leveraged the strong science relationship it has built with countries like Brazil in recent years to facilitate overseas trials of the Oxford/AstraZeneca vaccine, which enabled the efficacy of the vaccine to be quickly and confidently assessed.

Without international cooperation and collaboration, the rapid development of -19 vaccines would not have been possible. For example, the UK leveraged the strong science relationship it has built with countries like Brazil in recent years to facilitate overseas trials of the Oxford/AstraZeneca vaccine, which enabled the efficacy of the vaccine to be quickly and confidently assessed. Bring discovery and engineering side by side: We must view discovery, invention, and development as existing in a cycle, not as siloed separate parts. The full range of expertise was present throughout the Vaccine Taskforce mission. Even now, discovery researchers seek to predict new variants, in turn guiding the vaccine design teams whilst logistics experts identify how to secure supply chains, repeating the cycle of discovery, invention, and development.

We must view discovery, invention, and development as existing in a cycle, not as siloed separate parts. The full range of expertise was present throughout the Vaccine Taskforce mission. Even now, discovery researchers seek to predict new variants, in turn guiding the vaccine design teams whilst logistics experts identify how to secure supply chains, repeating the cycle of discovery, invention, and development. Build, not just design: Manufacturing and logistics are critical elements of an R&D ecosystem. The Life Sciences Vision, published July 2021, highlights the importance of manufacturing for UK health resilience, and the importance of proximal R&D in increasing the speed of innovation. Difficulties with the supply of vaccines have highlighted the need to have national, or at least allied, manufacturing and logistic capabilities for key R&D sectors.

Manufacturing and logistics are critical elements of an ecosystem. The Life Sciences Vision, published July 2021, highlights the importance of manufacturing for UK health resilience, and the importance of proximal in increasing the speed of innovation. Difficulties with the supply of vaccines have highlighted the need to have national, or at least allied, manufacturing and logistic capabilities for key sectors. Value non-monetized benefits: We must realise that the non-monetised benefits of research, development and innovation investment are profound. The networks that grew from prior R&D investment were central to our Vaccine Taskforce success. A long-term legacy of COVID -19 must be to keep, and replicate, the creation of innovation networks. We must therefore prioritise a systems-level approach to R&D investment, realising that these factors are valuable in nurturing innovation.

If we can learn these lessons, we will create an innovation ecosystem that transforms the innovation potential of this country.

Vision 2035: The UK as a global hub for innovation

We have four objectives – which we refer to as ‘Pillars’ – in this Strategy which, if delivered, will achieve our vision of the UK as a global hub for innovation by 2035:

Pillar 1: Unleashing business – We will fuel businesses who want to innovate.

Pillar 2: People – We will make the UK the most exciting place for innovation talent.

Pillar 3: Institutions & Places – We will ensure our research, development & innovation institutions serve the needs of businesses and places across the UK.

Pillar 4: Missions & Technologies – We will stimulate innovation to tackle major challenges faced by the UK and the world and drive capability in key technologies.

Tracking progress towards our vision

Achieving our objectives will require years of co-ordinated activity between the public and private sectors. We will need to be clear about how we measure success and how we track our progress. As we implement this Strategy we will examine a range of quantitative indicators, including:

International comparators , such as: the Global Innovation Index, the World Bank’s Ease of Doing Business Survey OECD cross country data covering innovation activity with comparator countries

, such as: UK-focused studies , such as the UK Innovation Survey ONS’ publications covering R&D expenditures Small Business Surveys covering innovation, entrepreneurship and finance. A wide range of other quantitative metrics, including new research.

, such as

We will also keep talking to all types of businesses, innovators, universities, local leaders, research establishments and the innovation community to get their feedback on innovation in the UK. Taken together this quantitative analysis and qualitative intelligence will enable us to track progress and course-correct if we are at risk of falling short in any particular area.

Part 3: Achieving Vision 2035

Pillar 1: Unleashing Business – We will fuel businesses who want to innovate

Private sector R&D and innovation is paramount if we are to compete with international competitors and accelerate growth. This Pillar sets out the steps we are taking to create an ecosystem that encourages and enables all UK businesses to innovate. We will ensure innovators can access the right private finance at the right stage and provide targeted public support where there are gaps in private markets. We will ensure businesses have access to the right infrastructure to innovate and grow, including transport, digital and data, energy and utilities. We will create the world’s most agile regulatory system, consult on the development of a pro-innovation competition regime, and continue to safeguard UK intellectual property. We will unleash innovation through international trade and develop an innovation to export pathway. We will use government procurement as a lever to pull through innovation from idea to market. We will improve our overall ability to commercialise new ideas, drive the adoption of technologies by businesses and celebrate the innovations that businesses bring.

We need a surge of business-led innovation

We are committed to increasing direct public expenditure on R&D to £22 billion per year. However, public investment alone will not be sufficient to deliver the step change in innovation that this country needs. We need to see a significant increase in private sector investment in innovative activity. Private investment in innovation in the UK lags behind international competitors and UK firms adopt and diffuse innovation less than firms in leading countries.

To be a global hub for innovation means having companies of all sizes creating breakthrough new products, becoming more efficient, and scaling to full growth, all with an eye to the international as well as domestic market. Some UK firms are world-leading innovators, in sectors like financial services, aerospace, life sciences, clean maritime, creative industries and many more. The UK has a vibrant ecosystem of innovative start-ups, with more ‘unicorns’ (start-ups that have grown to be worth more than $1 billion) than any other country in Europe. [footnote 20] The UK is also seeing a growing number of scale-up businesses, who are more likely to undertake innovation activity than conventional SMEs , make an impact across a whole range of sectors and markets. [footnote 21] We will continue to support these businesses and recognise that scale-ups require bespoke support due to their distinct needs.

