Report: Private, regional investment key to delivering UK’s net-zero ambitions

The recommendations are being made as part of a new policy paper – Charting the UK’s Net Zero Future: Policy recommendations to unlock investment – which outlines key net-zero policy priorities that the next government should focus on in the early days of a new parliament.

The soon-to-be-published policy paper builds on proposals contained in Phoenix’s November 2023 report – Unlocking Investment in Climate Solutions.

This paper found that, with the right reforms on the right terms for pension savers, UK pension funds could quadruple their investment in UK climate solutions to up to £1.2trn of their UK asset allocation.

This level of investment has the potential to account for half of the gross capital investment in climate solutions required by 2035 for the UK to remain on track with its net-zero transition.

The key government policy interventions recommended by Phoenix Group to catalyse net-zero transition at the regional and local level in its forthcoming policy paper are as follows:

• Create an investor advisory body to work with the Department of Energy Security and Net Zero (DESNZ) to collectively build the skills and capacity in local authorities needed to build an investible deal pipeline of climate solutions.
• Endorse the Local Area Energy Plan Guidance as the national framework for place-based whole energy system decarbonisation planning, to encourage regions to develop consistent local transition plans.
• Simplify funding pots and encourage the use of financing mechanisms to crowd in private sector capital.

Phoenix Group’s head of climate change and nature Bruno Gardner said: “We believe that the UK pensions industry has the potential to play a key role in accelerating the UK’s progress towards net-zero but the adoption of ambitious regional investment policies by the next Parliament will be crucial in catalysing investment in the transition.

“Around 80% of the UK’s overall greenhouse gas emissions lie within the scope or influence of local authorities, and much of the investment in the net-zero transition is needed in local infrastructure and services such as the built environment and transport.

“Phoenix Group wants to work with local and national government to help unlock this investment in a way that supports good outcomes for our customers, whilst also playing a part in helping the UK reach net-zero by 2050.”

Overcoming barriers

The policy paper directly addresses several barriers identified in the November 2023 report, which also recognises that there is a limited deal pipeline of investible opportunities for institutional investors to support regional investment specifically aimed at the net-zero transition.

These barriers include:

• Lack of sufficient capacity within many local authorities to support the national aim of reaching our net-zero goal: A Local Government Association survey found that 79 out of 90 respondents thought a lack of workforce capacity was a barrier to tackling climate change and 70 respondents identified skills and expertise as a barrier.
• Lack of certainty on regional investment opportunities: Many local authorities do not have detailed net-zero transition plans.
• Inconsistent access to funding and financing mechanisms to grow the deal pipeline: The National Audit Office identified 21 funds that local authorities can apply to, and there is often a lack of resources to manage this process.

Phoenix Group shareholder assets and private markets sustainability lead Anand Rajagopal said: “Institutional investors like Phoenix Group have a long track record of supporting regional investment in productive and capacity-enhancing assets such as social housing and regeneration projects across the UK.

“This is consistent with the principles laid down by the Productive Finance Working Group, i.e. productive finance does not solely refer to net-zero-accretive assets; the intent here is to also include broader social infrastructure that can help plug key productivity gaps alongside creating economic capacity.

“However, there are some limitations to the pipeline of investment opportunities to specifically support regional investment in net-zero transition, especially when various asset eligibility requirements for insurance balance sheet investing are taken into consideration.

“Further, the funding routes and processes for local government authorities are numerous and in need of simplification, and there is room for greater efficiencies and scale here.”

Related news: Local authority net-zero plans ‘strangled’ by inadequate funding