Is the UK Autumn Budget accelerating or decelerating UK climate ambitions and the future of London as a green financial centre?
The Autumn Budget provided some critical opportunities for the UK government to support London’s ambition as a green financial centre, especially regarding some of the key borrowing and spending areas. But more needs to be done on providing the policy environment that will further enable the transition.
Following the 2024 UK elections, Climate Bonds set out five key policies to make London a global centre for green and transition finance.
Our recommendations were published by King’s College Business School in this this e-book, alongside recommendations from a wide range of experts and organisations working to make the transition to net zero a reality.
We have reviewed the Autumn Budget to assess the extent to which it contributes to making London a green financial centre, based on our five policies, which are:
- Including transition pathways in the UK taxonomy will provide the foundation for a whole-economy transition
- Including adaptation and resilience in the UK taxonomy and leading the way on adaptation finance, which is lagging globally
- Introducing transition plan regulations to unlock credible and scalable transition finance
- Building a deeper and broader green gilt programme
- Using public financial institutions to crowd in more private investment
Here’s our take.
Issuing new debt as green gilts: strong potential to further build London as a green financial centre.
Starting with the most obvious point: this budget requires large levels of borrowing – GBP127.5bn this year. The UK government has an opportunity to
ensure that new debt is issued under the existing green gilt framework, noting that the Chancellor stated that increased infrastructure investment will be spent on the green transition. Deploying green gilts to finance this investment would provide a further strong signal that the UK is investing in green economic prosperity.
Currently, only 2% of the GBP1.8tn gilt market is labelled, compared to 18% of the sovereign debt market in France, and 46% in Chile. In addition to the new green infrastructure spending announced by the Chancellor, three measures could help ensure that the UK increases this proportion:
- Incorporating resilience expenditures, and not just mitigation, which would be facilitated by incorporating resilience and adaptation in the UK taxonomy;
- Undergoing a full green budget tagging exercise, which would also encourage government departments to tilt expenditure to green to access borrowing;
- Linking the green gilt framework to a national transition plan, which would demonstrate alignment of government priorities and set out a clear best practice example to the market. This could boost private green bond issuance – as seen following the debut green gilt.
The National Wealth Fund could be an accelerator of private capital mobilisation if it is willing to take on risks
The UK government announced an ambitious private capital mobilisation target for the new National Wealth Fund, which aims to catalyse GBP70bn of private investment through GBP27.8bn of public capital spending. This implies that it would be targeting a mobilisation ratio of roughly 1:2.5, compared with the less than 1:1 ratio currently achieved by the MDBs, on average.
Crucial to this will be the Fund’s risk appetite. While the fund will have access to a wide range of mobilisation tools at its disposal to crowd in private capital, from grant financing, to guarantees, to blended finance structures, those tools will only be as useful as the level of risk and return that the fund will be set up to achieve. A high-risk appetite will enable it to take in the investments, or parts of investments, that private investors would be unwilling to finance without demanding very high returns.
The correct risk/return profile will help unlock finance for climate projects within the UK, overcoming the current mismatch between financing needs and investor appetite. It would be further enhanced if the National Wealth Fund were to work in concert with other UK bodies such as BII and UK Export Finance.
Ramping up adaptation and resilience investment is great, but with an enabling policy environment, it would be better and easier
The budget included pledges for dedicated resilience investment, including GBP2.4bn in flood defences and GBP400m for nature-based resilience. This direct public funding is crucial and such activities could also be included in the green gilt framework to signal to the market how green gilts can finance resilience.
Beyond the announced spending, the integration of resilience could and should go further. Resilience and adaptation could be included in the Local Growth Plans, which can also be local transition opportunity plans, thereby embedding resilience as part of economic prosperity plans. To mobilise private investment, adaptation and resilience investments could also be included in National Wealth Fund investments.
However, whether it is about green infrastructure or resilience and adaptation, there are some important gaps in the decision-making infrastructure in the UK as a cornerstone of an enabling policy-making environment is still missing.
The UK taxonomy: still in hiding
A UK Taxonomy has yet to materialise. Across the globe, over 50 taxonomies inform credible climate investment. Enabling the green spending promises, including the private capital mobilisation initiatives, included in the budget would be greatly facilitated by a UK taxonomy. From lagging behind, the UK could leapfrog and design a taxonomy fit for its green ambitions and support London as a global and green financial centre.
More specifically, the UK could leapfrog by doing the following:
- Include clear and science-based transition pathways in its taxonomy. Many existing taxonomies lack forward-looking guidance for transition sectors. The inclusion of transition pathways would position the UK Taxonomy at the forefront of the transition. Sector-specific transition pathways provide important guidance on credible emissions reductions and viable low-carbon technologies, informing transition planning, investment decisions and real economy policy development, and;
- Include clear resilience criteria covering physical, economic, social and ecosystem dimensions of resilience will provide much-needed guidance on credible resilience investments in the UK and help close the global adaptation finance gap. Adaptation finance accounts for only 5% of total climate finance (USD63bn/year) and is almost entirely publicly financed. Resilience criteria would enable issuers, investors, banks, and insurers to identify credible resilience projects to include in transition plans and financial products.
Boosting London’s status as a global and green financial centre will require not just promises of spending and private capital mobilisation, but also building the policy infrastructure that will enable all stakeholders including both domestic and international investors, to fully participate in the transition to net zero and a more resilient and prosperous economy.
'Til next time.
Climate Bonds