Through this Strategy we want to create the conditions for all businesses to innovate. Our analysis and discussions with businesses suggest that there are system-wide changes we must make to create the optimal policy environment for innovation to occur. This Pillar looks to boost private investment in innovation by addressing market failures, providing businesses with the clarity and confidence they need to invest.

Finance to Unleash Innovation

Businesses’ ability to access the right type of finance at each stage of development is critical to allowing innovators to develop their ideas and enabling businesses to grow. While the UK already has a robust R&D funding system, we want to ensure that it is easy for businesses and innovators to navigate, address any outstanding gaps, and encourage a more connected supply of public and private sector finance.

The steps on the innovation finance journey typically involve progression from the founder’s own resources, grant funding, seed equity and later venture and institutional capital – and ultimately debt finance, once a business has demonstrated it is able to generate sufficient cashflows.

Case Study: Axial3D and its ground-breaking 3D imaging and printing offerings for healthcare sector Axial Medical Printing Ltd, trading as Axial3D, aims to be the leading developer of systems for generating 3D printed models for surgical planning. Founded in 2014, the models assist consultants with pre-operative planning procedures. Axial3D, based in Belfast, Northern Ireland, has developed ground-breaking 3D imaging and printing offerings for the healthcare sector. Surgeons using its solutions report an average 62-minute reduction in the time taken for critical surgeries, and an 18% decrease in the time of stay in hospital for patients. Invest NI has provided Axial3D with support in areas such as R&D and skill development. Recently Axial3D was the recipient of a grant award as part of the ‘Business-led innovation in response to global disruption’ competition run by Innovate UK. To date, Axial3D has raised £3 million in additional funding to accelerate growth, bringing total fund-raising to date to £6 million. The company’s solutions were used in more than 200 hospitals globally last year and it is aiming to add another 500 hospitals in 2021.

Thanks to its vibrant financial sector and deep capital markets, the UK is a good place for businesses to access the funding they need for innovation. However, the economy does not stand still, and our support for innovative businessest recognises this. This is why, for instance, UK government has agreed to take forward all of the recommendations in Lord Hill’s UK Listing Review. This independent review has made a series of recommendations aimed at modernising markets regulation to encourage more innovative high growth companies to list in the UK, taking advantage of EU exit to change rules previously set at the EU level.

The UK also has the most mature venture capital market in Europe in 2020. At least £8.8 billion was raised to start and grow innovative businesses, [footnote 22] more than France and Germany combined. [footnote 23] Over the last five years, investment in UK deep tech companies has increased by 291%. Between 2018 and 2020 venture capital investment in UK R&D intensive businesses was at a level equal to 0.17% of GDP . [footnote 24]

Alongside private capital markets, the UK has an array of public interventions designed to enhance the funding ecosystem, with Innovate UK and the British Business Bank playing a key role. UK government has continued to strengthen its support offer for innovative businesses in particular.

However, gaps remain. Information asymmetries and coordination failures mean that smaller, earlier-stage businesses can be overlooked by investors, and IP -rich companies with substantial intangible assets can find it difficult to secure debt finance. [footnote 25] Information failures make it harder for some SMEs to navigate financial markets and identify the right type of finance to suit their needs, whilst others lack the investment readiness and skills to stand a good chance of securing it. To help close these gaps, UK government is currently consulting on reforms to help smaller SMEs access capital markets, via the Wholesale Markets Review.

We want to continue bringing together effective private markets with well-targeted public investment. Through the work of our key public bodies and by working alongside industry, we want to ensure the system is easy for businesses and innovators to navigate, and that UK innovators can access the right type of finance at the right time in order to grow.

Figure 4: Innovation Funding Landscape – Illustrative Overview

Source: British Business Bank and Innovate UK

The first step is to make private markets function as effectively as possible. The UK benefits from a diverse ecosystem of finance for innovative start-ups, including angel investors, equity crowdfunding platforms, and venture capital funds. UK government co-invests alongside private investors where private capital alone is insufficient to enable innovative companies to start, grow and scale-up.

Bank lending is the most viable route to finance for established businesses. There is a high level of success in applications for debt finance by innovative businesses. [footnote 26] However, businesses with potentially valuable intellectual property but a limited track record of generating sales may be perceived as a risky investment and therefore struggle to access capital. As we shift increasingly towards a knowledge-based economy, it will be vital to future-proof our finance market such that intangible assets – including intellectual property – are properly considered as part of lending decisions. [footnote 27]

To support this, UK Finance is devising training that upskills the next generation of lenders. This will improve lenders’ understanding of business innovation and support their ability to assess risk when lending to innovative businesses. UK Finance will seek to raise awareness and understanding of business innovation, the impact it has on business risk and the availability of different types of finance. UK Finance and its members will also continue to raise awareness of the availability of a range of finance options for innovative businesses. This will build on existing work by lenders such as Barclays, whose Funding Readiness Programme – part of its Eagle Labs platform – aims to demystify funding options available to entrepreneurs and provide the skills required to fund business growth.

