3 March, 2021 / Regulation
Budget 2021: The ESG initiatives responsible investors need to know
By Natalie Kenway
BoE's new climate remit, a green savings bond and City leadership of the global carbon market
The UK Chancellor confirmed the government will be launching an infrastructure bank to fund a “green industrial revolution” and also revealed the Bank of England will be adding a climate remit to monetary policy in the annual Budget statement.
From the House of Commons, Chancellor Rishi Sunak also reaffirmed plans for a green gilt as well as unveiling a UK savings bond allowing retail savers to fund green projects, and also announced the set-up of a Carbon Markets working group to position the City of London as the leading global market for voluntary carbon offsets.
Social Investment Tax Relief was also extended to April 2023 amid a Budget that Sunak reiterated he would do “whatever it takes” to support British livelihoods despite “acute damage” to the economy a year on from the initial spread of coronavirus. He said the pandemic has “fundamentally altered” people’s lives with more than 700,000 people having lost their jobs, the economy shrinking by almost 10% last year and public borrowing is up to levels not seen since World War II.
However, he sounded an optimistic tone that the economy “will recover”, and highlight the Office for Budget Responsibility (OBR) are now forecasting a “swifter and more sustained recovery than expected in November 2020, with the economy returning to pre-Covid levels by the middle of next year.
“Whilst this last year has been a test unlike any other… The fundamentals of our character as a people have not changed,” Sunak said.
“Still determined, still generous, still fair. That’s what got us through the last year; it’s what will guide us through the next decade and beyond.
“Today we set out a plan to protect the jobs and livelihoods of the British people. But the promises that underpin that plan, remain unchanged from those we pledged ourselves to twelve long months ago.
“An important moment is upon us. A moment of challenge and of change. Of difficulties, yes, but of possibilities too.”
The Chancellor’s plan was broken down into three segments:
- billions to support businesses and families through the pandemic
- investment-led recovery as UK emerges from lockdown
- future changes to strengthen public finances
ESG Clarity takes a look at the initiatives responsible investors will be interested in below.
Bank of England’s climate remit
Noting the Bank of England’s (BOE) monetary policy’s “critical role” in supporting the economy through the Covid-19 pandemic, Sunak said the monetary policy framework “remains a central pillar of the government’s macroeconomic strategy” and as a result it is being updated to “reflect the government’s economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy”.
In a letter to BoE governor Andrew Bailey Chancellor Sunakr wrote: “As the world recovers from the pandemic, we also face a tipping point for our climate. The shift to a world where we are at net zero will mean systemic changes across all parts of our economy. This includes delivering a financial system which supports and enables the transition to an environmentally sustainable net zero economy by expanding the supply of green finance, and that is resilient to the physical and transition risks that climate change presents.”
He noted the various initiatives set out in the Budget such as the infrastructure banks and green savings bond, but also set out further guidance for the Financial Policy Committee.
“Consistent with its objectives, the Committee should continue to act with a view to building the resilience of the UK financial system to the risks from climate change and support the government’s ambition of a greener industry, using innovation and finance to protect our environment and tackle climate change.”
Building back better
Sunak has taken the UK’s post-Covid recovery plans as an opportunity to fast-track climate investments through a number of measures with the second segment of the three-point plan dedicated to “an investment-led recovery”.
Alongside today’s Budget, the government published Build Back Better: a plan for its growth strategy, setting out how infrastructure, skills and innovation will drive the UK economy (more on this in due course) and also announced several initiatives to boost green investments.
The Net Zero Innovation Portfolio is to provide £1bn in funding for low-carbon technologies and systems. The government said by decreasing the costs of decarbonisation, the portfolio will help enable the UK to end its contribution to climate change – it was initially announced in the government’s ten point plan for a green industrial revolution.
Giving further detail today, £20m has been allocated to fund a UK-wide competition to develop floating offshore wind demonstrators, and help support the government’s aim to generate enough electricity from offshore wind to power every home by 2030.
