Following the result of the general election in July 2024, the new Labour government is now responsible for ensuring the UK gets back on track with its Net Zero objectives. Green finance has become a burgeoning area of climate politics and financial markets, raising the question over how the new government might utilise it to the benefit of the UK. Despite the emphasis on ‘catalysing’ private capital, there appears to be a continuation of the previous governments approach. In this article, Dr James Jackson outlines why the new government adopted this course of action and suggests an alternative approach to green finance.    

• Green finance is a pronounced feature of Labour’s policy position in government so far, through the GB Energy and National Wealth Fund.
• Catalysing private capital is not inevitable but has been a failing strategy for almost a decade.
• The new government should focus on equity creating investment – investments in green infrastructure – rather than de-risking.

What is ‘green’ finance?

Green finance has become a growing area of the financial system during the previous government. Sometimes considered part of the wider category of Environmental, Social and Governance (ESG) investments or Sustainable Development Goals (SGD), governments, central banks, pension funds, asset managers and commercial banks the world over have begun to fashion ‘green’ financial assets.

Notwithstanding the veracity of the ‘green’ credentials of such assets, i.e., do they actually incur an environmental benefit, examples of green finance encompass anything from green bonds (government and/or corporate), green taxonomies, green loans, disclosure agreements to debt-for-nature swaps, to name a few.

Green finance in the last decade

In many instances, the advent of green finance is often attributed to Mark Carney’s ‘Breaking the tragedy of the horizon’ speech, made whilst he was governor of the Bank of England. Since this speech, the previous Conservative government implemented three separate instances of green finance strategy in 2016, 2019 and 2021, set up the Green Finance Institute to scale green finance across sectors of the British economy, gave the Bank of England a ‘Net Zero mandate’ and issued the UK’s first green government bond (Green+ bond), which was oversubscribed twelve-fold with the Debt Management Office (OMO). My recent paper outlines how this is of little surprise, given the conventional view of the UK political economy, which relies heavily on financial expertise located in the City of London.

Despite promising progress on green finance, the Starmer government faces difficult decisions on what to do next, given it inherits a precarious economy. Not least the 14-year high interest rates (currently 5.25%) to arrest inflation, now at 2% target, and a bond market regaining confidence after induced panic by contrast between the ‘mini-budget’ and the Bank of England’s Quantitative Tightening.

Since the 2024 general election

At the time of writing, the new government has only been in situ for a few weeks, yet, it has already made several interventions in a bid to ‘catalyse’ private investment. Not least (i) the revisions made to the National Planning Policy Framework to ease investments in onshore wind development, (ii) the creation of GB Energy, a publicly owned company capitalise to the tune of £8.3bn and (iii) the £7bn National Wealth Fund, working alongside the Crown Estate to ‘de-risk’ investments in technology not yet scalable or mature.

However, further investment in green finance remains in doubt given fiscal rules to both balance revenue-expenditure, particularly following claims of a £20bn ‘blackhole’ and half debt following as a portion of GDP in five years.

Alternative approaches of green finance

The new government is faced with two options on the question of green finance:

•  Incentivise private green finance through de-risking. Crowd-in private capital (at a ratio of 1:3) by derisking emergent technology through initial public investment (a continuation of the approach of the last decade).
• Or as an alternative, invest public green finance through Green bonds – investments in green infrastructure that create equity and yield returns.

As early signs suggest that the government is pursuing the first option, it is important to treat the idea of catalysing private capital with initial public investment, as if it is a natural sequence of events – with a degree of scepticism. Not least because, as I outlined, this is not dissimilar from the previous government’s approach, whose Industrial Strategy in 2017, Green Industrial Revolution in 2021 and Net Strategy in 2022 were all couched in very much the same terms.

That there remains what is often called a ‘finance gap’ between the amount required to decarbonise the economy and the amount being invested – even when assuming the private sector will come forth with the required capital – is evidence that such strategies do not work.

Even if incentivising private capital leads to the greater diffusion of renewables, this is not itself job done. As the current energy market shows, rearranging the energy mix does not inevitably lead to lower bills. It is still the case that fossil fuel projects yield greater returns (around 12% compared to renewable at 5-8%), which fundamentally determines the investment decisions of the private sector, particularly for investment and pension funds. Despite the sums proposed in Labour’s policy position, around £15bn over 5-years, are far less than the £28bn per-year proposed under its Green Prosperity Plan.

Rather than simply ‘de-risking’ private capital, the new government could instead invest in green infrastructure itself. It should therefore prioritise another round of Green+ Gilt (green bonds) to be invested in mature, reliable technologies that have not only already proved their viability (such as off/onshore wind and solar) but also yield reliable returns for the Treasury. Bond issuances can be kept within the fiscal rules by ceasing fossil fuel subsidies, adjusting the Bank of England’s rules on indemnifying bond holdings at commercial banks and increasing ‘wind fall taxes’ on energy producers, supermarkets and banks.

The second option, to invest in the UK economy, is unlikely to be as politically possible as it is now given the Labour majority. Therefore, if the government is to capitalise on its electoral fortunes, there seems little sense in repeating past failures on economy policy.