Initiatives like the Newton Venture Program, established in 2020, are also helping to increase diversity in the access to finance system. The program aims to train the next generation of venture investors across the innovation ecosystem (including venture capitalists, Limited Partners, angel investors, accelerators, incubators, and technology transfer officers) with a mission to make the venture landscape more diverse, inclusive and representative of the population it serves.

To drive greater investment into innovative businesses across the UK, it will be important to unlock alternative sources of capital. The UK has the third largest pensions market in the world, but only a fraction of its investment supports innovation via UK-based venture capital and private equity funds. Defined Contribution ( DC ) pensions currently account for £670 billion of the UK’s pensions market and are growing significantly in size. Unlocking just a small portion of this for investment into productive finance assets could generate improved returns for pensions savers, while increasing the supply of private finance for innovation. Facilitating increased institutional investment into illiquid assets will also be an important step towards closing the gap between the UK and US venture capital markets.

To this end, HM Treasury, the Bank of England, the Financial Conduct Authority and the Department for Work and Pensions ( DWP ) are meeting regularly as a jointly-convened industry working group – the Productive Finance Working Group – to focus on devising solutions to the current barriers to investment in illiquid assets for DC pension schemes. The group is working to ensure that the conditions are in place to allow DC pension schemes to invest in a new fund structure, the Long-Term Asset Fund. This complements a range of work by DWP to facilitate increased investment, including:

Assessing whether certain costs within the cap on fees that managers of pensions can pass onto members – the ‘charge cap’ – affect pension schemes’ ability to invest in a broader range of assets, to ensure that pension schemes are not discouraged from such investments.

New rules, announced by DWP in June 2021, to allow pension schemes to smooth performance fees over multiple years, to reduce the likelihood of a breach of the charge cap. These fees may be required in order to invest in certain forms of productive finance such as scale-up companies’ private equity. The rules also require pension schemes to publish their net returns, and will come into force in October.

in June 2021, to allow pension schemes to smooth performance fees over multiple years, to reduce the likelihood of a breach of the charge cap. These fees may be required in order to invest in certain forms of productive finance such as scale-up companies’ private equity. The rules also require pension schemes to publish their net returns, and will come into force in October. A new call for evidence launched in June 2021, seeking to understand how the DC market could be consolidated to build the scale necessary for better outcomes for savers – including through greater ability to access innovative investment opportunities.

The UK government will engage closely with pension funds and the investment industry to understand the scope for industry-led initiatives that take advantage of these opportunities.

The UK government also supports innovative firms to access private finance through the Catapult Network. Many Catapults use their sector-specific knowledge and capability to improve businesses’ access to finance capacity and match them with prospective investors. The 2021 Catapult Review recommended that Catapults should share best practice across the network and proactively broker introductions between businesses and investors. Innovate UK’s Investor Partnerships programmes also helps firms to access further private finance, using grant funding to leverage equity investment from private sources of finance. £25 million of grant funding has leveraged £69 million of equity into 108 SMEs , and £288 million of additional follow-on investment.

Providing targeted public support

Alongside these measures, UK government will seek to crowd-in additional investment in innovation where there are gaps in private markets. The British Business Bank is an important delivery partner in our efforts to make finance markets for smaller businesses work more effectively, allowing those businesses to prosper, grow and build UK economic activity. Up to the end of last year, the Bank had supported the provision of £42 billion worth of finance to 170,000 small and medium-sized businesses across the UK, not including its COVID -19 debt and equity finance schemes. In 2020, the Bank supported around 21% of all announced equity deals (13% from existing equity programmes and 11% from the Future Fund) compared to 10% in 2019. [footnote 28]

The Bank forms a key part of our innovation funding system and will continue its efforts to facilitate investment in innovative companies. Funds supported by the Bank are more likely to invest in technology and intellectual property-based businesses than the overall equity market – 49% of deals supported by the Bank are in this sector, compared to 40% of the wider market. [footnote 29]

Since the first fund was launched in 2017, the British Business Bank’s regional funds have helped innovative companies access venture capital outside London and South East England while also building better regional business ecosystems. The Northern Powerhouse Investment Fund now provides 16 per cent of all equity investment in the region it covers. By March 2021 the Fund had directly invested £256m in over 840 ambitious SMEs across the investment region. Those deals attracted an additional £310m of investment from the private sector.

The regional funds are delivered by specialist fund managers with a track record of investing in innovation. In addition to providing funding directly, these fund managers also work with the Bank’s UK Network and local partners to build networks that help connect innovative companies and potential investors.

Case Study: G2O Water Technologies G2O Water Technologies is a Manchester-based water treatment company that has received a total of £1.03 million of equity investment, including £400,000 through the Northern Powerhouse Investment Fund and £200,000 through the Finance Durham Fund, both managed by Maven Capital Partners. This was bolstered by £435,000 from private investors. The funding will enable the company to carry out the next stage of its technical development and forge industrial partnerships. The deal is a prime example of how one of the UK’s most active private equity firms can help attract additional investment for pioneering businesses – wherever they are based in the country.

More broadly, equity deals supported by the Bank are becoming more regionally diverse, with the proportion of deals undertaken in London reducing sharply in recent years, from 68% in 2016 to 42% in 2020.

This year, the British Business Bank has launched the Life Sciences Investment Programme, a £200 million investment targeting the growth-stage funding gap faced by UK life science companies. The programme aims to mobilise significant third-party capital alongside the BBB ’s investment. In addition, through the UK- UAE Sovereign Investment Partnership, Mubadala has made an £800 million commitment to investment in the UK life sciences sector.

