Catalysing green finance: a priority for the new government

Supporting the growth of the UK’s low carbon economy deserves particular attention. There is a real opportunity to develop policies in this parliament to unlock much-needed private investment in the low carbon industries that will be crucial to the UK’s future.

The Office of National Statistics (ONS) estimates that the UK’s low carbon and renewable energy economy employed some 447,000 people in 2015 and delivered a turnover of more than £77bn, making it larger than the steelmaking industry. With politicians rightly looking to address inequality across the country, it is critical to note that much of this low carbon investment and growth is taking place in parts of the UK that need it the most. In the North of England for instance, low carbon investment has created thousands of skilled jobs, developed local supply chains, encouraged innovation and produced clean energy generation.

Furthermore, we are now in a strong position to build on our international competitive advantage as the international market grows, whilst the US drops the ball by exiting the Paris Agreement.

Growing the UK’s low carbon economy, improving the state of its environment and meeting its binding targets cost-effectively will require urgent and significant further investment in green infrastructure, such as renewable energy technologies, energy efficiency improvements and flood management schemes. It is estimated that £330bn of investment between 2011 and 2020 and an annual investment in 2020 close to £50bn will be needed in the UK’s green economy to meet our targets.

With funds stretched, public money cannot fill this investment gap. However, government can play a strategic role in leveraging the vast capital available in private finance and creating the right regulatory and fiscal conditions for private investment. The market is a lucrative one – the UK share of the global low carbon financial services market could grow to up to £17bn per year in 2050 while low carbon investment strategies have the co-benefit of shielding investors from risks arising from climate change, such as the physical impacts of increased flooding or changes in policy that might impact investments.

To catalyse greater private investment in green infrastructure, the new government will need to develop some bold policy proposals. These should include:

• Ensuring a stable and long-term low carbon policy environment will be essential to generate a pipeline of investible projects and to reduce regulatory risk, driving the cost of investment down. The prompt publication of a detailed plan to meet the fourth and fifth carbon budgets, the 25-year plan for the environment and a clear resource efficiency strategy will be essential to build confidence in the intentions of the new government;

• Developing a new strategy for public funding to crowd in private sector finance, particularly in novel green technologies and complex projects at commercial scale. Strategic use of public funds can de-risk private investment, whilst building exportable expertise in this emerging market;

• Supporting access to finance for low carbon SMEs to facilitate collaborative financing and attract further investment of patient, long-term capital for SMEs who often lack the track record needed to receive bank loans. Those seeking £250,000 to £2m and longer-term investment particularly face a financing gap;

• Supporting the provision of better information for investors, for example, adopting the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) recommendations in the UK to help establish a direct link between the financial performance of a business and its climate risk management, helping investors to differentiate between companies and encouraging low carbon investment strategies;

• Increasing engagement with the finance community to ensure that it better understands the objectives of government policy and upcoming changes, and that government is better aware of the needs and risk considerations of the finance community when developing policy.

Tackling these initial barriers will be a crucial step towards increasing affordable private investment at the requisite speed to meet our climate and environmental goals cost-effectively, grow a competitive low carbon economy and strengthen the UK’s reputation as a centre for green infrastructure investment. The government and MPs from all parties should seize this opportunity to build the long-term resilience of the UK economy.