The net-zero target needs to become core to the purpose of the financial system to deliver an investment-led green recovery, writes Nick Robin

Robins, Nick

English

LSE Research Online

Financing	net-zero:	mobilising	the	money	for	actionon	the	groundThe	net-zero	target	needs	to	become	core	to	the	purpose	of	the	financial	system	to	deliver	an	investment-led	green	recovery,	writes	Nick	RobinsGetting	to	net-zero	greenhouse	gas	emissions	is	increasingly	recognised	as	an	important	goal	by	leaders	within	theUK’s	financial	community.	Strikingly,	COVID-19	has	deepened	rather	than	deflected	financial	sector	commitment	toclimate	action.	The	UK	government’s	green	recovery	strategy	remains	a	work	in	progress,	but	becameprogressively	more	ambitious	through	2020.	Importantly,	delivering	the	UK’s	2050	net-zero	target	is	no	longerviewed	as	a	necessity	to	be	endured	but	rather	as	a	driver	of	growth,	innovation	and	job	creation.Making	this	happen	will	require	unprecedented	levels	of	private	and	public	finance,	delivered	in	ways	that	genuinelyrespond	to	the	bottom-up	needs	of	businesses	and	communities	across	the	country.	Major	banks	and	investors	areall	pledging	to	make	their	portfolios	net-zero	by	2050.	But	translating	this	into	real	investment	in	buildings,	industry,transport	and	nature	remains	a	critical	challenge.To	help	identify	how	the	UK	can	mobilise	the	capital	needed	to	deliver	net-zero,	I	was	asked	by	the	Climate	ChangeCommittee	to	chair	an	advisory	group	on	finance	to	feed	into	its	recommendation	to	government	for	the	UK’s	6th	Carbon	Budget.	Our	report,	The	Road	to	Net-Zero	Finance,	was	published	alongside	the	6th	Carbon	Budgetand	its	15	recommendations	incorporated	into	the	CCC’s	main	report.The	net-zero	economy	of	the	future	will	be	more	capital-intensive,	moving	from	a	system	reliant	on	resourcethroughput	to	an	investment-led	model	of	development.	Crucially,	this	shift	needs	to	take	place	this	decade,	with	theCCC	estimating	that	there	needs	to	be	a	five-fold	increase	in	extra	net-zero	investment	from	circa	£10bn/year	in2020	to	around	£50bn	in	2030,	before	peaking	in	2035	(Figure	1).Figure	1.	Achieving	net-zero:	estimated	additional	investment	and	operating	cost	savings	by	yearLSE Business Review: Financing net-zero: mobilising the money for action on the ground Page 1 of 4		Date originally posted: 2021-01-21Permalink: https://blogs.lse.ac.uk/businessreview/2021/01/21/financing-net-zero-mobilising-the-money-for-action-on-the-ground/Blog homepage: https://blogs.lse.ac.uk/businessreview/Source:	CCC	6th	Carbon	Budget	analysis	(2020).	Notes:	LULUCF	is	Land-Use,	Land-Use	Change	and	Forestry.	M&C	ismanufacturing	and	construction.These	capital	costs	will	be	more	than	offset	by	major	financial	savings	in	operating	costs	(Figure	2).	One	of	thestriking	analytical	findings	in	the	6th	Carbon	Budget	is	that	“the	level	of	UK	GDP	would	be	around	2%	higher	than	itwould	have	been	by	2035	as	resources	are	redirected	from	fossil	fuel	imports	to	UK	investment”.Figure	2.	Borrowing	costs	can	make	up	a	substantial	proportion	of	the	costs	of	meeting	net-zeroLSE Business Review: Financing net-zero: mobilising the money for action on the ground Page 2 of 4		Date originally posted: 2021-01-21Permalink: https://blogs.lse.ac.uk/businessreview/2021/01/21/financing-net-zero-mobilising-the-money-for-action-on-the-ground/Blog homepage: https://blogs.lse.ac.uk/businessreview/Source:	CCC	analysis	contained	in	The	Road	to	Net-Zero	Finance	report.	Notes:	Costs	of	electricity	are	included	in	the	energysupply	sector,	whereas	costs	of	other	low-carbon	fuels	such	as	hydrogen	and	bioenergy	are	included	in	the	sectors	that	use	thesefuels.	M&C	is	manufacturing	and	construction.	Other	category	includes	aviation,	shipping,	land-use,	land-use	change	and	forestry,agriculture,	removals,	waste	and	F-gases.The	depth	of	the	UK’s	capital	markets	along	with	its	growing	expertise	in	sustainable	finance	mean	that	thissignificant	ramp-up	in	investment	is	eminently	deliverable.	But	it	will	necessitate	being	resolutely	focused	onremoving	the	obstacles	that	exist.	Net-zero	is	still	not	embedded	into	routine	financial	decisions.	Market,	policy	andinstitutional	failures	continue	to	undermine	the	predictable	cash	flows	that	are	needed	to	attract	capital	at	scale.Demand	for	net-zero	finance	remains	mixed:	growing	in	the	energy	sector,	almost	non-existent	in	housing.Development	capital	is	insufficient	to	build	the	net-zero	infrastructure	pipeline.	Local	authorities	lack	the	capacityand	tools	to	channel	finance	for	place-based	priorities.	