The British Business Bank has also launched Future Fund: Breakthrough, a new £375 million UK-wide programme that will co-invest alongside private investors directly in later funding rounds at high-growth, innovative firms. The programme will focus on R&D intensive companies and will aim at accelerating the deployment of breakthrough technologies which can transform major industries, develop new medicines, and support the UK transition to a net zero economy.

Table 1: British Business Bank Programmes

British Business Bank Programmes Description Start Up Loans Offers loans (from £500 to £25,000, at 6% interest) alongside free mentoring and support to individuals who are starting a new business or who have been trading for less than two years. Regional Angels Programme Aims to reduce regional imbalances in access to early-stage equity finance, by increasing the aggregate amount of early-stage equity capital available to smaller businesses across the UK. Regional Funds Three funds – covering the North of England, Midlands, Cornwall and the Isles of Scilly – provide debt and equity finance, in the form of co-investment by the public and private sectors. Enterprise Capital Funds Combines private and public money to make equity investments in high growth businesses. Managed Funds Programme Makes investments in large-scale, private sector managed fund of funds, that invest in venture and growth capital funds backing innovative businesses. The programme aims to draw in institutional capital to this asset class. British Patient Capital Invests in best-in-class venture and growth capital funds and works to encourage more investors to make allocations to this asset class. National Security Strategic Investment Fund A joint initiative between HMG and BBB , that invests in advanced technology firms supporting long term equity investment. ENABLE Programmes Supports lenders, such as banks and non-bank financial institutions, to unlock more lending to smaller businesses through a portfolio-level guarantee. Recovery Loan Scheme Provides lenders with a government-backed guarantee of 80% of the loan value to facilitate lending (including asset and invoice finance) to smaller businesses.

Innovate UK

Innovate UK plays a critical role in providing funding to innovative companies through the early stages of idea development, and to commercial success. This is achieved through challenge-led competitive grant-funding programmes, pre-commercial procurement contracts and loans. In 2020/21 Innovate UK awarded £986 million, supporting over 4,500 organisations. [footnote 30]

One mechanism that Innovate UK uses to provide access to finance for innovative firms is Innovation Loans. The Innovation Loans scheme provides affordable and flexible finance to small and medium-sized businesses. It offers loans up to £1.6 million for highly innovative late-stage projects with a clear route to commercialisation and economic impact. A total of £155.7 million of commitments have been made so far. Innovate UK has extended the Innovation Loans pilot, providing a further £20 million in finance for innovative companies in 2021.

UKRI ’s wider commercialisation activity includes the work of the UK Innovation and Science Seed Fund ( UKI2S ). UKI2S plays an instrumental role in addressing finance gaps for early-stage science and technology start-ups and SMEs from PSREs and select research institutes and organisations. Backed directly by UKRI and the Defence Science and Technology Laboratory, its portfolio of 70 companies have gone on to attract over £640 million in private investment and created over 700 high-value jobs. UKRI have provided a further £10 million funding for UKI2S in 2021. This will allow UKI2S to continue to provide early-stage, high-risk, patient capital for high-potential businesses arising from world-class research carried out in partner laboratories, campuses and Catapults across the UK. This will back the creation and growth of high potential science-based businesses, leveraging significant private investment and creating hundreds of jobs across the UK.

Case Study: Zentraxa Ltd Zentraxa, a spinout from the University of Bristol following early investment in BrisSynBio by BBSRC and EPSRC , is manufacturing biopolymers for use in highly functional adhesives in medical and industrial settings. They are establishing a new niche in the synthetic peptides market, which is projected to be worth more than $425 million by 2023. Zentraxa received grant funding of £232,000 from Innovate UK, aligned with £110,000 investment from UKI2S which leveraged £337,000 from private investors and which in turn was amplified by £188,000 of co-investment from the BBB ’s Managed Funds Programme. This spectrum of support, from spinout stage to the current round of public and private funding, will help to take Zentraxa’s innovative products into market testing and allow them to expand their employee base, secure more contracts and refine the technology.

Improving accessibility of public support

Through our engagement with businesses, we have consistently heard that the public funding landscape is complex to navigate for firms seeking finance to innovate. As is evident from the above, public support in this area is led by multiple bodies with overlapping activities which can be hard for early-stage businesses to access. To make finance more accessible and signpost firms towards the available support:

Innovate UK will develop an online Innovation Hub to sit alongside and complement the British Business Bank’s existing Finance Hub, with clear links between the two to provide innovators with a complete view of government-backed funding options. This will make it easier for businesses to navigate the funding offer across both institutions. Innovate UK and BBB will introduce improvements as swiftly as possible within the next 12 months, by consulting with users and stakeholders to develop and implement an improved digital solution.

to sit alongside and complement the British Business Bank’s existing Finance Hub, with clear links between the two to provide innovators with a complete view of government-backed funding options. This will make it easier for businesses to navigate the funding offer across both institutions. Innovate UK and will introduce improvements as swiftly as possible within the next 12 months, by consulting with users and stakeholders to develop and implement an improved digital solution. Innovate UK (as part of UKRI ) and the British Business Bank will jointly investigate how businesses interact with different parts of the public support landscape. This will maximise accessibility for qualifying businesses through: exploring how the UKRI system could be simplified, and bureaucracy reduced, so that applicants are not required to submit the same information twice; signposting the availability and application requirements of future funding opportunities, to help businesses access the right financing options to scale; enhancing investment readiness through Innovate EDGE, which helps businesses to develop the evidence they need to access further public finance and move towards private investment; linking these services to the Innovation Hub where appropriate, saving time and effort for businesses and SMEs by providing them with a single portal for their innovation finance needs.

