Introduction
The financial and related professional services industry is responsible for capital allocation and has a critical role to play in financing and driving the net-zero transition. Last year, in our 'Enabling the net-zero transition' report in collaboration with PwC, we called for the government to provide more subsidies and market guidance to incentivise and de-risk long-term investment into green infrastructure and technology. The government has not yet adopted this approach, but the US has. The Inflation Reduction Act (IRA) unveiled $369bn of subsidies for US green infrastructure projects, overriding objections that they undermine trade policy commitments. Initial indications suggest that the IRA is channelling more investment towards the US. The EU has responded by launching its own green industrial strategy.
In March, the UK government released its ‘Update to the Green Finance Strategy’, setting out its ambition to be the world’s first net-zero aligned financial centre. The government must now deliver on its promises and build on this strong foundation. This requires a comprehensive response to the increased level of international competition (as the Chancellor has promised for the Autumn Statement) and developing a strategy which draws on the UK’s strengths to ensure that it remains an attractive market for green investment. We call on the government to take forward action in three key areas - long-term policy, long-term certainty and nurturing competitive advantage.
1. Long-term policy
As highlighted in the latest Intergovernmental Panel on Climate Change (IPCC) report on climate change, the world is running out of time to avert the worst effects of global temperature rises. Over recent years, the UK government has risen to this challenge, being proactive in producing strategies and plans for net zero including the Ten Point Plan, Net Zero Strategy, and Powering Up Britain, and is in the process setting a high-level of ambition. The government should now go further by:
- Bringing together these disparate strategies under a clear and coherent narrative for the net zero transition, accompanied by detailed delivery plans to incentivise investment and provide clear signals to the markets and drive action across the economy.
- Working with the private sector to build on its investment roadmaps, released as part of the Green Finance Strategy, to create specific, quantifiable, and actionable implementation plans for sectors across the economy, particularly in high-emissions industries.
- Developing and communicating detailed timelines for how the UK plans to reduce its reliance on fossil-fuel energy, helping firms understand the attractiveness of projects and allocate capital.
2. Long-term certainty
Meeting the UK’s 2050 net-zero target will require investments in technologies and infrastructure projects at varying levels of maturity and attractiveness. These investments are often capital intensive and have long returns on investment, proving a risk for many private investors. To attract private finance, the government needs to offer the right signals to the market to provide long-term certainty for investors, laying out clearly the incentives to invest in the UK. Given that capital is highly mobile, the government otherwise risks losing investments to more attractive destinations. The government should consider how it can make best use of the tax regime in the UK, which is often short term in focus and has been subject to frequent change over recent years, by:
- Ensuring businesses that offer green and sustainable finance in the UK should be subject to a tax regime which is internationally competitive and provides long-term certainty in tax rates, policy making, and administration.
- Reviewing and expanding the scope of investment reliefs such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) relief to scale up investment in key net zero industries, especially nascent low carbon energy and infrastructure.
- Adjusting and broadening the R&D regime, which is still geared towards investments in manufacturing over services, to support the development of technology for the net zero transition.
3. Nurturing competitive advantage
The UK is well positioned to build on its strengths in financial and related professional services, including strong financial markets, access to a skilled workforce, leading legal system, and a competitive regulatory environment to foster green growth. The UK should use this solid footing to introduce policy and incentives to nurture industries in which it has, or could have, competitive advantage. This includes industries such as carbon capture, carbon use and storage (CCUS), green hydrogen, tidal and wind power, battery and hydrogen storage, and sustainable aviation fuel. In doing so, the UK can progress the net zero transition while creating jobs, driving regional growth, and securing greater energy security. The government should support these industries by:
- Committing to delivering projects at pace, coordinating regulation and delivery such as manufacturing and installation, and dealing with bottlenecks by driving policy and delivery alignment across departments and at multiple levels of government.
- Creating a specific government unit to focus on net zero planning and delivery.
- Supporting this with planning reform, upgrading grid capacity and a focusing on improving green skills to reflect workforce needs.
- Crowding in private investment into projects, some of which are high-risk for investors, supported by public investment (such as blended finance) or subsidies, accompanied by effective and proportionate regulation and reporting standards to de-risk and scale-up low carbon investments.
Conclusion
Green and sustainable finance is now a major investment area, and governments around the world are recognising this and supporting industry to attract investments into green technologies and renewable energy. The government must act now to respond to the increased level of international competition, providing the right policy and signals to the market to provide long-term certainty for investors, nurture competitive advantage and drive the net-zero transition. Private finance stands ready to invest if the government can provide the right parameters and incentives to do so.
