Analysis: Show me the Green

Chancellor Rishi Sunak wants the UK to become a green finance centre. What will that mean for infrastructure investment?

“The UK will become the first ever Net Zero Aligned Financial Centre,” announced UK Chancellor Rishi Sunak during this year’s COP 26 event in Glasgow. 

“This means we are going to move towards making it mandatory for firms to publish a clear, deliverable plan setting out how they will decarbonise and transition to Net Zero - with an independent taskforce to define what’s required,” he explained.

The big question for the infrastructure industry is how all this will affect it. “It will be interesting to see whether the requirement to publish Net Zero transition plans will flow down to infrastructure funds,” says Daniel Grosvenor, partner at Deloitte. “The drive from government is helpful. Financial services and regulation will have a big role to play.” 

One question here is how much of an impact statements such as those by Sunak and other government ministers will really have on investment policies. After all, there is a strong argument to say that the market is already moving towards green investments, driven not by government pronouncements but by client demand and market forces.

“For a company to be relevant, it has to have a sense of what the challenges are and embrace and reflect that,” says Amar Qureshi, founder and chief executive of advisory firm Agilia Infrastructure Partners.

However, he and others agree that to deliver the truly transformative work required to move the UK and other economies to Net Zero, there needs to be strong support from government sitting behind that.

As EY partner Manish Gupta points out, such changes will need policy support from government as the bare minimum. “There is a need for a consistency of long-term policy, backed by significant financial support from government to back the policy,” he explains. “This is important in areas where the market is still nascent and commercial viability is still not confirmed - hence impacting the scale and pace of investment.

“EV charging infrastructure is one such example, especially outside the city centres. This is important to ensure that infrastructure development keeps pace with government policy objectives and ambition.”

The question then comes down to an old favourite: who is willing to take the risk? “To deliver Net Zero, there is going to be a need to invest in innovative technology and to take risks in sectors that are not so well-developed, for example hydrogen and carbon capture & storage,” says Grosvenor. “Will there be an expectation that investors will take on the risks around volume and commerciality of these technologies? That is not something we have tended to do in the UK.”

We have had some hints on this from government in this year’s Budget, when it was confirmed that the regulated asset base (RAB) model would be used for new nuclear power. With the government pledging to support one major new nuclear development this parliament - and Sizewell C shouting increasingly loudly about its merits and planned use of the RAB model - there appears to be some clear policy direction here. 

“The government’s decision to use the RAB model for new nuclear should not be underestimated in terms of embracing a clear policy around Net Zero and providing the tools to execute on that,” says Qureshi. “The RAB decision is facilitating private finance to come into nuclear power.” 

“We are already having conversations about RAB and there is interest from infrastructure investors,” says Grosvenor. He adds that investors have traditionally been nervous about investing in the sector because of the risk involved, as well as the lag in putting their money into projects and getting it out again. “That is what the RAB model is meant to deal with,” he suggests. 

Not everyone is convinced, however. Gupta and others warn that some of the publicity around the RAB model has suggested it removes the risks for the taxpayer, but this is not the case, so any cost overruns will fall on the public side, not the private partner.

Those working on Sizewell C are quick to point out that such risks are strongly mitigated because they are planning to effectively pick up the blueprint for Hinkley Point C and drop it into the Sizewell programme, thereby bringing with it all the learnings and improvements from the previous job. Whether that will prove to be an effective model remains to be seen. 

One area that has been touted as helping to drive the change has been green certification. 

While this might be a clear possibility for projects such as wind farms or EV infrastructure, Gupta highlights it is not as yet clear-cut in other sectors. He refers to a recent transport project financing where additional diligence requirements for green certification felt untested and added a degree of risk to the financing process. As a result, the advisors decided not to go down the green certification route.

“If we targeted only the route of green certification, many investors would invest through their green certified funds as they were set up to deal with the monitoring that is part of a green certification,” he explains. “So, to some extent, this would restrict the choice of funds, if only the green route was chosen. However, sponsors can reach out to a wider investor base by using a green option alongside the normal fundraising option.”

Going green, therefore, is going to take a lot more work from both the government and the private sector over the coming years.