This will maximise accessibility for qualifying businesses through:

Case Study: TotalControlPro Ltd TotalControlPro Ltd is a Northampton-based SME that delivers an affordable, accessible manufacturing platform to put customers in control of their production facility and provide real-time visibility to the entire enterprise. In 2019 it took out a £300,000 Innovation Loan to develop its synchronised cloud manufacturing system. The company has now expanded its Manufacturing Platform to clients around the world, with six interconnected modules and full third-party connection. Strategic Director and Co-Founder Dolores Sanders was also a winner of an Innovate UK Women in Innovation award.

Tax incentives

R&D tax credits are an important part of the UK government’s support for innovative business, incentivising businesses to invest in R&D by allowing companies to claim an enhanced corporation tax deduction or payable credit on their R&D costs.

At Budget 2021, the Chancellor announced a review of R&D tax reliefs covering all aspects of the two schemes: the R&D Expenditure Credit, and R&D tax relief for SMEs . The review aims to ensure that the reliefs are up-to-date, internationally competitive, and effectively targeted on activities that drive the best outcomes for the UK economy. A consultation was published alongside the Budget, exploring the nature of private-sector R&D investment in the UK, how it is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate. UK Government will consider R&D tax relief options in light of evidence from this consultation.

At Budget 2021, a new tax super-deduction was also announced. It allows companies to claim 130% capital allowances on qualifying plant and machinery investments. The change makes the UK’s capital allowance regime more internationally competitive, lifting the net present value of our plant and machinery allowances from 30th in the OECD to 1st.

Also important are the UK’s world-leading tax-advantaged venture capital schemes: the Enterprise Investment Scheme ( EIS ), the Seed Enterprise Investment Scheme ( SEIS ) and Venture Capital Trusts ( VCTs ). These schemes encourage investment in higher-risk, early-stage innovative businesses that often face the biggest challenges in accessing growth capital. In 2018/19 alone, they generated over £2.6 billion of funds for business across the three schemes.

Infrastructure

Infrastructure underpins the innovation economy. Transport, digital and data, energy and utility networks are vital enablers of innovation. Infrastructure can improve ease of access, efficiency and collaboration by businesses, which can directly impact how innovative they can be. Maximising the potential of the UK’s innovation ecosystem also means ensuring businesses can access the right infrastructure to innovate and grow. As the National Infrastructure Strategy sets out, UK government wants to deliver an infrastructure revolution: a radical improvement in the quality of the UK’s infrastructure to help level up the country, strengthen the Union, and put the UK on the path to net zero emissions by 2050.

By building on our existing infrastructure and using opportunities such as those identified in the UKRI research and innovation infrastructure report [footnote 31] and the UK R&D Roadmap, we will seize opportunities for the next generation of research and innovation infrastructure.

Digital infrastructure is a key enabler. Digital services and networks underpin the UK’s ambition to be a world leading science, technology and cyber power, allowing industry to grow and innovate. The Department for Digital, Culture, Media and Sport’s ( DCMS ’s) Ten Tech Priorities [footnote 32] set out our ambition to roll out world-class infrastructure nationwide. The UK government is spending £5 billion to make sure homes and businesses across the country benefit from gigabit-capable broadband – including those in harder-to-reach areas. DCMS is also taking forward a wide-ranging programme of work to drive the rollout of 4G and 5G networks across the UK, including investing £200 million through our 5G Testbeds & Trials Programme to ensure the UK is at the forefront of global 5G innovation, maximising the use-cases and benefits of this transformative technology.

To further strengthen our innovation infrastructure, UKRI is investing £50 million into a portfolio of over a dozen infrastructure projects. This will underpin the UK’s position as a science superpower by supporting projects that cross all disciplines and span the research and innovation spectrum. The package will cover the first year (2021/22) of time-critical projects and scoping for future investments, including a boost to the world’s largest and most sensitive radio telescope, carbon capture technologies, a state-of-the-art airborne research laboratory and a £17 million investment in digital research infrastructure.

Looking ahead, we need to ensure that our infrastructure is future proofed. One of the focus areas will be identifying how common, interoperable digital tools and platforms, as well as physical testing and innovation spaces can be brought together to form a digital and physical shared infrastructure for innovators. Examples of these include digital twins, simulation and emulation tools, synthetic environments, test beds and living labs. Supporting and enabling this shared infrastructure will help remove time, cost and risk from the process of bringing innovation to market.

One example can be seen in the use of digital twins throughout the Formula 1 racing lifecycle by McLaren and Dell. [footnote 33] During a race, high-fidelity digital representations of vehicles are fed by hundreds of thousands of data points every second, informing race strategy and decision making. Before a car even reaches a track, AI and simulated environments are combined through digital twins with real-world testing to enable data-driven engineering changes every 20 minutes on average. The insights from this type of rapid innovation are being applied across the economy, including in healthcare and transport.

