New blueprint outlines the role of the City in supporting industrial strategy, alongside catalytic public finance
London, 20th February 2024: Today, a new report authored by IPPR, with contributions from the Green Finance Institute, sets out a practical roadmap for ways to mobilise the private sector to invest in net zero at pace and scale.
The UK Government has acknowledged that £50-60 billion per year is required annually from 2030 to finance the UK’s net zero transition. Private investment will make up the majority of this but will require policy predictability and catalytic public finance to create credible investment opportunities. This new report offers a blueprint for a systematic, collaborative approach between the state and the market to mobilise private capital. This approach was informed by extensive consultation with the market and confirms the appetite of investors to work more closely with the public sector in an accountable, transparent way.
Drawing on insights from over 40 experts, Making Markets: The City’s Role in Industrial Strategy offers both broad commentary on the changes needed to attract greater private sector investment, as well as specific, practical recommendations. This includes an overview of what is needed to mobilise the private sector to invest, including:
- Long-term strategy , clarity and consistency in policy pathways, with investable transition plans.
- Catalytic public finance, where regulation alone is insufficient for the scale of the net zero challenge, private capital can be mobilised into priority sectors through blended finance solutions.
- Sector-specific policy interventions. Financial sector regulation is outpacing action in the real economy sectors, leaving private sector firms unable to take concrete steps beyond disclosure; more focus must be given to solving sector-specific policy and regulatory barriers and creating adequate financial incentives to invest.
- Partnership and monitoring progress, so that the market can operate with sufficient information and where needed, co-create investment solutions with government, with a function to track investor confidence and growth of markets.
The overarching recommendation is that greater partnership and collaboration between the public and private sectors, underpinned by investable sectoral transition pathways, is required to ensure strong, secure growth and a fairer, greener future. Understanding that different sectors have unique risk-return characteristics, and different public finance interventions will be needed for different sectors, alongside specific pools of private sector capital, is crucial.
It also sets out the tangible means to turn partnership into outcomes. A key recommendation to do this is to set up a new state-backed investment fund to deliver equity co-investments, recycling capital to catalyse new markets, alongside the government using existing grant funding and guarantee schemes more efficiently.
It offers recommendations in three key areas:
- Understanding and Collaboration: Sectoral stakeholder councils, guided by sectoral pathways, should be established to accurately monitor green investment, investor confidence, and the impact of policies to stimulate investment. This will be the baseline to establish trust and consistency between the market and the government, and must have the ability to support policy changes and co-create and operationalise solutions.
- Catalyse Green Markets: Even with the clarity that an industrial strategy will provide, catalytic state investment is necessary to scale investment at pace. A new public-backed institution should be established to take a more risk-appropriate approach to financing priority sectors, focusing on delivering an average public to private finance mobilisation ratio, rather than be constrained by risk-averse target returns or public borrowing target. Blended finance and the more strategic use of public capital should underpin all of this, with the ultimate goal of making emerging UK industries less risky to invest in.
- Deliver a Wider Policy and Regulatory Environment: It is essential to develop a robust green finance regulatory framework and real economy, sector-specific enabling environments. Sectoral stakeholder forums should develop solutions to sector-specific investment barriers, and delivering the Government’s 2023 Green Finance Strategy is important Several key policies and regulations having been delayed; a clear timeline and commitment to implement these must be provided by the government.
The Conservative government has taken key steps forward since COP26 with the establishment of the Net Zero Council, committing to implement key regulations, and making targeted investments in critical industries. Opposition parties have stated their commitment and outlined their plans to finance the net zero transition. This implies that there will be increased public finance and the need for the private sector to fill the remaining funding gap, which this paper seeks to close.
Sam Alvis, Associate Fellow at the Institute for Public Policy Research (IPPR), said: “Government needs to lead. We heard throughout our research that industrial strategy is about setting the direction and the boundaries for the private sector to follow. We cannot afford to wait. We are far behind on our climate targets, and the UK economy is in recession. Investment from both government and private finance is central to solving both those challenges. But without the building a closer relationship between the state and the City, now, through a green industrial strategy will create, we will never get the scale or pace of spending we need.”
George Dibb, Associate Director for Economic Policy at IPPR, said: “Net zero presents a challenge to the City like no other. This isn’t about investors identifying the best returns. We already know the tech and infrastructure we need, it’s about financing them at the scale required. Whilst our financial services sector is world-leading, neither firms nor our regulators are currently set up to confront this challenge. Equally a lack of strategy and insufficient catalytic investment from government are holding back progress.
“It’s a myth that there is a single, simple, de-regulatory reform that will unleash private investment. This report sets out a mix of policies, developed in conversation with investors themselves, to provide much-needed finance for an ambitious green industrial strategy.”
