A new national wealth fund to target green investment was part of the original £28bn commitment to “green economics” and survived the earlier cull of manifesto promises. The Chancellor announced last week that officials are working to establish the new national wealth fund (NWF) within the next week, building on the consultation and preliminary work already done by the Green Finance Institute. The NWF will be supported with £7.3bn in allocated funding through the UK Infrastructure Bank.
Whilst the announcements have come quickly after the election, the full detail as to how the NWF will operate and its investment parameters will be shared before the Government’s international investment summit, currently anticipated to be held in October.
However, given the input of the Green Finance Institute and the National Wealth Fund Taskforce’s July report prepared for Labour (the July Report), we expect that the NWF will not be a wide-ranging sovereign wealth fund similar to Norway’s Government Pension Fund, but more of a “green catalytic fund", focussed on de-risking specific “green” parts of the economy.
The July Report highlights the conceptual and practical points that the NWF, in its set up, constitution and operation, will need to address. The July Report also suggests a preferred way forward on a number of these questions, in part drawn by comparisons with the Canada Growth Fund and Australia’s Clean Energy Finance Corporation. From the point of view of private capital managers, it looks like the NWF will not be investing at scale as a primary investor in other fund sponsors’ primary blind pool funds, save in very specific circumstances; it is more likely to be of interest as a potential co-investor or cornerstone investor into portfolio investments in the sectors specified below.
Private capital currently leaves a funding gap for green investment projects: the NWF’s objective should be to plug that gap, and in so doing, drive up UK competitiveness by accelerating the UK economy’s transition to a low carbon economy, “crowd in” private capital alongside public capital (the July Report repeats Labour’s aspirations to operate the NWF such that every £1 of public investment is accompanied by £3 of private investment) and create economic growth and new jobs.
The preference is for the NWF to have a broad investment mandate rather than a fixed sector funding model or rigid investment criteria. There is no firm conclusion on target rates of return or an expected risk-return profile but the intention seems to be to create a funding model which is self-sustaining rather than profit-maximising.
In terms of what, Labour has already indicated that the NWF should focus on five preliminary sectors where NWF investment should be considered: (i) green steel; (ii) green hydrogen; (iii) industrial decarbonisation; (iv) gigafactories (i.e. battery production); and (v) ports. In terms of future areas to focus on, the July Report anticipates the NWF could invest to support enabling infrastructure, help remove significant supply chain gaps, and support commercialisation of new technologies.
In terms of the how, the July Report envisages that will be done through all manner of instruments: equity (particularly where the investment is non-control and comes with a higher degree of risk), concessional debt (offering loans at below market rates), guarantees, wider price assurance options (including off-take contracts and contracts for difference) and other blended finance models, as discussed in part in our July Policy in Practice podcast.
Occasionally, and where the situation merits it, the NWF could also invest in funds managed by third party fund sponsors.
Alongside investment capability, the July Report believes that the NWF, in combination with government, will need to address policy gaps and encourage policy changes so that the broader financial landscape becomes more conducive to “green” investment.
The July Report discusses various options for how the NWF could be set up, including separate dedicated investment vehicles investing pre-defined tranches of capital, or one all-encompassing fund (which the July Report concludes would be the most natural choice; it notes that this is successfully used by the Australian Clean Energy Finance Corporation). The use of one, combined pot would give the operators of the NWF greater flexibility to invest and benefit from blended rates of return at the fund level rather than worrying about performance in sub-sectors or sub-funds. The July Report admits that there may be political pressure to ring-fence capital for particular areas on particular terms but prefers the more generalised approach.
There is also an interesting discussion in the July Report about how best to involve UK pension funds in the investments made by the NWF: whether at fund level (and whether the NWF should evolve in the future to raise third party capital) or at the level of individual deals.
In our previous note on Labour party financial services policy, we had pointed out the danger of any new national wealth fund becoming pulled between different political objectives and masters. The July Report also highlights this and the importance of independent governance, together with:
Interestingly, the July Report does not come to firm conclusions (and the Government announcements to date do not give any firm indication) as to where the interface with government should come. It remains to be seen whether it is HM Treasury, the Department for Energy & Net Zero, or the Department for Business and Trade, which is expected to adopt the lead in managing the relationship with the new NWF.
The July Report discusses different options for the set-up of the NWF, but the Government has in the first instance decided that two existing public finance institutions – the UK Infrastructure Bank and the British Business Bank (BBB) – will operate under the NWF umbrella, with a renewed focus on investments in decarbonisation technologies.
There will also be clear blue water between the NWF and the similarly new GB Energy. GB Energy will be a new, publicly owned green “power” company, which will receive £8.3bn of government investment and co-invest alongside the private sector into emerging energy technologies, including hydrogen, floating offshore windfarms and tidal power, and scaling investment into more mature energy technologies such as onshore wind, solar power, and nuclear energy.