In	terms	of	practical	delivery,	financing	net-zero	also	needsto	be	connected	to	wider	issues	of	resilience	and	fairness,	making	sure	that	the	just	transition	becomes	a	reality.And	there	is	still	a	lack	of	decision-useful	climate	data,	including	the	absence	of	timely	information	that	tracks	flowsof	net-zero	financial	flows	across	the	economy.LSE Business Review: Financing net-zero: mobilising the money for action on the ground Page 3 of 4		Date originally posted: 2021-01-21Permalink: https://blogs.lse.ac.uk/businessreview/2021/01/21/financing-net-zero-mobilising-the-money-for-action-on-the-ground/Blog homepage: https://blogs.lse.ac.uk/businessreview/Overcoming	these	obstacles	means	making	net-zero	an	explicit	goal	for	the	UK’s	financial	system,	and	thencascading	this	down	through	private	finance,	financial	regulation	and	public	finance.	As	we	move	towards	theCOP26	climate	summit,	the	UK	could	show	real	leadership	by	committing	to	become	the	world’s	first	net-zerofinancial	system.	This	would	be	followed	by	introducing	mandatory	requirements	for	financial	institutions	to	developnet-zero	targets	and	plans,	matching	the	current	focus	on	managing	climate	risk.	These	targets	will	help	to	drive	thenecessary	innovation	in	financial	services	that	is	needed	to	respond	to	the	net-zero	needs	of	households,businesses	and	the	public	sector.	Sector	by	sector	transition	pathways	will	also	need	to	integrate	financing	as	acore	element	so	that	breakthrough	strategies	can	be	developed,	as	is	starting	to	take	place	for	green	buildings.Getting	this	financial	shift	underway	needs	to	be	led	by	the	post-COVID	recovery	plans,	using	this	as	an	opportunityto	fast-track	net-zero	investment	and	make	this	core	to	the	UK’s	public	finance	framework.	At	the	heart	of	this	willbe	making	net-zero	part	of	the	purpose	of	the	UK’s	existing	public	finance	institutions	(such	as	the	British	BusinessBank)	and	getting	the	new	National	Infrastructure	Bank	(NIB)	operational	as	soon	as	possible.	The	prize	is	to	placenet-zero	at	the	heart	of	the	NIB’s	mandate,	crowding	in	the	private	sector	and	working	with	local	authorities	todeliver	investment	on	the	ground.	The	NIB	also	has	the	potential	to	be	an	anchor	investor	in	just	transition	initiativesacross	the	country,	playing	the	role	that	the	European	Investment	Bank	does	in	the	EU.To	finance	the	post-COVID	recovery	strategy,	a	strategic	programme	of	green	sovereign	bonds	has	immensepotential,	responding	to	rising	investor	demand.	The	chancellor’s	announcement	that	the	UK	will	issue	its	firstsovereign	green	bond	in	2021	will	not	only	help	to	tackle	climate	change,	but	could	also	boost	green	jobs	across	thecountry.	It	can	also	serve	to	catalyse	additional	green	bond	issuance	by	business	and	public	bodies,	building	on	thepromising	start	from	the	new	Community	Municipal	Investments	in	West	Berkshire	and	Warrington.	The	Bank	ofEngland	can	play	its	own	part	by	becoming	a	net-zero	central	bank	and	aligning	its	finance	facilities	and	liquidityprovision	with	the	UK’s	climate	goals	–	not	least	to	respond	to	the	COVID-19	downturn.Net-zero	finance	is	not	just	a	national	priority,	but	also	a	global	imperative.	Mark	Carney	has	set	out	acomprehensive	private	finance	agenda	for	the	COP26	summit:	net-zero	is	included	as	part	of	the	‘returns’	pillar	ofhis	four-part	‘reporting,	risk	management,	returns	and	mobilisation’	mantra.	This	year,	the	UK	is	president	of	bothCOP26	and	the	G7	and	as	such	has	a	major	opportunity	to	channel	capital	behind	a	sustainable	and	inclusiverecovery	from	COVID-19	(for	example,	through	coordinated	issuance	of	green	sovereign	bonds	across	the	world).This	change	in	financial	mindset	from	one	focused	on	climate	risk	to	one	also	focused	on	net-zero	delivery	looks	setto	be	a	defining	feature	of	2021	–	but	also	the	rest	of	the	decade.♣♣♣Notes:This	blog	post	is	based	on	the	author’s	report	to	the	UK	Climate	Change	Commission.The	post	expresses	the	views	of	its	author(s),	not	the	position	of	LSE	Business	Review	or	the	London	Schoolof	Economics.Featured	image	by	Tyler	Casey	on	UnsplashWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	Policy			LSE Business Review: Financing net-zero: mobilising the money for action on the ground Page 4 of 4		Date originally posted: 2021-01-21Permalink: https://blogs.lse.ac.uk/businessreview/2021/01/21/financing-net-zero-mobilising-the-money-for-action-on-the-ground/Blog homepage: https://blogs.lse.ac.uk/businessreview/

Financing net-zero: mobilising the money for action on the ground

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Financing net-zero: mobilising the money for action on the ground

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