Budget 2024: How can the Chancellor unleash a wave of private investment to green the economy?

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The report comes on the eve of Chancellor Jeremy Hunt’s 2024 Budget, due to be delivered in early March. It sets how the UK Government can take a more strategic and bold approach to unlocking the £50-60bn it estimates will be required post-2030 to achieve the nation’s legally binding climate commitments.

The vast majority of this finance will need to come from private sources, especially given that the national debt is now on the cusp of exceeding 100% of GDP.

The report may yet influence Hunt and his team as it draws upon insight from dozens of experts across Britain’s financial, policy and sustainability spheres including representatives from the Association of British Insurers, the Green Finance Institute, Bankers for Net-Zero and the Institute for Public Policy Research (IPPR).

Its key call to action is for the Government to provide more of a long-term strategy to delivering net-zero with “clarity and consistency in policy pathways”.

Funding pots with limited budgets and limited timescales can make for the risk of future drop-offs that can deter investment, it states. The risk of policies being watered down, axed or delayed, as was the case last September, also dents investor confidence.

Changes announced in September 2023 to policies around low-carbon heating, energy-efficient buildings and electric vehicles (EVs) form part of the Prime Minister’s drive for a “more pragmatic” net-zero transition pathway that minimises upfront costs on households in the near term. Yet the changes made so far are not aligned with recommendations from the UK’s official climate advisors and may risk baking in future risks and costs for workers in the decades to come.

The Public Accounts Committee has also stated that now is the time for greater long-term certainty to deliver value for money.

Green Finance Strategy gaps

The UK Government did make something of a song and dance of updating its net-zero strategy in March 2023.

Among a tranche of documents published and consultations issued on ‘Green Day’ within this month was a Green Finance Strategy. The Strategy did kick-start important workstreams on corporate net-zero transition planning, growing the transition finance market and weeding out greenwashing in ESG-labelled investments. But the consensus is that it was not, in and of itself, sufficient to deliver the UK’s ambition of being the world’s first net-zero financial centre.

The report points out that several of the Strategy’s omissions have not yet been rectified, with key policy packages such as the Green Finance Taxonomy delayed. This Taxonomy will set out which financial activities and investments can be classed as ‘green’ and, potentially, as ‘transition’ finance.

The UK first promised such a taxonomy in 2021 and the need for one has become increasingly clear since the EU has launched its own version. Other markets with live green taxonomies include China, Indonesia and South Korea, while the likes of Australia and Canada are developing theirs.

There is sympathy for the necessity of delays to ensure that regulations are robust. However, the report calls on Ministers set set out a “clear timeline” and renewed commitment for delivery ahead of the general election.

Sector-specific focus

Another key facet of an updated, clearer long-term plan from the Government, the new report states, is are sector-specific transition plans that set out appropriate decarbonisation targets and indicate the preferred technologies for achieving them.

Such plans were promised through the Government’s original Net-Zero Strategy but were not included. The Strategy was ruled unlawful by the High Court and Ministers mandated to provide a thorough update – but the refreshed version, again without sector-specific pathways – is facing another legal challenge this week.

The report argues that, at present, financial institutions are subject to more robust decarbonisation-related regulations than real economy sectors in which they invest. As such, many are stuck in working towards enhanced disclosure rather than taking “concrete steps” to drive decarbonisation throughout the real economy.

This is partly due to confusion over which technology pathways are preferred and the most investable. In shipping and road haulage, for example, which alternative fuels should be prioritised? And should steelmakers look towards hydrogen or electrification?

The report floats the idea of creating sectoral stakeholder councils to co-create pathways with policymakers and to monitor investment and investor confidence going forward. They could then make further recommendations for stimulating investment as the UK’s economic context shifts and as technologies mature.

Beyond indicating preferred technology pathways for hard-to-abate sectors, the report states that catalytic finance from Treasury coffers is needed. It argues that financial packages placed on the table in recent times are not yet likely to unlock private finance at scale due to a lack of clarity and innovative design.

For example, there has not yet been an indication of when and how the first tranche of a £20bn package for the carbon capture and storage sector announced at last year’s Budget will be spent. Confusion also reigns over the UK Government’s plans for funding small-scale nuclear beyond an initial innovation competition.

The report implores the Government to get clear on a full industrial strategy, covering all sectors – not just those that the incumbent party favours – and setting out in more detail how its grant schemes will provide value for money and crowd in as much private capital as possible.

It also advocates for a new public-backed institution to be created with the function of providing blended finance for priority sectors beyond the constraints of risk requirements on typical government borrowing arrangements.

The UK Government did recently announce a £4.5 billion package for strategic manufacturing sectors, including £2bn for the automotive sector with a focus on the EV transition.

But the report notes that this package did not cover all manufacturing sectors that will need to be rapidly scaled to deliver net-zero. Moreover, the funding for automakers, MPs recently pointed out, is not being provided under a credible strategy to scale battery manufacturing in the UK.

IPPR associate fellow Sam Alvis said: “We heard throughout our research that industrial strategy is about setting the direction and the boundaries for the private sector to follow.

“We cannot afford to wait. We are far behind on our climate targets, and the UK economy is in recession. Investment from both government and private finance is central to solving both those challenges. But without building a closer relationship between the state and the City, now, through a green industrial strategy will create, we will never get the scale or pace of spending we need.”

The Confederation of British Industry (CBI) is due to publish its own recommendations on unlocking private finance for the net-zero transition next week, and will posit this as a major opportunity for economic growth and levelling up. Watch this space for edie’s coverage.

Related feature: How is sustainable finance faring amidst policy uncertainty and the anti-ESG movement?