A further £68m will be used to fund a UK-wide competition to deliver “first-of-a-kind long-duration energy storage prototypes” that will reduce the cost of net zero by storing excess low carbon energy over longer periods.
Additionally, £4m has been awards to a biomass feedstocks programme to identify ways to increase the production of green energy crops and forest products that can be used for energy.
Separately to the Net Zero Innovation Portfolio, the ‘Future Fund: Breakthrough’ was announced which will direct £375m to invest in highly innovative companies such as those working in life sciences, quantum computing, or clean tech, that are aiming to raise at least £20m of funding.
As widely reported in the lead-up to today’s speech, Sunak unveiled the UK Infrastructure Bank, based in Leeds, which will partner with the private sector and local government to increase infrastructure investment to help tackle climate change and promote economic growth across the UK.
The Budget document said: “In the year the UK holds the presidency of the UN climate change talks (COP26), the government remains committed to growth that is based on a foundation of sustainability, as the UK makes progress towards meeting its commitment to reach net-zero greenhouse gas emissions in 2050.”
It will be able to deploy £12bn of equity and debt capital and be able to issue up to £10bn of guarantees. It will offer a range of financing tools including debt, hybrid products, equity and guarantees to support private infrastructure projects and will begin operating in an interim form later in spring 2021.
Speaking ahead of the announcement Tom Williams, head of energy and infrastructure at Downing and investment manager of Downing Renewables & Infrastructure Trust, said: “A new UK infrastructure bank is a welcome statement of intent and can significantly increase public investment in renewable assets. While some may consider £22bn to be insufficient, the government is right that the private sector, which is already heavily invested in green initiatives and renewable infrastructure, is ready and willing to provide the bulk of the capital required to meet our Net Zero targets. A stable and consistent regulatory environment is also key to encouraging new levels of private investment.”
Kate Elliot, deputy head of ethical, sustainable and impact research, Rathbone Greenbank Investments, added the move is welcome but more needs to be done.
“Connecting public debt and Covid recovery to climate goals is one of the most important steps that the government can take,” she said. “Following recommendations from the Climate Change Committee’s ‘Road to Net-Zero Finance’ report, we support the creation of a National Infrastructure Bank, that isn’t simply seen as a niche green bank but one that de-risks private investments via low-carbon solutions.
“However, climate change is not just an issue for us here in the UK and Europe. The government needs to use its international platform to drive net-zero goals globally, and right now that might mean supporting the countries hardest-hit and least able to deal with Covid-19.”
Green gilt and savings bond
As announced in November, Sunak confirmed the UK government will be issuing its first sovereign green bond – or green gilt – this summer, with a further issuance to follow later in 2021. Green gilt issuance for the 2021/22 financial year will total a minimum of £15bn.
Budget documents said: “The green gilt framework, to be published in June, will detail the types of expenditures that will be financed to help meet the government’s green objectives. The government also commits to reporting the contributions of green gilt spending towards social benefits such as job creation and levelling up.”
Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy Nigel Peaple said the association welcomes the announcement the government will begin to issue green gilts this summer. “In our 2020 report, A Changing Climate, we called on government to make it easier for pension funds to invest in a climate aware way and, in particular, we asked them to introduce a green gilt. With new rules for climate disclosure coming into force for large pension schemes from October 2022, pension fund trustees need a broader array of investments to meet their climate ambitions. Green gilts issued by the UK government will be particularly appealing for funded defined benefit pension schemes as they are lower risk when compared to investing directly in green energy projects. The plan to raise £15bn this year is a very good start.”
Furthermore, the Chancellor confirmed the leaked news of a green savings bond for retail investors to back green projects. The green retail National Savings and Investment (NS&I) product will be available in summer 2021 and will be closely linked to the UK’s sovereign green bond framework.
