Our specialists outline how the Budget aims to get companies, financial institutions and institutional investment firms involved in helping the UK adapt to the effects of climate change and build a more resilient future.
Key takeaways:
- Investment and upskilling will drive innovations that will help the UK reach its net-zero ambition and create “green-collar jobs”: new investments in green tech, energy and a range of other sectors should fuel the growth of innovative new firms and lead to green jobs being created.
- The creation of a new UK lender will increase the depth of the infrastructure market: by focusing on local projects and filling in the gaps left by the private sector, the new UK infrastructure bank will help nurture expertise at the local level and create new investment opportunities.
- Amending the Bank of England (BOE) mandate to incorporate sustainability will provide a boost to the UK’s green bond market: the new focus on sustainability will help reduce the cost of issuance and boost demand for green bonds.
- Green gilts and green retail savings represent major breakthroughs for investors and companies alike: creating a liquid sovereign green curve and boosting demand through retail channels could persuade more corporate borrowers to issue green bonds, deepening and diversifying the market.
The UK government has set out a plan to promote a post-pandemic economic recovery in its 2021/22 Budget. It includes a number of significant initiatives aimed at linking its climate resilience and net-zero-emissions ambitions to the country’s economic growth and the development of the broader sustainable finance market.
Even though they’re still in their early stages, these initiatives could have a significant impact on a range of corporate sectors, the investment community and the wider sustainable finance market. This could result in new opportunities for corporate finance decision-makers and investors.
Innovation and upskilling: new investments should benefit investors and a broad array of companies
The new Budget is putting innovation firmly at the centre of the government’s long-term economic plan, providing a range of support measures for UK companies and creating new opportunities for investors. Its goals include helping commercialise new green technologies and business models, creating more green jobs and boosting private investment in high-growth firms as well as businesses in energy, infrastructure and housing.
The plans include a new “Net Zero Innovation Portfolio” – a £1 billion fund to speed up the commercialisation of low-carbon technologies and business models – and a £375 million “Future Fund: Breakthrough” scheme, which will, alongside the private sector, invest in innovative, high-growth UK clean tech firms. These initiatives complement the government’s Ten Point Plan for a Green Industrial Revolution, which was announced in November 2020. It aims to attract up to £36 billion of private investment in clean energy by 2030 and create over 120,000 jobs in offshore wind, hydrogen production, green transport and real estate. The plan should nurture some much-needed expertise and upskilling that will help increase the UK economy’s resilience to climate change.
New national UK lender to increase the depth of the infrastructure market
The Chancellor has confirmed the creation of a UK infrastructure bank, which will drive investment into less-established green industries and local projects, increasing the depth and breadth of the infrastructure market.
When it is launched, the Leeds-based National Infrastructure Bank will have £22 billion of financial capacity to achieve its objectives, made up of £12 billion of equity and debt capital and the ability to issue £10 billion of guarantees. There are hopes that it will entice more than £40 billion of private investment. From this summer onwards, the Bank will provide local authorities with funding at a highly competitive rate of gilts + 60 basis points and advice about complex projects. The success of the projects local authorities are responsible for is essential if the UK is to achieve its net-zero emissions target by 2050.
Crucially, the Bank will focus on getting involved where it believes it can have the greatest impact: for example, by investing in projects that otherwise would not have got off the ground, or by bringing projects forward to help meet net-zero or local growth objectives. By focusing on developing new infrastructure assets and limiting its exposure to projects that could be fulfilled by the private sector, the Bank looks set to play an important role in the growth of the UK infrastructure market and create new investment opportunities without crowding out or competing with private lenders and investors.
The Bank of England is going green, which could boost demand for green debt and encourage the financial system to move towards sustainability
In a significant development, the remit of the BOE’s monetary and financial policy committees has been expanded to incorporate a focus on environmental sustainability and the drive towards net-zero emissions. This should result in increased supply of green finance and nurture a financial system that facilitates the transition to a net-zero economy, increasing the UK’s resilience to climate change.
The first evidence of this move that we are likely to see will be in form of the BOE’s asset purchase programme – otherwise known as quantitative easing. Reports suggest the BOE has already stated it will start “greening its corporate bond-buying programme” from the end of this year by considering climate risks when buying corporate debt. What’s more, it could build on this by buying more certified green bonds and sustainability-linked debt. Increased BOE demand for green assets could attract a wider range of issuers to the market, and – as is the case with the impact of central banks’ quantitative easing measures on conventional assets – apply downward pressure on bond yields. This would of course reduce costs for borrowers.
Over the longer term, the BOE’s greener policy mandate could represent a solid platform from which to build on its recent efforts to make the financial system more resilient to climate change. The BOE has asked banks and insurers to carry out a first in-depth climate “stress test” in June to calculate the potential impact of climate-related risks on the UK financial system. Meanwhile, the government looks likely to introduce new climate-related corporate disclosure requirements later in 2021. These requirements will be based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), of which the BOE is a member and key advocate.
The BOE’s new mandate also provides it with a new motivation to consider a wider range of tools to support the development of a net-zero economy through the structure of the financial system. For example, it could fine-tune banking capital regulations – potentially by adjusting how banks’ risk-weighted assets are measured to account for resilience to climate change – to help banks speed up their green and transitional lending. Pricing benefits could be passed on to borrowers embracing low-carbon technologies. Or it could adjust exposure requirements for institutional investment portfolios to incentivise capital allocation towards companies that are more resilient to climate change and other sustainability risks. These kinds of changes could dramatically affect how, and to which companies, capital is allocated across the UK’s financial system. This also underscores how vital it is for companies to manage exposure to climate – and other environmental, social & governance (ESG) – risks.
Green gilts could be a game changer for investors, companies and the sustainable finance market
The UK government has stated that it will get involved in the sovereign green bond market for the first time. It has plans to issue up to £15 billion this year – one of the largest green bond programmes in Europe – with the first sale likely to be in June. The green gilt programme is to be complemented by a green retail savings product that will be launched around the same time.
We should find out more about how the proceeds from the green gilts will be spent in June, with early indications suggesting that they will finance projects seeking to tackle climate change and other environmental problems. As well as channelling billions of pounds of public funding into green and environmental projects, this could represent a major breakthrough for the UK’s sustainable finance market more broadly by helping to create a liquid sovereign green bond curve. This would represent an important pricing benchmark for companies and other entities looking to issue green sterling-denominated bonds. The UK’s first sovereign green issuance could also attract more corporate borrowers to market: a recent study of European bond markets by NatWest has shown that when sovereigns take the lead on green borrowing, companies generally follow. This often results in greater domestic corporate green bond issuance and better diversification among the domestic green issuer base.
As the green gilt programme evolves and more green bonds are issued, we are likely to see a wider pool of investable assets for domestic and global investors active in sustainable finance markets, where demand continues to outstrip supply. Similarly, thanks to the green retail savings product, more savers and investors are set to become better acquainted with sustainable products. Over time, this should lead to more demand – via pension funds and similar vehicles – for green assets. This is a trend that we only see accelerating as sustainability-conscious millennials exert ever-increasing influence on capital allocation decisions.
A positive step forward
While it’s too early to measure how effective they will be, we believe these initiatives represent a positive step forward as the UK government aims to ensure a climate-resilient future and achieve its goal of net-zero carbon emissions. They have certainly generated interest among our clients and the wider market. If they reach fruition, they have the potential to shape the UK’s sustainable finance market for years to come.