As the world edges closer to climate tipping points, the urgency for robust, sustainable financing models is undeniable. With the UK aiming for net zero by 2050, the scale of investment needed is vast. The Climate Change Committee estimates that reaching our target will require £50bn a year by 2030. Governments alone cannot bear this cost, nor should they. Instead, the private sector must play a pivotal role in this historic transition. But how do we ensure capital flows into the right areas of the green economy?
There are two crucial ways to encourage private investment in the green transition. First, we must clearly define what we mean by the transition and, where necessary, regulate markets to ensure capital flows effectively. Investors need certainty that their capital is aligned with net-zero goals. Last month’s Transition Finance Market Review (TFMR) serves as an essential sense check, offering insights into both policy and market activity to date. It highlights the importance of establishing a well-defined framework for transition finance, which helps investors and regulators alike understand what counts as green and what counts as transitional.
The second way to boost private investment is by ensuring that there are sufficient, attractive opportunities for investors to commit capital. We cannot regulate our way to net zero; real investment opportunities must be created in sectors crucial to the transition. The TFMR recognises the need for sectoral investment pathways. Some sectors that are central to the green economy, such as hydrogen, carbon capture and storage, or advanced recycling, are not yet mature or fully investable. Without targeted efforts to develop these sectors, we risk missing critical opportunities to reduce emissions.
This raises the important question of who should fund the green transition. The simple answer is the private sector, given the quantum of capital required and the government’s limited fiscal headroom. Yet, the government still has a crucial role to play.
There are three key ways it can support the mobilisation of private finance. One, defining transition. Clear definitions of transition sectors and activities, backed by strong regulatory frameworks, will give private investors the confidence that they are supporting legitimate, impactful projects. Clarity here will help prevent greenwashing while ensuring that capital flows into the right areas of the economy.
Two, long-term policy direction. Investors need to know that the government’s commitment to the green transition is serious and long-term. Setting clear, consistent policies around key sectors will help foster the confidence necessary for long-term green investment.
Three, public capital deployment. Public capital can be deployed smartly to share risks with private capital. This can unlock investment in emerging sectors by signalling alignment with industrial strategy. For example, if public funds are invested in a nascent technology, private investors will see this as a vote of confidence, accelerating further investment. The National Wealth Fund should be assessed against these outcomes.
Our approach must be mirrored internationally. We cannot expect to deploy capital globally through agreements at Cop alone. Instead, we must focus on creating a pipeline of investable opportunities in developing markets. New institutions can play a critical role by developing projects, deploying public capital and fostering the right policy environment to reassure global investors.
The good news is surely that to deliver the transition, both here and globally, we have all of the tools. We just need to find a way to coordinate them better. The UK is now in a position to demonstrate how to effectively finance net zero here, create sustainable jobs and resilient communities, restore our leadership position on climate and deliver a new approach in international climate finance that moves from commitments to real investment.
This article first appeared in our print Spotlight report on Sustainability, first published on 8 November. Read it here.
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