The budget announcement of last week has been viewed by many within the green community as underwhelming and insufficient. This week we’re exploring where and how the government could be doing more to stimulate a green recovery.
The opacity we are facing in assessing the budget’s green policies is seemingly densening, as the latest critics of Rishi Sunak’s budget scramble to draw concrete actions from the Ten Point Plan for Green Revolution.
With one of the key focus areas of COP26 centring around switching the finance system to low-carbon investments, the hope was for more tangible details around the extension of the Bank of England’s remit to “help channel billions of private capital towards green spending.” Yet, as highlighted by the Tony Blair Institute for Global Change, the new National Infrastructure Bank will actually invest less in the UK each year than the £7bn which used to come from the European Investment Bank (prior to Brexit). With limited specifics of the desired focus of these collaborations, the government’s action doesn’t yet seem to be fulfilling their rhetoric.
That’s not to say there aren’t some pockets of hope – for example the £375 million UK-wide ‘Future Fund: Breakthrough’ designed to invest in innovative companies, including those in the clean tech space. Also worth mentioning is the £68 million to fund a UK-wide competition to deliver new energy storage to reduce the cost of net zero by storing excess low carbon energy over longer periods.
But, with public finances in dire straits, where are the structural and regulatory changes the sector so desperately calls for? The government needs to leverage investment capital to turn billions into the trillions needed to achieve the UN’s hope for a more sustainable future.
There are three areas which consistently arise, as to where government policy can intervene to build a long-term approach to both green finance, and ‘financing the green’.
1) Measurement and Reporting of ‘Impact’
Let’s turn to the cliché to end all business-management clichés – you can’t manage what you don’t measure.
In the aftermath of the Wall Street Crash in 1929, the world wondered how investors were ever able to make robust stock selections, when every company published accounts according to their own standards. The same can be said of our current regard for ‘Impact’.
As we’ve highlighted in previous posts, the appetite for ethical/responsible/sustainable investing has risen exponentially in recent years – but with no consistent measure as to the environmental or social impacts of a company, how can Impact sit safely alongside Risk and Return for investment decision making?
Credit: Spectrum Impact
The government needs to be leading companies into collecting and auditing Impact data, much as the Japanese, French and Italians are. As soon as this is mandated, a critical founding step towards impact-weighted financial accounts becoming the new normal will be taken. This would then provide the critical visibility needed into which organisations are adding or detracting most to the environmental crisis. Unfortunately, the government’s decision to make disclosures related to climate change risk mandatory by 2025 doesn’t go far enough.
2) Building sustainable market infrastructure
The explosion of Venture Capitalist markets in the 1980s offers a great example as to how an industry can be radically transformed through regulatory changes. Our current governing framework around institutional investment imposes the pure pursuit of profit which hugely limits the flow of capital into Impact projects. In response to increasingly conscious consumers, the French introduced a ‘90/10 legislation’ in 2001, which stipulates that every third-party pension manager (big investment company) has to offer a scheme whereby 10% of pension assets are invested in unlisted, “solidarity designed” organisations. Likewise, calls for UK pension funds to have at least one trustee with sustainability or environmental expertise have yet to be answered. As such a large segment in investment universe, without the financial backing of these investors, many innovative enterprises could be overlooked.
3) Introduction of incentives for investors in positive Impact
The UK’s first ever green gilt issuance was announced, and at £15 billion, it will be the second ever largest green sovereign debt product. This investment will help finance critical projects to tackle climate change and other environmental challenges, fund important infrastructure investment, and create green jobs across the UK. Yet, no additional tax incentives have been offered to investors, causing fears of low uptake, and therefore limited funding for the proposed projects.
The need for this kind of government action is supported by many, for example Bill Gates., In a recent interview with Harvard Business Review, Gates marked the incentives for riskier venture capitalist activity as the lynch-pin for step-change sustainable technologies coming to fruition.
No advancement on the expiring Social Investment Tax Relief programme instigated a few years ago was announced despite calls for an extension. A letter to the Treasury with 33 signatories from the social enterprise and third sector stated: ‘These two years will also give us the breathing space to consider the replacement of the tax relief with something more ambitious which can turbocharge the levelling up agenda and increase investment into these unique forms of business that have a positive social and environmental impact in their communities.”
In conclusion, given current circumstances, we need to be more patient. MPs are claiming that a ‘plethora’ of new policies are en route, and the Treasury themselves will be looking inwards first, to ensure that departments will place greater emphasis on what the environmental impact of their own policies could be. Yet, as ever, we hear the discourse but are yet to see the deeds.
– Read ‘Impact’ by the founding father of Impact Investing, Sir Ronald Cohen to learn more about how to reshape capitalism to drive real change
– Check out further green policy from the House of Commons’ Library
– Dig into the different ways to measure Impact with this guide from Harvard