Mobilising private capital to reach net zero

The role of private finance in climate transition

Countries across the world are increasingly addressing the necessity and urgency in tackling climate change. Yet decarbonisation requires significant reallocation of resources and new investments in sustainable infrastructure, energy, transport, built environment and innovation.

US$1-2tn a year is needed to achieve net zero by 2050

The Energy Transitions Commission estimates that US$1-2 trillion (1%-1.5% of global GDP) a year is needed to achieve net zero by 2050 . Public finance alone will not be able to deliver the target. The owners and managers of assets, including banks, insurers, pension funds and asset managers, have crucial role to play in channelling private finance and financing transition, and growth.  

With COP26 in Glasgow approaching, the UK has an opportunity to show leadership in financing the transition to net zero.  

A global shift to ESG driven investment approaches

Investors have historically approached climate change from a risk management perspective. Natural disasters and paradigmatic shifts in economic activities are likely to make some businesses unprofitable and affect asset valuations. But alongside risk management, the financial system has started to place more focus on investing for positive sustainability impacts.

Approaches such as excluding certain sectors or companies that generate harmful economic and social governance (ESG) impacts; investing in projects for positive performance relative to industry peers and investing in targeted sustainability objectives (such as decarbonisation) have entered the mainstream.

This mainstreaming of sustainable and green finance is demonstrated by strong growth in sustainability-related investment products in the past two years. For instance, the annual global issuance of sustainability-related bonds in 2020 grew to an all-time record of £432 billion, doubling 2019’s level. ESG exchange traded funds (ETFs) saw net inflows of £65 billion in 2020, three times higher than 2019 and 10 times higher than 2018. 

Investor interest driving sustainable investment in the UK

Financial institutions and the UK investment industry are actively focusing on financing the green transition. Many markets in the world struggle to accelerate investment in climate and sustainability initiatives due to a lack of investor interest. But the UK’s sustainable finance ecosystem benefits from asset owners and an investment industry, with has strong ESG awareness and drive to invest in green. This combined with the UK’s huge financial market reach and capability, makes the UK a great choice for global financial leadership in sustainable finance.  

642 UK signatories to the UN's Principles for Responsible Investment Programme, second only to the US.

UK investors’ efforts in sustainable investment is reflected in the encouraging level of support for the United Nation Principles for Responsible Investment (PRI) programme. There are 642 UK signatories, with £8.8 trillion assets under management, second only to the US.   Among these 642 signatories, 72% are investment managers and 12% asset owners. Almost all leading institutional investors in the UK are PRI signatories. These investors have made a public commitment to incorporate ESG issues into their investment practices. UK signatories also top the PRI’s investors assessment on implementation of responsible investment. Along with the Nordics, the UK has the highest share (70%) of signatories graded A or A+.   

Matching commitment to action

As well as making commitments, the UK investment industry demonstrates promising progress in allocating funds in accordance with responsible investment principles.

In 2020, the value of responsible investment (RI) funds under management almost doubled to £55 billion from the previous year. At the same time the value of net retail sales in responsible investments funds more than tripled to £10 billion.

Even though the share of RI funds in the UK’s funds under management is still relatively small at 4.5%, its growth has picked up momentum rapidly and shows huge potential for further increase. The growth marks UK investors’ strong appetite for sustainable investment that is driving change.

Responsible investment funds managed in the UK grew steadily throughout 2020

The UK has also achieved some early successes in catalysing private investment into climate change initiatives. The UK Green Investment Bank (UKGIB) was a good example. The UKGIB was created by the Department for Business, Energy & Industrial Strategy (BEIS) in 2012 as a response to the passage of the Climate Change Act in 2008, with £3 billion provided for capitalisation from the Chancellor.

For every £1 the UKGIB invested, £3 in private sector investment was mobilised

Within three years of its establishment, UKGIB nearly tripled the investment in UK green infrastructure. For every £1 the UKGIB invested, £3 in private sector investment was mobilised. The UKGIB demonstrated great success in mobilising investment in the offshore wind market and contributed to establishing UK’s status as the world’s largest offshore wind market. 

The UK government is also committed to helping developing countries tackle climate change through the International Climate Finance (ICF). Between its inception in 2011 and 2020, the ICF mobilised £2.2 billion private financing for climate change initiatives in developing countries.

Actors in the UK financial system are responding to the call for more private finance in the climate transition. With strong expertise, great size and depth of international pool, the UK financial services industry is ready to contribute their strengths to mobilising and scaling up investment to net zero in the UK and the world.