Ryan Jude Programme Director at the Green Finance Institute, said: “After leading the green finance agenda for the last five years, the Green Finance Institute is delighted to have supported IPPR with the technical insights and network to enable this critical report. We stand ready to support the government to mobilise the billions we need for the net zero transition in the UK, for which this report provides an actionable roadmap for the public and private sectors in the year ahead.”
Chris Cummings, Chief Executive Officer at the Investment Association, said: “Investment managers have an important role to play in the transition to a net zero economy and it is important that their insights are heard by policy makers. As such, we were pleased to sponsor this report, which canvassed a wide range of stakeholders, and outlines the crucial role that collaboration between private capital and the public sector plays in bringing about effective, tangible and positive change. The report highlights the risk that we concentrate too much on describing the problem and not enough on solving it. It’s time to create a culture of greater collaboration between policymakers and industry to create a market for growing innovative industries in the UK.”
Chris Hayward, Policy Chairman at City of London Corporation, said: Sustainable finance and the green transition provide an opportunity for transformational economic growth. The UK needs strong economic growth as a growing economy means more investment, more jobs, and more funding for public services. To reach the UK’s legally binding net zero commitments, private capital must play a significant role. Working together, the public and private sectors can jointly do even more – and the City stands ready to partner. I am pleased that today’s report by the IPPR, with contributions from the Green Finance Institute, provides a host of clear recommendations on how we can progress against our green ambitions. Sustainable finance is one of the best tools available to meet climate targets and London is well placed to be the world leader in driving growth and innovation in sustainable finance.
Rebecca Deegan, Chief Sustainability Officer at the Association of British Insurers, said: “To unlock the full potential of private-sector investment, new models of funding that blend public and private finance are crucial to reduce risk and make more projects investment grade. Long-term strategies, sector-specific interventions and the principle of catalytic state investment as detailed in this report are all ideas we support and are putting into action through the Investment Delivery Forum.”
Ian Bhullar, Head of Sustainability Policy at UK Finance said “Private capital will be essential to the net zero transition, and we know financial services has a critical role to play. We need a clear, consistent direction of travel to enable firms to allocate capital where it is needed to transform and decarbonise the economy quickly. UK Finance welcomes this research, which echoes our own findings and calls for stronger net zero policy leadership from all Parties.”
Karim Palant, Director of External Affairs, British Private Equity and Venture Capital Association said: ‘This report is an important call to arms for those who want to see Government and private capital working together to deliver investment in the transition. Private Equity and Venture Capital backs businesses for the long term – on average five to six years – and plays a vital role in providing the expertise, capital and long-term perspective needed in driving the energy transition and sustainability including in the scale up of new businesses to meet these emerging challenges . That is why thoughtful contributions like this one, which bring in voices from across the sector are so key in shaping the agenda. We look forward to working with all involved and with Governments of all stripes to take this vital agenda forwards.’
James Alexander, Chief Executive of the UK Sustainable Investment and Finance Association said: “Private sector finance is the true prize in unlocking the UK’s net-zero transition. This report rightly reflects the need for clear and decisive policy, founded on collaboration between public and private institutions, to bring the huge investment potential of the UK to fruition and rapidly advance faltering progress towards net zero.”
Rishi Madlani, UK Head of Sustainability at Investec, said: “A successful transition to a net zero economy can only be achieved through public and private sectors collaborating and playing their parts. At Investec, we strongly believe that businesses have a responsibility to support this transition. This blueprint is an essential tool to help public and private sectors come together – ultimately leading to a better and more equitable world for all.”
Heather McKay, UK Sustainable Finance lead at E3G said: “Unlocking UK growth requires the rapid mobilisation of green investment. However, the huge investment appetite of Britain’s private sector will not be unlocked without government action to rebuild market confidence in the UK’s net zero direction of travel. This requires a whole-of-economy plan which leverages Government’s full toolkit, including regulatory reform, policy clarity and catalytic public investment. Delivering this smart and coherent green growth strategy is not just essential for the UK’s net zero target, it is vital if the UK is to be a thriving, internationally competitive economy for years to come.”
Heather Buchanan, Co-Founder at Bankers for Net Zero said: “The financial industry has made a series of commitments for the transition to a net-zero economy. However, an enabling policy environment is essential to mobilise capital towards this goal. This report’s emphasis on long-term strategies, catalytic public finance, and sector-specific policy interventions aligns seamlessly with our commitment at Bankers for Net Zero. A successful transition necessitates a robust partnership between public and private sectors, as outlined in this report. We actively advocate for these recommendations, facilitating dialogue among policymakers, regulators, and industry stakeholders through initiatives like our Perseus program, showcasing the transformative potential of pre-competitive collaboration across the market.”
The views expressed in this report are solely those of the authors. It was developed from contributions, insights and feedback from the market.