03 Jul Private investors require more certainty to support UK net zero plan
Uncertainty surrounding policy changes has impacted international investors, with investors urging for a long-term green industrial strategy for the UK. Both rival political parties in the UK have claimed they are committed to achieving net zero by 2050, but determining the price of the transition and how the next government will cover this expense remains unknown. Both political parties believe that securing more private-sector investment is critical, but both must define a clear plan as to how they will gain investor support.
In 2021, the Office for Budget Responsibility (OBR) calculated that reaching net zero by 2050 would cost in the region of £1.4 trillion, based on data from the Climate Change Committee. OBR assumed that public spending would be approximately a quarter of this figure.
In the sixth carbon budget produced by CCC, achieving the UK’s net zero target would require investment levels to increase during the 2020s, reaching a figure of £50 billion a year between 2030 and 2050. CCC suggested that the investment plans should be managed by the government, but predominantly funded and delivered by private businesses and individuals. There isn’t a clear plan for how the government can secure investment from the private sector, but policy experts suggest there are several key measures that could help deliver a clear and comprehensive strategy for the future.
Creating Political Certainty
The political challenges in recent years and adjustments to climate measures have impacted investor confidence in the UK. The policy uncertainty of the last few years has upset many international investors and created an image that the UK isn’t a reliable long-term option.
According to research from think-tank the Institute for Public Policy Research, private sector investment is currently lower in the UK than in any other G7 nation for the third consecutive year. The IPPRs priority suggestion to strengthen private investment levels is for the government to secure a long-term green industrial strategy, to generate business and regulatory confidence.
Using capital efficiently
The US Inflation Reduction Act is a prime financial intervention. While the UK cannot replicate and compete with the IRA, the UK must deliver public funds in areas where it will create the biggest impact.
The UK must strategically spend public money on the right sectors to enhance market confidence. Industry experts believe that public money should be aligned with the UK’s net zero plan and directed towards critical sectors. The new government must create a net zero investment plan, including a clear and structured sector-focused road map. Previously published strategies on net zero have lacked details on how the government will incentivise the required amount of private finance to achieve its goals. E3G believes that implementing monitoring plans to measure financial flow should be introduced, to support the government focus more effectively. This type of document would create clarity on the economic transition, including sector-specific transition pathways and what support the government is creating regarding policy, regulation and targeted public investment.
Creative financing structures
The specific financial mechanisms to drive greater private investment would differ by industry. Policy experts believe the government needs to be more innovative, rather than depending on conventional grant-based financing schemes. Creative financing options could be adopted that operate similarly to the contracts for difference scheme which incentivised investment in renewable energy.
Prioritising Institutional Capital
Broader reforms to enable institutional investor capacity could have a considerable impact. Peter Bachmann, the MD of sustainable infrastructure at Gresham House believes that enabling large institutional investors to build allocations into private assets would benefit net zero plans because many net zero priority areas depend on nascent markets and technologies outside of public markets and need private capital investment.
Other industry professionals believe that the government must create a more positive story, enabling private investors to harness the opportunities of net zero. Many private sector partners want the narrative adapted towards prioritising the investment benefits associated with net zero.
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