Commentary
Jamie Brogan, Brendan Curran, Andy Gouldson, Sabrina Muller and Nick Robins
25 January 2022
Ramping up flows of finance is crucial to delivering the UK’s goal to be a resilient, net-zero economy by 2050. According to the Climate Change Committee, extra net-zero investment flows need to grow five-fold this decade from £10bn a year in 2020 to over £50bn in 2030.
In one sense, there’s no shortage of capital. The UK financial system holds more than £20 trillion in assets, and the increase in investment that is required is well within the historical range. Moreover, the UK’s leading banks and investors have committed to aligning their portfolios with net zero. A “wall of money” is seeking bankable green investment projects.
Yet a thicket of barriers prevents this latent supply of finance connecting with surging demand for green investment in energy, housing, industry and transport and nature up and down the country. The UK Government published its Net Zero Strategy ahead of COP26 and, while there was progress outlining pathways to net zero for many sectors, there were insufficient policy incentives to mobilise capital at scale in crucial sectors. For example, while the grants for heat pumps are welcome, the materiality of the grant fund isn’t large enough to make a dent in the domestic energy efficiency challenge we have in the UK.
There also remains a particular disconnect between the UK’s highly global capital markets and the bottom-up needs of its localities and regions. Over 70% of the country’s 400+ local authorities have declared a climate emergency. Some leading cities and regions are starting to develop financing strategies. But the reality remains only a handful have yet started to think through how to raise the capital needed to drive action, both within the public sector, and more importantly, in local businesses and households. This local approach to tackling climate investment was echoed by the UK Cities Climate Investment Commission[1], which recommended “place-based investment demonstrators” that could be replicated and scaled.
If the UK is to deliver on its net-zero and nature-positive ambitions, it will need to catalyse local climate pipelines and pump-prime local finance markets to allow private capital to be leveraged. So, the country faces a real bottleneck. Financial institutions are seeking net-zero investment opportunities but complain of a lack of investable projects and programmes of the right scale and form (notably demonstrated by the GFANZ headline figure of £130tn AUM)[2]. Local authorities and other place-based actors have a wealth of potential projects but find it difficult to develop and aggregate these to attract the finance. What is missing is the intermediary or middle layer that can develop and consolidate projects and programmes and match them to different forms of finance.
Some steps are being taken to overcome this divide. The new UK Infrastructure Bank has a really promising dual mandate connecting net zero and supporting local economic development. To make this happen, it will need local interlocuteurs who can build the project pipelines and make the link with the pools of finance. Furthermore, much of the finance that is needed falls outside the infrastructure arena (for example, for households and SMEs). While the Bank does not have any specific development capital, its guarantee book of £10 billion could be utilised effectively to encourage private investors into frontier sectors and geographies.
A place-based approach to climate investment is essential to support the mobilisation of capital for climate action. Strong evidence suggests unlocking climate finance this way would both enable decarbonisation and deliver local environmental, economic and social benefits whilst generating effective financial returns. But the reality of this “missing middle” is clear from the work we have been doing on the ground as part of the Place-based Climate Action Network (PCAN), from Edinburgh to Surrey and from Belfast to London and Leeds. To close this institutional divide, we believe that the UK needs to establish a network of local climate finance hubs.
Building a network of local climate finance hubs
There is a clear need to bridge gaps between projects and investment by building capability, capacity and connections to match owners of place-based climate programmes with institutional investors. We propose to establish a network of local climate finance hubs around the UK to pilot, evaluate and enable rapid scale-up of the practical steps needed to bridge these gaps. These platforms would support development of programmes to meet the needs of local and national government, communities and investors, as shown below.
To be effective, the approach for connecting local projects to national investment must operate on two levels:
- Locally embedded through place-based nodes to develop and maintain a pipeline of high quality, high impact projects informed by a deep knowledge of local opportunities, needs, capabilities and capacities and the benefits that can be realised from place-based projects.
- Centrally connected to expertise, knowledge and networks for finance and investment. This central hub can aggregate place-based projects into programmes and articulate them as investable proposals to connect to appropriate sources and models for investment.
The case for such hubs is increasingly accepted, but they have yet to be established, tested and evaluated in the robust way needed to enable widespread adoption. The hubs would lead engagement with financial institutions to target sources of investment and understand their requirements. They would also create and curate a set of assets, tools and resources for developing proposals and securing investment. Many issues also remain to be resolved, including that of the hubs’ governance and organisation, their funding, and their precise functions. Establishing the hubs at city-region level would most likely give scale and rootedness.
Pilot proposal
One way of getting things underway would be to establish a network of pilot hubs across the UK, from each of the devolved administrations and key English regions. This model enables easy addition of local platforms to grow and scale impact. The network would build and share knowledge and examples of different replicable approaches across the UK, contextualised to place-based requirements and connecting climate action with institutional investment and deliver the economic, social and climate benefits.
2022 is a decisive year for both UK and global climate action. Establishing a network of pilot local climate finance hubs would go some way to filling the missing middle in the country’s climate finance architecture. This would enable the delivery of the ambitious net zero roadmap laid out in the Government’s Net Zero Strategy, as well as ensuring nature-positive and climate-resilient regions across the UK.
[1] https://cp.catapult.org.uk/news/uk-cities-climate-investment-commission-report/