There is, financiers agree, no shortage of capital ready and waiting to finance the low-carbon transition, but, too often, policy is misaligned, regulation is outdated and risk is misunderstood, mispriced or misallocated between the public and private sectors. Improving the dialogue between government and private sector investors will be central to resolving these policy barriers and unlocking finance.
Step forward the UK’s Green Finance Institute (GFI). The body – an independent organisation funded by government, the City of London Corporation and philanthropic organisations – was set up in 2019 with a mission to “accelerate the transition to a clean, resilient and environmentally sustainable economy by channelling capital at pace and scale”.
“Private capital is there to deploy at scale,” says Ingrid Holmes, hired from asset manager Hermes in April 2021 as the GFI’s executive director, number two to CEO Rhian-Mari Thomas, a former banker. “But there are all these issues around risk sharing, building markets … Public money and policy is going to be key.”
As the UK prepares to host COP26, and as the government develops policies to deliver its extremely ambitious carbon reduction goals, the work of the GFI is ramping up. Its approach, Holmes says, is based on “radical collaboration”, creating coalitions on, so far, energy efficiency in buildings, decarbonising road transport, financing sustainable supply chains and nature.
These coalitions bring together a range of stakeholders to focus on barriers to the investment needed to meet policy objectives. For example, the Coalition for the Energy Efficiency of Buildings, whose members provide 70% of mortgages written in the UK, has worked on a range of initiatives to help enable green mortgages and investments in energy efficiency retrofitting. These include analysis of investment barriers to retrofitting and heat decarbonisation and the development of principles for home retrofitting finance. The Coalition has also created a protocol to measure energy savings from retrofitting and allow lenders to better assess the risk of providing capital to energy efficiency projects.
Coalition members have launched a number of discounted green mortgage products, for which highly energy efficient homes are eligible, and products that offer cashback or extended loans for energy efficiency improvements. However, this increased supply must be met with policies that stimulate demand, says Holmes. These could include rebates on stamp duty – a tax paid by sellers of houses in the UK – based on their energy efficiency.
On transport decarbonisation, the GFI is looking at how the government might best deploy the public money it has earmarked for local authorities to reduce some of the barriers to investing in fast-charging networks. Today, developers of fast charging points have to pay for grid upgrades without any certainty that the capacity will be used, Holmes states, suggesting public money could be used to de-risk these investments.
Regulatory quick fixes
There are also regulatory tweaks that could help the finance sector underwrite electric vehicles (EVs). For example, providers cannot currently bundle consumer car financing and loans to install home charging systems, because consumer protection laws require the consumer to be able to return the product – impossible with a charging station. Bundling these products would allow providers to charge lower rates. Also, and crucially, such products – if they were also offered with a green power tariff – would provide visibility on the overall costs of running an EV versus a petrol or diesel equivalent, Holmes says. “This would enable the consumer to do a like-for-like comparison and see that it is cheaper to go electric.”
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Given the international reach of the UK’s financial sector, and the oft-repeated ‘Global Britain’ aspirations of the country’s government, the GFI’s horizons extend beyond its domestic market. Specifically, the GFI is working on a sustainable infrastructure guarantee product that would reduce the risk faced by investors in clean infrastructure projects in emerging economies, and reduce those projects’ cost of capital.
“It aims to address the issue of how we are going to start deploying at scale and pace capital from the global North to the global South, as well as enabling those countries to help themselves,” says Holmes.
This type of financial product, which typically involves a government or supranational financial institution taking the first hit should the investment lose money, is not new, Holmes states, but existing products tend to be generic. “This means the due diligence process when you are doing something like climate-smart infrastructure takes longer,” she says. “The innovation here is to come up with a vehicle that is very specific to climate… meaning the sign-up process is much quicker.”
Commodity supply chains
The GFI is also working on a proposal for a sustainable commodity import guarantee. This would help reduce the cost differential between sustainably and unsustainably produced commodities by reducing the amount of capital banks have to hold against trade finance loans made to importers of sustainable commodities. “Reducing the cost of capital for sustainable inputs would incentivise the more sustainable production of commodities from emerging markets,” Holmes explains.
Reducing the cost of capital for sustainable inputs would incentivise the more sustainable production of commodities from emerging markets. Ingrid Holmes, GFI
The GFI also has one eye on London’s role as an international centre for green finance with its work on a UK Taxonomy. Holmes is chairing the Green Technical Advisory Group, set up to provide the government with advice on establishing a UK equivalent of the EU Taxonomy, which defines which economic activities can be described by companies and investors as sustainable. The intent of such taxonomies is to help investors direct capital to such activities and reduce opportunities for greenwashing.
Critics argue that a home-grown taxonomy will simply replicate the extensive work already undertaken by the EU and add to confusion in the market. Holmes, however, argues that the EU’s work can be improved upon and made more internationally relevant. “It is a brilliant version 1.0, but I think we can make it better,” she says.
There is a case for “strengthening the level of ambition” achieved by the EU Taxonomy, which was “weakened due to the political negotiations” between EU member state governments and the European Commission, believes Holmes. The EU Taxonomy is also closely tied to EU legislation, “which means it is not very transferable to any other jurisdiction”.
An eye on COP26
Indeed, with COP26 approaching, the UK has staked out a leading position internationally on climate ambition. It was the first major economy to commit to net-zero emissions and boasts one of the world’s most ambitious medium-term reduction goals, pledging to reduce emissions by 78% below 1990 levels by 2035. However, the government is accused by critics of failing to put aggressive near-term policies in place to enable these targets to be met.
“The jury is out,” says Holmes. “All eyes are going to be on what comes out in the coming months in terms of concrete policy actions to deliver on the net-zero goals.” The UK government has recently published its hydrogen plan and is due to release its heat and buildings, and overarching net zero strategies in the coming months.
“The government’s focus in its Ten Point Plan on linking climate ambition to jobs, skills and industrial policy is the right one – but the question is, where is the detail?” she asks.
Meanwhile, COP26 is set to provide a fillip to climate commitments from the financial sector. “We are seeing the benefit of lots of banks, asset managers and asset owners saying, ‘yes, I am in on the net-zero challenge’,” she says.
The challenge is how to ensure that these commitments “materialise as a transformation process in the real economy”, she says. “We need to be thinking about what the post-COP architecture is, and what its legacies are going to be… It is going to be about turning commitments and ambition, particularly from the private sector, into a smart interventionist approach from government. There are no shortcuts on this stuff.”