Tuesday, October 19, 2021
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Green Public Finance | New Economics Foundation

Achieving British goals Achieving net zero emissions by 2050 will require far-reaching changes to transform the UK economy and put it on a more sustainable path. The green financial system is a key part of this transformation. While aligning the private financial sector with Britain’s climate goals is a priority, the scale and speed of the transition means that public finances must also lead by example.

In recent years, the UK has established a series of new state-owned financial institutions (SOFI) and has significantly expanded the scale of existing institutions. These include the British Infrastructure Bank (UKIB) and British Commercial Bank (BBB), which operate domestically, and the British Export Finance (UKEF) and CDC Group, which operate internationally. In summary, these institutions have strong financial resources and can effectively mobilize and expand their scale to support green transformation. However, so far, in view of the UK’s commitment to the net-zero transition, the UK’s public finance structure has not been updated. If the UK is to achieve its net zero emissions targets and fulfill its historical responsibility for climate justice abroad, its SOFI must fully meet these targets. This requires some changes to its design and governance.

The responsibilities of each agency must be aligned with the UK’s climate goals. We recommend updating each SOFI’s mission and supporting goals to align with a fair transition to net zero, and formulating specific reforms to reform each agency’s mission.

For UKIB, we recommend that the bank’s private sector lending department aims to decarbonize existing infrastructure and expand low-carbon alternatives by providing new preferential financial products and technical support. UKIB will play a key role in making up for the losses of the European Investment Bank (EIB) and its mandate should be expanded to ensure a just transition. We recommend that UKIB’s local authority lending department becomes the central coordinator of certain fair transition plans across the country, and cooperates with local authorities to identify, design and fund a series of fundable projects to accelerate a fair transition to net zero.

We recommend that BBB launch a series of tailor-made preferential financial products to stimulate small and medium-sized enterprises to invest in zero-carbon transformation, and announce that it will no longer cooperate with private sector financial institutions that have not taken sufficient measures to align their business activities with the Paris Agreement. protocol. We also suggest that it should play a greater role in green venture capital and provide high-risk and patient capital for innovators and start-ups that contribute to the UK’s climate goals, including investing in shares where appropriate.

For UKEF, we recommend more measures to green its export financing, including providing more generous financing conditions for exporters of low-carbon goods and services; actively assisting export companies to prepare for and adapt to climate-related risks; and prioritize the development of global renewable energy Supply chain; assess the protection of biodiversity and nature in financing decisions.

For CDC, we recommend that it end the practice of investing through private equity funds and align its climate-related investments with national development plans and industrial strategies. We also recommend that CDC become the center of the United Kingdom and provide broader international climate assistance beyond finance, including technical support and technology transfer, to help promote a just global transformation.

To be successful, every organization must have sufficient financial resources. On average, these institutions provide financing for projects worth more than £7 billion a year. However, the recommendations outlined in this report will significantly increase the amount of financing provided by these institutions-making a considerable contribution to decarbonization at home and abroad. We recommend that the British government not impose arbitrary limits on the amount of loans that SOFI can borrow, but instead promise that each institution can raise the funds needed to meet its mission, provided that their balance sheets are within the agreed leverage ratio. Careful management and risk. We also recommend that the Bank of England fund SOFI under certain conditions, for example, if it believes that the government is underutilizing its fiscal space.

The last area that needs reform is governance. Governance arrangements are particularly important for public financial institutions, because compared with private financial institutions, it is their unique governance that enables them to play a fundamentally different role in the economy. We recommend that the UK government establish a new state-owned holding company UK Public Finance (UKPF) to exercise supervision and control over UKIB, BBB, UKEF and CDC. The supervision of all four institutions by one management entity will help to achieve synergy, promote strategic planning, establish clear democratic accountability, and ensure a more cohesive public finance ecosystem. The board of directors of UKPF is chaired by the Minister of Finance and should include stakeholders from different backgrounds, including finance, regional representatives, industry groups and trade unions.

The UK has pledged to become a world leader in green finance. If structure and governance are effective, the UK’s state-owned financial institutions can make a significant contribution to achieving this goal-whether at home or abroad.

Picture: iStock

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