Given its importance, UK government will launch a consultation later this year to seek input from business, academia and individuals across the UK on the potential value of and options for a UK capability in digital twinning and wider ‘cyber-physical infrastructure’ to help unleash innovation. This will support the work of the National Digital Twin Programme, which was established in response to the National Infrastructure Commission’s report ‘Data for the Public Good’. [footnote 34]

World-class Regulation

Innovators operate in a complex environment of legal, voluntary and regulatory frameworks. A well-designed regulation system provides certainty to reduce investment risk and the clarity needed to make markets function effectively. It can encourage innovation, create consumer confidence, steer development of new products, and enable the rapid but safe adoption of new and disruptive technologies.

The UK government’s approach to regulation has evolved over the past ten years. Initiatives such as the Red Tape Challenge and the ‘One In, Two Out’ policy sought to reduce regulatory burdens on firms. Building on this, the 2019 ‘Regulation for the Fourth Industrial Revolution’ white paper set out how regulation can actively support and promote the development and adoption of innovations. This approach can be seen in our work with regulators through the Regulators’ Pioneer Fund, assisting and enabling experimentation through the use of regulatory sandboxes and cutting-edge healthcare solutions. However, we can, and must, go further.

Historically, regulation has sometimes stifled innovation. Some of the current regulatory standards inherited from the EU are based on an overly restrictive interpretation of the precautionary principle. Loosely, this principle can be summarised as ‘look before you leap’. When used proportionately, for example as it appears in the 1992 Rio Declaration on Environment and Development, it ensures that a lack of total scientific certainty that something is dangerous is not used as an excuse to postpone cost-effective measures to prevent serious harm to the environment or health. This principle is being placed on a statutory footing through the Environment Bill to reflect its important role in international environmental policy, for example, the successful Montreal Protocol which effectively tackled the damage to the ozone layer caused by CFC gases. The UK approach recognises that the principle should be applied proportionately, and there must be sufficient evidence that the risk of environmental damage is credible and real.

However, when applied disproportionately the precautionary principle can err too much on the side of caution, reversing the burden of proof and placing it on the Innovator to demonstrate no possible harm from an innovation. While the UK has world-leading strengths across our regulatory frameworks, we must continuously improve to facilitate the increasing pace of innovation and change.

The precautionary principle can be interpreted in ways that can produce more harm than good. In some cases, the precautionary principle has become a policy of blocking all potential harms, even a possibility of harm, without a balanced analysis of likely benefits. One example is Genetically Modified ( GM ) crops, where the EU relied on a strict interpretation of the precautionary principle which resulted in the absence of any significant adoption of GM crops in the EU and the departure of European companies working on GM technologies to the USA and other countries. This was despite the potential these technologies have in contributing to our work to tackle climate change.

While the UK has world-leading strengths across our regulatory frameworks, we must continuously improve the regime to facilitate the increasing pace of innovation and change. The Taskforce on Innovation, Growth and Regulatory Reform ( TIGRR ) has now proposed options for how the UK can further reshape its approach to regulation and seize new opportunities from exiting the EU with its newfound regulatory freedom. As recommended by the Taskforce’s recent report, we will consult on how regulation can ensure that the UK is well-placed to extract the best value from innovation – including on the need for and benefit of a new proportionality principle for regulation.

Standards are one important regulatory tool. The importance of standards is growing with the increasing globalisation of commerce, the emergence of new technologies and the need for interoperability. In new markets, including digital, the Internet of Things and AI , products from different manufacturers need to be able to seamlessly ‘talk to’ each other to provide value to consumers. Leading the development of global standards, including through working with multilateral institutions and focusing our efforts in key areas, allows UK businesses to benefit from knowledge transfer, be thought leaders, and export on a global stage. This work will also help de-risk innovation and position the UK as a force for good around the world, promoting the benefit innovation can bring whilst minimising the scope for its abuse.

This championing of experimentation also sees the start of a new £3 million round of the Regulators’ Pioneer Fund ( RPF ), launched on 20 May 2021, which enables regulators to test and pilot ambitious and experimental approaches to regulation that can improve their ability to support innovation. The RPF ’s success can be seen from its previous project supporting the Medicines and Healthcare Products Regulatory Agency ( MHRA ). One of the key challenges in both validating and developing new medical devices and software is having access to representative patient data, which cannot be freely or cheaply shared as there is a need to protect patient privacy. Using RPF funding, MHRA aimed to address this challenge by developing a first-of-its-kind synthetic dataset that mimics real patient data with very high fidelity. These datasets are designed to help researchers and companies develop and validate their innovative new AI and medical devices. This development will support bringing safe products to market sooner, enabling patients to benefit from the latest technical advances.

We will use the opportunity of EU Exit to create the world’s most agile regulatory system, focussed on continual adaptation to new products and technologies. We have created the Regulatory Horizons Council to this end. It acts as a strong voice in government for the creators of new technologies, ensuring a continual pressure to adapt our regulatory environment to be pro-Innovation whilst also being safe. We will commission the Regulatory Horizons Council to consider how best to support innovation through regulation, including looking at whether there are a set of high-level guiding principles for regulation that may apply broadly to any sector of innovation. We will ask the Council to work with regulators, industry, government, and other stakeholders as they see fit. They will develop and test their recommendations, source tangible case studies of pro-innovation regulation in action, and ultimately present their conclusions to government. This will build on and complement the publication of the Plan for Digital Regulation in July 2021, setting out the UK government’s pro-innovation approach to regulating digital technologies. It outlines the principles for digital regulation to: promote innovation; achieve forward-looking and coherent outcomes; and exploit opportunities and address challenges in the international arena.

