Mobilising green investment: challenges and opportunities for the UK economy

9 June 2023


Reported by Pedro Vianez, EPSRC Doctoral Prize Fellow in Physics, Cavendish Laboratory, University of Cambridge

This Cambridge Zero Policy forum seminar explored the second Green Finance Strategy, published on 30 March 2023, with Ben Fagan-Watson, Head of the Green Finance Team, Net Zero Strategy Directorate.

On 30 March 2023 the UK government published the second Green Finance Strategy, which outlines a roadmap for harnessing private sector investment in support of climate and environmental objectives. Ben Fagan-Watson, Head of the Green Finance Team in the newly created Department for Energy Security and Net Zero (previously part of the Department for Business, Energy and Industrial Strategy), met with the Cambridge Zero Policy Forum to discuss its main points and objectives.

Following Russia’s illegal invasion of Ukraine in February 2022, the global energy market has been volatile and unpredictable. This has led to the UK government offering an unprecedented level of support to both consumers and firms in order to keep prices and energy bills down. It is, however, clear that in order to meet Britain’s future energy needs as well as guarantee its own energy security, the energy system needs to be diversified and decarbonised whilst maintaining and expanding domestic energy production capabilities.

In March 2023 the second Green Finance Strategy (an update on the 2019 report of the same name) was published by the UK government outlining its strategy for harnessing capital from the financial and professional services sector in support of net zero and broader nature goals.

Funding requirements and the present financial gap

The UK has a good track record of decarbonising whilst also growing the economy, decarbonising faster than its G7 partners from 1990 to 2022. It is estimated, nevertheless, that by the late 2020s and early 2030s, about £50-60bn a year of additional capital investment will be required each year, every year in order for the UK to remain on track to meet its net zero climate targets. To put this in perspective, £23bn was invested last year, and £27bn the year before that; but prior to that investments were £10-15bn per year.

In addition, a 2021 report by the Green Finance Institute also estimated that between £44-97bn over the next ten years alone will be required in order to fulfil all domestic nature-related goals. It is clear, therefore, that there is a significant financial gap that needs to be filled in order to meet both climate and nature-related goals. Here, the private sector ought to play an important role.

Significant market opportunity for financial and professional services in the UK

Green finance, that is, financial products and services in which climate and environmental risks and opportunities take a central role in investment decision-making, has grown fivefold in the UK since 2017, with London ranking #1 in the Global Green Finance Index since 2021. With an increased focus towards ‘green’, ‘sustainable’, and ‘ESG’ (Environmental, social and governance) factors and clear shifts in both consumer interest, organisational commitments and asset management strategies, the UK has the opportunity to establish itself as a market leader in the field. This requires, however, growing the finance sector domestically and internationally. It will also require continuing efforts to remain attractive to private investment in both net zero and energy security projects. Doing so will also allow the UK to exert a leadership position in net zero alignment of global financial flows, by ensuring it is the most innovative, highly skilled and well-capitalised market offering green finance services. The global market for green financial services is estimated to be worth £1 trillion to UK businesses by 2030.

The 2023 Green Finance Strategy

Published on March 30 2023 as part of the wider Powering Up Britain package, the 2023 Green Finance Strategy outlines the UK’s government strategy for harnessing investment from the financial services sector in support of climate and environmental commitments. It includes ambitious new policy on disclosure, financial market regulation and the use of government levers in mobilising private investment, marking also the first time that nature is directly brought in as part of the framework (previous frameworks, for instance, had been mostly climate-adaptation and climate-mitigation focused). As outlined, the UK’s government’s view is that while early stages of transition should be mostly taxpayer-funded (i.e. R&D and start-ups, via national agencies such as Innovate UK), later stages of growth and scale-up would be taken up by the private sector. This ensures that the full economic cycle is supported, from initial conceptualisation to implementation.

Policy announcements

The following were some of the headline policy announcements discussed:

  • the Transition Finance Market Review, an independent review on the present state of transition finance, and how the UK can become a better place in ensuring energy-intensive companies have the right tools and support to transition;
  • details on the UK’s current framework for becoming a Net Zero-aligned Financial Centre, including specific details regarding disclosure requirements by large companies on climate risks and opportunities. the UK has also supported the Taskforce for Nature Related Financial Disclosures, which is expected to publish its final framework by September 2023;
  • committing to a consultation on the UK Green Taxonomy, which will define what is a green economic activity and which standards will be set to define it;
  • a commitment to intensify work with the UK’s Public Finance Institutions like Innovate UK; the British Business Bank, UK Export Finance and the UK Infrastructure Bank (the latter of which has £12bn of capital and £10bn of guarantees to deploy)
  • 4 new net zero investment roadmaps for hydrogen, CCUS, offshore wind and heat pumps were published alongside the strategy, with more coming later in the year.
Take-home messages

There are just 27 years left to go to become a net zero economy by 2050. While the UK is currently on track to meet its Carbon Budgets 4 and 5 as outlined in the 2008 Climate Change Act, a significant gap remains in funding over the next 10 years, with an estimated £50-60bn a year of additional capital investment required every year in the late 2020s and early 2030s in order to meet present ambitions. The UK has the challenge of diversifying and decarbonising whilst also growing its economy, but also the opportunity to assume a leadership position as a green finance world centre. Participants also discussed a gap in the current evidence available on topics such as the scale of the investment required, how to best incorporate nature into financial decision-making, and adaptation of present business models to meet transition goals.

Image by Wolfgang Hasselmann - Unsplash