What is the City’s role in the UK’s green industrial strategy?

A new report argues that government must take the lead to harness net zero investment.

Reaching net zero is an expensive ambition. According to the non-departmental Committee on Climate Change (CCC), the amount of capital investment needed to accelerate the green transition is between £50-60bn a year. With high inflation, rising interest rates and cuts to government spending, it’s unlikely the public purse will be able to achieve this alone. Private investment is essential.

But the UK’s turbulent landscape of green policies does not make investing in sustainable development easy or appealing. The current government ended 2023 by watering down several key green policies, and Labour recently pared back its headline £28bn pledge to invest in the green economy.

According to a new report by Sam Alvis, associate fellow at the Institute for Public Policy Research (IPPR) this turbulence must subside, and fast, if the government is to harness the full weight of investment needed to reach net zero.

Titled “Making Markets: The City’s Role in Industrial Strategy”, the report argues that “public investment” when “targeted correctly, can lead to solutions that crowd in multiples more in private finance”. It was written with advice from the Green Finance Institute (GFI) and calls for a UK-wide green industrial strategy to carve out a long-term direction for the green transition.

Alvis points out that an ongoing “global wave of industrial policy” is “accelerating international competition for capital”. The most obvious example of this is President Joe Biden’s Inflation Reduction Act in the US, which has been a global success story for green investment. The Inflation Reduction Act – which was first introduced in 2022 – provides tax credits for investment in green industries. Could the UK adopt something similar?

Speaking exclusively to New Statesman Spotlight ahead of the report’s release, Alvis said there was an important distinction to be made between “how the US approached this” and the approach recommended in the report. “The US reduced the cost of every intervention that the private sector needed to make,” Alvis added. “In the UK, what we need to have is initial investment from the state in certain areas to make that proposition more attractive for private investment to take over.”

He said: “Fundamentally, the US can afford not to choose. We have to be very targeted and deliberate with everything we do in this country.” In other words, providing the private sector with long-term detail as to which sectors public investment will prioritise is crucial. For example, the report identifies that essential investment in riskier sectors such as green hydrogen, or carbon capture and storage could be unlocked if the government make clear it plans to channel public investment towards them.

The report suggests this could be tackled through the creation of “sectoral stakeholder councils”, which could oversee progress on green projects. It argues this will provide transparency for private sector investors, improving their appetite to invest in riskier technologies like green hydrogen.

Ryan Jude, director of the Green Taxonomy Programme at the GFI told Spotlight, these “stakeholder councils” would meet regularly. They would include practitioners from across the industry, investors, trade unions, local government and policymakers. That way, investors will be kept informed of changes in green or economic policy which may have an impact on their investment.

“The economic situation changes, but as long as you’re talking and communicating [on] why and how these policies might develop, then it allows investors to feel confidence in the long-term plan,” Jude added.

Indeed, laying the groundwork for further private investment will also require a shift in the state’s attitude to public investment in green projects. The report points out that we could be making better use of “public finance tools” such as the UK Infrastructure Bank if these institutions adapted their acceptance of risk. As Alvis told Spotlight, this doesn’t mean scrapping the need for oversight, but rather reframing where that oversight is directed.

“We have to safeguard public money,” he said, “but there are also things that the state can do that the private sector can’t.” Primarily, government can take a longer-term view than businesses can, as they do not have a target for revenue.

“Government can potentially go into slightly more risky areas because it can afford to make more losses in the short term,” Alvis said. He explained that, currently, bodies such as the National Audit Office focus over a “shorter time period, ensuring that we get a closer financial return”. Instead, Alvis said, looking at the long-term impact of investment might help to spur on investment in more green projects, as government looks to set the tone on financing net zero.

As the report points out, this is a challenge for the City, like no other, and it is one that we have little time to solve. Working in siloes of public and private investment will only get us so far. But if both sectors come together, it might just harness the major levels of funding the UK needs to get to net zero.