In addition, we will bring forward action to improve regulation in the following areas:

We will maintain global leadership in regulation through regulatory diplomacy, and extend the reach of the ‘Agile Nations’ network by engaging more countries. The UK spearheaded the establishment of Agile Nations, an inter-governmental regulatory co-operation network, at the end of 2020. This will make it easier for businesses to introduce and scale innovations across their markets while upholding protections for citizens and the environment.

The UK spearheaded the establishment of Agile Nations, an inter-governmental regulatory co-operation network, at the end of 2020. This will make it easier for businesses to introduce and scale innovations across their markets while upholding protections for citizens and the environment. We will publish a joint Action Plan on Standards for the Fourth Industrial Revolution with the British Standards Institution ( BSI ), the National Physical Laboratory ( NPL ) and the UK Accreditation Service ( UKAS ). This plan will champion an agile approach to standardisation to respond to fast-paced technological change and foster synergies between standardisation, policy making and strategic research work that are needed to underpin innovation across sectors.

with the British Standards Institution ( ), the National Physical Laboratory ( ) and the UK Accreditation Service ( ). This plan will champion an agile approach to standardisation to respond to fast-paced technological change and foster synergies between standardisation, policy making and strategic research work that are needed to underpin innovation across sectors. The UK Measurement Strategy will be published this Summer. It will outline how the UK will capitalise on its world-leading status to provide the measurement infrastructure that the UK needs to innovate and be safer, healthier, greener and more prosperous.

A pro-innovation competition regime

Competition and innovation are intrinsically linked. A competitive market creates incentives for firms to innovate and develop better quality products and services. The Competition and Markets Authority ( CMA ) promotes effective competition in UK markets by regulating anti-competitive behaviour, reviewing mergers to ensure they do not reduce competition, and investigating and remedying entire markets that have competition problems.

We are committed to a best-in-class competition regime. As outlined in our plan for growth, we are consulting on reforms to ensure that the competition framework is effective for an innovative modern economy. This will include updating and strengthening enforcement of competition law to ensure it is agile and effective, for both businesses and consumers.

In the digital sector, there is a growing consensus that the concentration of power amongst a small number of tech companies is restraining competition and holding back innovation. Addressing this market failure will help spur the development of new products and services and level the playing field for UK digital SMEs .

To this end, we are consulting on setting up a new, pro-competition regime for digital markets. This will tackle the concentration of market power in big digital companies, protect consumers, and promote innovation. This follows the recommendations of the government-commissioned Furman Review, which called for a new Digital Markets Unit ( DMU ) to address these unique competition issues.

Capitalising on data

The Economist famously noted that “the world’s most valuable resource is no longer oil, but data”. [footnote 35] Global networks of data flows are critical to our prosperity and modern way of life. They fuel consumers and businesses, including start-ups, SMEs and large corporations. The ability to collect, share and process personal data is crucial for the digital economy.

The National Data Strategy set out the UK government’s vision for harnessing the power of responsible data use and launched a national conversation on how to make the most of data’s opportunities. The public consultation demonstrated that people welcome the idea of data as a strategic asset and that it should not just be considered a threat, but an opportunity to drive productivity and innovation. It also highlighted that data must be made to work for everyone.

The UK government will therefore prioritise regulatory certainty in the use of data – not only to build trust, but to lower compliance costs for businesses, and remove unnecessary barriers to international data flows which could impede innovation and growth for UK companies.

To this end, the Department for Health and Social Care ( DHSC ) has recently published a draft of Data saves lives: reshaping health and social care with data: a strategy that sets out how data will be used to improve the health and care of the population in a safe, trusted and transparent way. The strategy recognises that data was essential to all aspects of our response to COVID -19, and that we now have an opportunity to apply these approaches to long-term challenges and the immediate tasks of rebuilding from the pandemic.

One avenue of innovation opportunity is smart data: the secure sharing of customer data with authorised third parties. Better use of smart data will support innovation by enabling start-ups, scale-ups and existing businesses to enter the market, develop and provide innovative services, and drive growth and productivity in relevant sectors. Smart data can also help smaller providers to grow and compete more effectively – for example, by facilitating better comparison of goods and services when competing for customers. The potential impacts of smart data on productivity could be as high as a £27.8 billion increase in UK GDP . [footnote 36] In Autumn 2021, UK government will publish a policy framework to focus and prioritise government’s role in enabling better data availability in the wider economy. This will set out how government can intervene to create an environment where data is appropriately usable, accessible and available across the economy.

Case Studies: Open Banking and the Global Open Finance Centre of Excellence CMA ’s Retail Banking order in 2017 mandated the nine largest UK banks to share customer data (with consent) and required them to fund implementation of Open Banking, enabling personal customers and small businesses to share their data securely with other banks and other third parties. As of 2021, over three million UK people and businesses are using open banking. The potential estimated annual benefits of Open Banking-enabled services are up to £12 billion for consumers and £6 billion for businesses. The Global Open Finance Centre of Excellence in Edinburgh is an example of the potential of data sharing initiatives. The centre aims to support data sharing and data-driven innovation in fintech, economic and social research, innovation and talent development.

