Mobilising the money for action on the ground

Nick Robins, Professor in Practice for Sustainable Finance

Net zero is increasingly recognised as an important goal by leaders within the UK’s financial community. Strikingly, COVID-19 has deepened rather than deflected financial sector commitment to climate action. The government’s green recovery strategy is still a work in progress, but has become progressively more ambitious through 2020. Importantly, delivering the UK’s 2050 goal of net zero greenhouse gas emissions is no longer viewed as a necessity to be endured but rather as a driver of growth, innovation and job creation.

Making this happen will require unprecedented levels of private and public finance, delivered in ways that genuinely respond to the bottom-up needs of businesses and communities across the country. Major banks and investors are all pledging to make their portfolios net zero by 2050. But translating this into mechanisms that result in real investment in buildings, industry, transport and nature remains a critical challenge. To help identify how the UK can mobilise the capital needed to deliver net zero, I chaired an advisory group on finance for the Climate Change Committee (CCC) to feed into its Sixth Carbon Budget. Our report was published alongside the 6th Carbon Budget and its recommendations incorporated into the CCC’s main report.

The net zero economy of the future will be more capital-intensive, with extra upfront investment and much less spending on resource and energy use, moving from an Opex (Operating Expenditure) to a Capex (Capital Expenditure) business model. This will generate major benefits for the UK. One of the striking findings of the Sixth Carbon Budget is that “the level of UK GDP would be around 2% higher than it would have been by 2035 as resources are redirected from fossil fuel imports to UK investment”.

Action cannot be delayed, and the CCC estimates that there needs to be a five-fold increase in extra net zero investment from c£10bn/year in 2020 to around c£50bn in 2030, before peaking in 2035. These capital costs will be more than offset by major financial savings in operating costs.

Graphic showing additional investment required to achieve net zero
The CCC estimates that extra net zero investment needs to grow five-fold from c£10bn/year in 2020 to around c£50bn in 2030, before peaking in 2035.

The depth of the UK’s capital markets along with its growing expertise in sustainable finance means that this significant ramp-up in the scale of investment is eminently deliverable. But it will mean being resolutely focused on removing the obstacles that exist. Net zero is still not embedded into routine financial decisions. Market, policy and institutional failures continue to undermine the predictable cash flows that are needed to attract capital at scale. Demand for net zero finance remains mixed: growing in the energy sector, almost non-existent in housing. Development capital is insufficient to build the net zero infrastructure pipeline. Local authorities lack the capacity and tools to channel finance for place-based priorities. In terms of practical delivery, financing net zero needs to be connected to wider issues of resilience and fairness, making sure that the just transition becomes a reality.

Overcoming these obstacles means making net zero an explicit goal for the UK’s financial system, and then cascading this down through private finance, financial regulation and public finance. As we move towards the COP26 climate summit, the UK could show real leadership by committing to become the world’s first net zero financial system. This would be followed by introducing mandatory requirements for financial institutions to develop net zero targets and plans, matching the current focus on managing climate risk. This will drive the necessary innovation in financial services that is needed to respond to the net zero needs of households, businesses and the public sector.

Getting this financial shift underway needs to be led by the post-COVID recovery plans, using this as an opportunity to fast-track net zero investment and make this a core part of the UK’s public finance framework. At the heart of this will be making net zero part of the purpose of the UK’s existing public finance institutions (such as the British Business Bank) and getting the new National Infrastructure Bank (NIB) operational as soon as possible. The prize is to place net zero at the heart of the NIB’s purpose, crowding in the private sector and working with local authorities to deliver investment on the ground. The NIB also has the potential to be an anchor investor in just transition initiatives across the country, playing the role that the European Investment Bank does in the EU.

To finance the post-COVID recovery strategy, a strategic programme of green sovereign bonds has immense potential, responding to rising investor demand. The Chancellor’s announcement that the UK will issue its first Sovereign Green Bond in 2021 will not only help to tackle climate change, but will also boost green jobs across the country. In addition, it can serve to catalyse additional green bond issuance by business and public bodies, building on the promising start from the new Community Municipal Investments in West Berkshire and Warrington. Now is the time to build a mainstream strategy for green municipal bonds in the UK, matching what is taking place elsewhere, notably in France, Germany, Sweden and the USA. The Bank of England can also play its part by making sure that its finance facilities and liquidity provision – not least to respond to the COVID downturn – are also fully aligned with the UK’s climate goals.

Realising net zero finance is not just a national and global imperative. It offers a strategic opportunity for the UK’s financial sector for the next decade and beyond.

This article is from our Local Path to Net Zero series.