Gemma Woodward, director of responsible investment at Quilter Cheviot, commented: “It will give all UK savers the opportunity to take part in the collective effort to tackle climate change, benefiting from the innovative reporting standards planned for the green gilt programme,” the Budget document said.
“The Chancellor today unveiled new sovereign green savings bonds, which solve the dual purpose of allowing retail investors to buy into the green agenda, while providing an outlet for the ‘accidental’ savings build up by households during the pandemic.
“Ultimately, any measure which allows people to connect their own finances to the green economy and which broadens retail investor access to a diverse array of green products is welcome.
“However, the million pound question is how much will be raised from retail investors through the green savings bond? Will it actually make a difference to efforts to achieve net zero? Perhaps not on their own, but accompanied with green gilts for the institutional market, which will also be launched this year, they could make a difference.”
Meanwhile, Sarah Coles, personal finance analyst at Hargreaves Lansdown, added: “We don’t yet know what term the green bond will run for, or what rate it will pay. There’s the hope that NS&I will take the opportunity to expand its range by offering something really attractive. Savers wanting to support green projects already have some competitive options, including the Gatehouse green savings bond, offering 0.55% for one year, 0.75% for two years and 1.4% for five years. There’s the hope that this bond will compete effectively.
“However, on the flip side, from the government’s perspective, funding is so cheap at the moment, and savers have so much money sloshing around right now, that it doesn’t make sense to pay over-the-odds.”
Carbon Markets working group
Although few details were given, Sunak announced the government is establishing a new working group with the aim of positioning the UK and the City of London as the leading global market for high quality voluntary carbon offsets, which it said can play an important role in addition to international efforts to reduce carbon emissions.
Led by Dame Clara Furse, who was the chief executive of the London Stock Exchange between January 2001 and May 2009 and is chair of HSBC UK, the working group will draw on the UK’s financial expertise and entrepreneurship and build on the work of crossing-cutting initiatives such as the Taskforce for Scaling Voluntary Carbon Markets, the government said.
There were initial question marks around whether the government would continue with Social Investment Tax Relief (SITR) which allows Income Tax relief and Capital Gains Tax hold-over relief for investors in qualifying social enterprises, helping them access patient capital. However, Sunak said government will continue to support social enterprises in the UK that are seeking growth investment by extending the operation of SITR to April 2023.
Melanie Mills, senior director, social sector engagement at Big Society Capital, which had been campaigning for an extension said: “We are delighted today to hear the Chancellor’s continued support for SITR for another two years, demonstrating the government’s commitment to the social sector and the role it can play in the levelling up agenda. Today’s promise will enable vital patient and affordable capital to continue to be unlocked for social enterprises, charities and community businesses, allowing them to build back better and fairer.
“Saving SITR is just the first step towards unlocking more private investors’ capital to support social enterprises and charities. Now, our action is to improve and extend it. We look forward to working with the Enterprise Investment Team within HM Treasury and Civil Society and Youth Directorate within DCMS to reform SITR, so that it can fulfil its potential.” –
In other headline announcements around boosting society and livelihoods, Sunak allocated £7m for a new “flexi-job” apprenticeship programme in England, that will enable apprentices to work with a number of employers in one sector and an additional £126m for 40,000 more traineeships in England, funding high quality work placements and training for 16-24 year olds in 2021/22 academic year.
Meanwhile, £10m was directed towards supporting veterans with mental health needs and £19m to tackle domestic abuse in England and Wales, with funding for a network of ‘Respite Rooms’ to support homeless women and a programme to prevent reoffending.
Over £1bn in funding was also announced for a further 45 towns through the Towns Fund, supporting their long-term economic and social regeneration as well as their immediate recovery from the impacts of Covid-19, and a £150m Community Ownership Fund was announced to allow communities across the UK to invest to protect the assets that matter most to them such as pubs, theatres, shops, or local sports clubs.
For more Budget articles following today’s announcements, see below from our sister publications:
Part of the Bonhill Group.