UK National Wealth Fund to ‘unlock’ private capital for green transition

The NWF is designed as a sovereign-backed green catalytic fund rather than a sovereign wealth fund. It is delivered through the UK Infrastructure Bank (UKIB) instead of a new body. The fund’s objective is to mobilise private capital and coordinate across the various funds, banks and development finance bodies in the UK to drive the UK’s transition to a low carbon economy whilst creating growth and new jobs.

Under the Labour government’s new plans, the UKIB and the British Business Bank will be aligned to crowd in much needed private investment in achieving UK’s energy transition and net zero targets. The government has allocated £7.3 billion of additional funding to the UKIB to enable immediate investments in projects, focusing on five priority sectors and catalysing private investment at a significant scale. Meanwhile, reforms are to be made to the British Business Bank, which focuses on venture capital investment and smaller business finance, to ensure it can effectively mobilise institutional capital to support the government’s new plans.

According to the National Wealth Fund Taskforce report (40-page PDF/2.9MB), the five priority sectors where NWF capital could help to catalyse private investment are green steel, green hydrogen, industrial decarbonisation, gigafactories, and ports.

The taskforce is chaired by the Green Finance Institute and includes former Bank of England governor Mark Carney, as well as the chief executives of Barclays and Aviva and large institutional investors. Its report set out five recommendations from the taskforce on the design of the new fund.

The recommendations include empowering the NWF to deploy catalytic capital with higher levels of risk appetite and allowing it to response innovatively to the challenges and opportunities of different sectoral transitions; mandating it to deploy a broad range of products and financial instruments; and crowding in private capital on a deal-by-deal basis, rather than at the fund level, to maximise its catalytic potential. The taskforce also recommended that the NWF’s capital should initially be managed and deployed by an existing organisation in the current UK development finance architecture, such as UKIB, and that the NWF, or the institution that will house it, must operate at arms-length from government.

Commenting on the development, climate and sustainability expert Michael Watson of Pinsent Masons said: “It’s great that the recommendations have been endorsed and moved to implementation so quickly after the election and in particular that an existing body, UKIB, that is already up and running is to be the delivery body for the NWF.”

“This means less reinventing the wheel and quicker implementation. In the UK, we already have a full panoply of funding models and tools that can deliver public sector support to crowd in private sector investment. It is just a case of using them consistently and predictably to create an accelerated pipeline of investable projects,” he said.

Hayden Morgan, a former director of sustainable finance at the UK Green Investment Bank, which was originally set up to accelerate private sector investment into the UK green economy, highlighted the need for the NWF to establish robust green investment principles.

Morgan, now of Pinsent Masons, said: “Having transparent investment and monitoring criteria, using scientific best practice, is critical in measuring outcomes needed. Private sector investors and lenders are using their own sustainable and transition finance frameworks, using such criteria, for decision-making. This will support an increase in industrial decarbonation, and access other energy transition opportunities. The NWF should be aiming to demonstrate leading science-based sustainability practice, to support market confidence.”

The taskforce report highlighted some barriers to private investment in green industries and technologies, which were the rationale for intervention. The main barriers are investment viability, demand certainty, and value chain readiness.

It said that a combination of high capital requirement, first-of-a-kind technology risk, and volatility in the price of production inputs and outputs means that, for financial institutions, the level of risk posed for certain green investment is beyond their appetite. The taskforce, therefore, suggested that the fund “will likely be most additive” by investing in nascent technologies or projects at the initial stages of market development, to address risk and reduce private sector barriers to investment.

“The net zero and green transition is said to present the biggest private sector investment opportunity since the industrial revolution, but turning that into reality is the challenge,” said Watson. “This requires intervention in markets and transition technologies, projects, and the industrial base. Without such intervention, ‘market forces’ won’t be sufficient.”

“The involvement of key private sector investors in the NWF taskforce brings weight and impact to its recommendations, which are focused on five key areas for the UK,” he added.

Alongside the launch of the NWF, the government has further ramped up green transition focus by appointing former chief executive of the Climate Change Committee Chris Stark to lead a new “mission” control centre tasked with delivering cheaper and clean power mission by 2030. This is the first of its kind in government. It will bring together a team of industry experts and officials, working with key energy companies, grid operators and regulators, to break down barriers and accelerate progress for clean energy projects.