Report calls for investors to engage at local level to encourage growth of sectors required to power net zero transition.
Institutional investors need to scale up collaboration with the public sector locally and nationally to drive development of the UK’s clean technology sector, a key component of meeting the country’s net zero targets, according to authors of a new report by the Resolution Foundation and the London School of Economics (LSE).
According to the report, ‘Growing Clean: identifying and investing in sustainable growth opportunities across the UK’, investment and innovation will be key to the UK reaching a new phase in its net zero transition this decade, with the independent Climate Change Committee (CCC) estimating 84% of decarbonisation required between 2020 and 2035 will involve low-carbon technologies or fuels, in combination with consumer behaviour changes.
Clean technology in the UK currently suffers from under-investment, particularly when it comes to early stage and venture capital deployment, according to Brendan Curran, Policy Fellow for Sustainable Finance at the LSE’s Grantham Research Institute on Climate Change and the Environment, and one of the report’s authors.
“Institutional investors have funds they can look into, particularly across private debt and private equity,” he said. “Finance through just transition means investment must employ a regional stance.”
Curran highlighted Legal and General’s recently announced seven-year partnership with the West Midlands Combined Authority (WMCA), a body encompassing 19 local councils and three Local Enterprise Partnerships (LEPs), as an example of investors taking the action needed to support levelling up and achieving net zero.
Strengths and weaknesses
The CCC has estimated that an additional £13.5 billion of annual investment will be needed in 2022 to deliver net zero, rising to over £50 billion by 2030, with financing needs in the current decade highest in electricity supply.
According to a separate report published this week by the National Grid ESO, the UK’s electricity market will require substantial reform, noting that its current market is not fit for deliver a net zero electricity system by 2035 net zero at minimal cost to consumers and industry.
The LSE’s report highlighted that various sub-categories of clean technology that can meet this need are already areas of strength for the UK, including tidal, offshore wind, nuclear energy and carbon capture and storage (CCS), all of which require public and private investment.
It also emphasised that ‘national’ returns from government support for innovation – including private returns as well as direct and indirect knowledge ‘spillovers’ to other firms – are particularly high for tidal and offshore wind energy technologies, which, according to the report, with estimated returns three times higher than average across technology fields.
“UK strengths vary, but offshore wind, innovation, tidal energy, and heat and buildings, are stand out areas, although domestic deployment of capital is really critical here,” said Esin Serin, Policy Analyst at the Grantham Research Institute, and one of the report’s authors.
“The UK is also quite specialised in heat pumps and insulation. This should all work in tandem with the levelling up agenda,” she added.
The report also highlighted certain weaknesses in the UK clean technology sector, including in the net zero vehicle space which, according to Serin, will require further digitalisation.
Beyond the golden triangle
The report said that the net zero transition presented an opportunity to address regional economic inequalities in the UK, pushing technology innovation beyond the ‘golden triangle’ between London, Oxford and Cambridge. Regions outside these “innovation-intense” areas, including Derbyshire, Nottinghamshire, Cornwall and the Isles of Scilly, and Lincolnshire, appear more specialised when it comes to clean technologies, according to the report.
Investment in tidal and offshore wind were found to generate both high national economic returns and regional growth.
The report explained that a primary issue was with “pipeline development” that ensures projects are investable. It highlighted the Place-based Climate Action Network (PCAN) as a body currently designing local climate finance hubs, workstreams designed to tackle this issue.
Hubs would be “locally embedded”, according to the report, and aim to operate a pipeline of quality, impact-driven projects informed by local opportunities and needs.
Barriers to investment
The report said policy initiatives aimed at “doubling down on net zero capabilities” in the UK should be part of a broader coordinated growth policy aimed at driving growth and addressing regional disparities in economic activity.
To maximise the likelihood of reaching net zero targets, transition must be “embedded” into a structured policy approach that drives targeted investment across innovation, infrastructure and skills.
Venture capitalists and private equity investors are expected to have a large role in higher risk, and higher growth emerging technology investment, following input from public innovation grants.
However, the report said noted clean technology investments are currently attracting a very small share of UK venture capital investment, partly due to risk perceptions.
“This is beginning to change given the tougher policy commitments to net zero, but there is a clear role for government to develop investable business models and to de-risk emerging sectors such as hydrogen and greenhouse gas removals, particularly in commercially maturing sectors,” the report said.
According to Curran, while the barriers that exist for investment vary across sectors, innovation levels are scaling.
“There are still things that need to be done in terms of scale, and in terms of national policy drive,” he said.
As well as facilitating investment, Serin said policy intervention was also needed on the demand side, including signals to markets around carbon pricing and signals to the general population.