Case Study: The Digital Sandbox pilot – Financial Conduct Authority ( FCA ) & City of London Corporation ( CoLC ) The FCA ’s engagement with industry and experience running innovation services indicated that a digital testing environment would be a valuable addition to the ecosystem – enabling digital solutions to be tested, which could reduce time to market. The FCA collaborated with the CoLC to pilot a ‘digital sandbox’. The 11-week pilot, which ended in February 2021, provided support to innovative firms tackling challenges caused by COVID -19. 94 organisations applied for the digital sandbox pilot and 28 were selected to take part in the pilot to test their innovative solutions. The FCA ’s evaluation of the pilot found that access to a digital testing environment accelerated development times for the vast majority (84%) of participants, as well as benefitting other aspects such as improving product design and refining early-stage business models. A second phase of the pilot, focused on sustainable finance, will be launched later this year.

Artificial intelligence ( AI ) has changed the way we process and communicate data. That is why UK government will publish the National AI Strategy in Autumn 2021, co-ordinated by the Office for AI . Following on from the nearly £1 billion partnership between government, industry and academia, the National AI Strategy will set out how we intend to build on the UK’s early lead in AI while also supporting businesses and the public sector to responsibly adopt AI .

Value of design to innovation

Design is core to successful innovation. Great design means putting the needs, wishes and behaviours of people at the heart of the innovation process, so that new ideas are truly desirable as well as being technically feasible and financially viable. Design brings ideas alive and makes them tangible, providing the impetus for growth and ultimately value to shareholders. Good design is for people and the planet, an increasingly critical focus.

Design is key to a strong pro-innovation economy. Design generated £85.2 billion GVA in 2016 (7% of GVA total and an increase of 52% since 2009), with 68% of designers working in non-design firms such as aerospace, automotive and banking. Research shows that design applied to science and technology research accelerates commercialisation and increases value [footnote 37] and that organisations that invest in design also invest in R&D . [footnote 38]

The Design Council supports businesses use design to innovate and grow. ‘Designing Demand’ was a five year programme which supported 5,000 businesses – from yacht building to clothing – to use design and branding. It showed that for every £1 invested in design, businesses generated £20 in increased revenues, £4 in net operating profit and £5 in increased exports. Businesses supported were twice as likely to remain in business five years after the last recession, had improved their brand image and increased productivity, with their turnover growth exceeding their employment growth.

Safeguarding Intellectual Property

The Intellectual Property ( IP ) regime gives researchers, inventors and creators the confidence to develop something new. It helps innovators reap the rewards of their investments, promoting investment in research and innovation. IP is vital to the UK economy: in 2016, firms in the UK private sector invested an estimated £134.3 billion in knowledge assets, of which £63.8 billion was protected by IP rights. [footnote 39], [footnote 40] Use of IP has been linked with an increase in firm performance, with ownership of IP rights being strongly associated with improved economic performance at firm level.

The UK IP system – led by the Intellectual Property Office ( IPO ) – is consistently highly regarded around the world. [footnote 41] However, we must build on this strong foundation. The ability to identify IP in research is critical to achieving impact. To this end, the IPO will expand its IP education programme for research education. This will enable it to reach more researchers so they can fully leverage their intellectual property to commercialise their ideas.

Furthermore, the IPO recognises that SMEs need the right support commercialising their IP . This coming year, the IPO will support growing and recovering businesses to research and develop innovative products and processes, and secure and manage new IP rights. Specifically, it will help with the costs that businesses face when acting to leverage their IP assets or negotiate the IP landscape, in order to seize opportunities and mitigate risks that SMEs face.

Effective use of IP rights can also help UK firms operate internationally. To bolster innovative companies’ and researchers’ ability to confidently collaborate, export and invest overseas, the IPO will launch the International IP Service. This will provide easy access guidance and support that will help innovative UK companies to make informed decisions about navigating the international IP environment.

The UK IP system’s ability to keep pace with technological change is central to its high performance. This year the IPO will consult on the protection of inventions and creations made by AI with minimal human input and on whether improved licensing or copyright exceptions could make it easier for innovative businesses and researchers to use copyright material for data mining, including with AI systems.

In addition, it is increasingly important for innovation that standards and patents can span across multiple disciplines and sectors. In some cases, standards require the use of specific, patented technologies, called Standard Essential Patents ( SEPs ). Access to such SEPs on fair, reasonable and non-discriminatory terms is therefore essential for firms that must comply with the standard. To gain further understanding of the issues faced by industry, the IPO will lead a call for views to better understand how the current framework for SEPs is functioning to support innovation, and to establish whether change is needed.

The Patent Box tax incentive is a further measure that supports the retention of IP in the UK, by allowing businesses to pay a reduced rate of tax on profits arising from exploiting patents and other qualifying products. Its aim is to encourage the commercialisation of inventions by companies in the UK.

The Centre for the Protection of National Infrastructure ( CPNI ) and the National Cyber Security Centre ( NCSC ) have developed ‘Secure Innovation’: guidance which aims to highlight the risks undertaken by start-ups and growing companies in the innovative and emerging technology space, and provide practical steps to protect their intellectual property.

Unleashing innovation through international trade

As a sovereign nation, we must take advantage of our ability to be agile and responsive to global opportunities. In support of business objectives, we will promote an open, free and fair rules-based trade system – positioning the UK as a global services, digital and data hub which seizes international opportunities to share ideas and export our innovation to new markets.

The UK’s vision for the temporary movement and presence of professionals will support our position as a global leader in services trade, improving access to overseas markets and giving UK businesses access to the talent and skills that they require to drive innovation.

New Free Trade Agreements and reduced market access barriers will help innovative UK businesses to access new markets. Exporting plays a key role in enabling pioneering sectors and technologies to become world-leading, which in turn drives growth and creates jobs. We