Supporting the flow of sustainable finance: Focus on the UK
This article was written by Nadia Humphreys, Global Head of Sustainable Finance Data Solutions at Bloomberg.
Ensuring effective sustainable finance policies is a complex undertaking. What are the incentives in place to increase their flow in the UK?
At Bloomberg’s recent Sustainable Finance Forum in London, I moderated a panel discussion that explored the emerging UK regulatory landscape, the potential impact of this year"s general election on the regulatory agenda, and how the UK can help unblock investment flows to a sustainable future.
Panelists included Ingrid Holmes, Executive Director of the Green Finance Institute, Huw van Steenis, Vice Chair at Oliver Wyman & NBIM, and Ilan Jacobs, Managing Director and Head of UK Government Affairs at Citi.
According to Ingrid Holmes, what is currently needed to support the flow of sustainable finance is a strong policy framework to guide sustainable finance efforts. "The taxonomy consultation is ready to go," said Holmes, pointing to the importance of consistent policy direction amid changing economic leadership.
While the UK has pioneered legislation such as the Climate Change Act, further policy enhancements are required to meet net zero commitments effectively, said Holmes. Importantly, they must address both climate mitigation and adaptation, particularly in managing risks like coastal erosion and heat stress, which have significant cost implications.
Additionally, while policy enhancements play an important role, according to Huw van Steenis, policy instability might adversely impact investor confidence. As an example, Van Steenis highlights the cancellation of High Speed 2 (HS2), Britain’s second high-speed railway, as an example of policy changes that had an adverse effect on investors. "We’ve obviously had a period of significant policy uncertainty and instability, and also the cancellation of HS2, whatever the merits and demerits, which has upset international investors," said Van Steenis.
Another important pillar of driving sustainable finance, according to the experts, is the role of the private sector, particularly in the context of its cooperation with public entities. The UK might benefit from similar strategies to the US Inflation Reduction Act (IRA), which uses tax credits to support renewable energy projects, according to Ilan Jacobs. "We need strong disclosure frameworks and policies that encourage private investment," said Jacobs.
According to Ingrid Holmes, such public and private partnership can be based on the concept of catalytic capital, where public funds are used to mitigate risks that private investors are hesitant to take on.
"Historically, we’ve always leaned in on the returns, but we need to now focus down on managing risk. And I think we’ve got a real opportunity in the UK," she said. To that end, Holmes advocates for innovative risk-sharing approaches and underscored the role of public funds in seeding large-scale sustainable projects.
However, the implementation of sustainable finance initiatives is not without challenges. Apart from high-profile policy reversals, such as HS2 cancellation, according to Holmes, there are specific hurdles in new technologies such as broad application of sustainable aviation fuel (SAF), given there is still a lack of clear pathways for scaling these technologies.
"We need strong disclosure frameworks and policies that encourage private investment,"
Additionally, according to Van Steenis the increasing physical risks posed by climate change, such as flood risk, heat stress, and water scarcity are becoming immediate concerns. Van Steenis emphasized the need for financial institutions to rapidly recalibrate their metrics to account for these emerging risks.
He also stressed the importance of integrating climate policy with international trade policy to attract foreign direct investment (FDI) post-Brexit.
The complexities of navigating global markets and the pressures from various stakeholders to both accelerate and manage the pace of decarbonization can be also seen as a challenge.
"There’s pressure, as we’ve heard from politicians, investors and clients in opposing directions, both to move faster towards decarbonization, but also to not to move so fast, for fear of the impact on traditional industries, communities and security of energy supply," Jacobs explained.
Additionally, Jacobs emphasizes the need for tailored approaches to different markets, reflecting the different stages of development and energy needs of different nations. With no shortage of opportunities but also challenges, where do we go from here? According to Holmes it is important to put an emphasis on collaborative efforts to support the flow of sustainable finance. “We need structured dialogue between policymakers and private financiers to get these frameworks right.”