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Achieving the UK’s goal of reaching ‘net zero’ emissions by 2050 will require far-reachingchanges to transform the UK economy and put it on a more sustainable path.Greening the finance system is a key part of this transition. While aligning the privatefinancial sector with the UK’s climate goals is an urgent priority, the scale and speed ofthe transition means that public finance must also lead by example.
In recent years the UK has established a range of new state-owned finance institutions(SOFIs) and significantly scaled up existing ones. These include the UK InfrastructureBank (UKIB) and the British Business Bank (BBB), which operate domestically, and UKExport Finance (UKEF) and CDC Group, which operate internationally. Taken together,these institutions have significant financial firepower that could be effectively mobilisedand scaled up to support the green transition. To date however, the UK’s public financearchitecture has not been updated in light of the UK’s commitment to a net zerotransition. If the UK is to achieve its net zero target and uphold its historic responsibilityto deliver climate justice abroad, it is critical that its SOFIs are fully aligned with thesegoals. This requires a number of changes to their design and governance.
It is essential that the mandate of each institution is aligned with the UK’s climateobjectives. We recommend that the mission and supporting objectives of each SOFI isupdated to align with a just transition to net zero and set out specific reforms forreforming each institution’s mandate.
For the UKIB, we recommend that the Bank’s private sector lending arm aims todecarbonise existing infrastructure and scale up low-carbon alternatives by offering newconcessional financial products and technical support. The UKIB will play a critical rolein substituting the loss of the European Investment Bank (EIB) and its remit should bebroadened to ensure the delivery of a just transition. We recommend that the UKIB’slocal authority lending arm becomes a central coordinator for certain Just Transitioninitiatives across the country, engaging with local authorities to identify, design, andfinance a pipeline of bankable projects that will accelerate a just transition to net zero.
We recommend that the BBB introduces a range of tailored concessional financialproducts to stimulate SME investment in the zero-carbon transition and announces thatit will no longer work with private sector financial institutions that have not takensufficient steps to align their business activities with the Paris Agreement. We alsorecommend that it should play a scaled-up green venture-capital role, providing highrisk,patient capital for innovators and startups that are contributing to the UK’s climategoals, including taking equity stakes where appropriate.
For UKEF, we recommend that additional steps are taken to green its export financing,including providing more generous financing terms for exporters of low-carbon goodsand services; proactively assisting exporting firms with preparation for and adaptation toclimate-related risks; prioritising the development of global renewable energy supplychains; and assessing the protection of biodiversity and nature in its financing decisions.
For the CDC, we recommend that it end the practice of making investments throughprivate equity funds and align its climate-related investments with nationaldevelopment plans and industrial strategies. We also recommend that the CDCbecomes the UK’s hub for a broader range of international climate assistance beyondfinance, including technical support and technology transfers, to help drive a global justtransition.
To succeed, it is crucial that each institution has sufficient financial firepower.Combined, these institutions on average finance over £7bn worth of projects every year.However, the proposals outlined in this report will enable the amount of finance theseinstitutions provide to be significantly scaled up – making a considerable contribution todecarbonisation domestically and abroad. Instead of imposing arbitrary limits on howmuch SOFIs can borrow and lend, we recommend that the UK government commits toenabling each institution to raise the funding they need to meet their mandate, providedthat their balance sheets are managed prudently within an agreed envelope of leverageand risk. We also recommend that the Bank of England finances SOFIs under certainconditions, for example if it believes the government is underusing its fiscal space.
The final area that requires reform is governance. Governance arrangements areparticularly important for public financing institutions, as it is their distinct governancethat enables them to play a fundamentally different role in the economy compared tothat of private financial institutions. We recommend that the UK governmentestablishes a new state holding company, UK Public Finance (UKPF), to exercise itsoversight and control of the UKIB, the BBB, UKEF, and the CDC. Having a singlegoverning entity oversee all four institutions will help to exploit synergies, promotestrategic planning, establish a clear line of democratic accountability, and ensure a morecohesive public finance ecosystem. Chaired by the Chancellor of the Exchequer, UKPFBoard members should include stakeholders from a wide range of backgroundsincluding finance, regional representatives, industry groups, and trade unions.
The UK has pledged to become a world leader in green finance. If structured andgoverned effectively, the UK’s state-owned finance institutions can make a significantcontribution to achieving this goal – both at home and abroad.
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