Green Finance and professional business services: ensuring that the energy transition gets the funding it deserves

Green finance

‘Green finance’ is the mobilisation of private sector capital for investment in sustainable and environmental companies, projects, and infrastructure, working closely together with stimuli provided by the public sector.

As a global financial hub, the UK is a leading player in green finance – the strength, maturity and international role of its financial sector is proven not just in volume (deals, capital, revenues) but also in international presence and initiative.

UK institutions are strengthened by a unique ecosystem that attracts capital, know-how and talent.

They also benefit from the political will in the UK to tackle climate change and to transition the global economy and financial system.

Green finance is characterised by mobilising capital through specific green financial mechanisms – both for Inward Foreign Direct Investments (FDI) and exports, and integrating Environmental, Social and Governance (ESG) considerations into the financial system and disclosing such risks.

The UK is home to considerable expertise, ideation, and action in green finance – a brief list of examples includes:

• Asset managers developing a number of successful specialist funds
• Investment banks highly involved in the green bond market.
• The world’s largest specialty insurance market in London
• UK leadership in the development and international adoption of Task Force on Climate-Related Financial Disclosures (TCFD) reporting
• The unique London Stock Exchange Group (LSEG) Green Economy Mark, helping investors identify London-listed companies and funds whose revenues are mostly ‘green
• The world’s first Green Finance Education Charter

The UK government launched its Green Finance Strategy (GFS) in July 2019, setting out specific proposals to strengthen the UK’s lead and competitiveness in green finance.

UK firms across all sectors are well equipped to work in line with this strategy and attract export and inward investment opportunities to the UK.

Green Finance is not a new financial product, but for the most part it is the application of existing financing tools to green/sustainability projects and companies, such as:

Green corporate finance

Also known as corporate finance or ‘on-balance-sheet finance’, this allows companies like utilities and developers to finance new green developments and construction projects using their own company funds and borrowings.

Green project lending

Usually provide by banks, in which project debt and equity used to finance a specific green project are paid back from the cash flow generated by that project alone, also known as project finance or ‘off-balance-sheet finance’.

Public/private co-financing or ‘blended financing’

Where national and multi-lateral development banks (e.g., International Finance Corporation, Inter-American Development Bank, Deutsche Bank, Asian Development Bank, CDC Group) and/or export credit agencies (e.g., UK Export Finance) can provide certain guarantees and credit-enhancements to reduce the risk to private sector investors and therefore reduce borrowing costs.

Capital markets

By providing a market for tradable securities listed on global stock and bond exchanges, mainly green bonds and green equities, this allows businesses to raise long-term funds.

Retail finance

Bank loans for individual consumers where the use of funds is for environmental purposes: green mortgages, car loans for electric vehicles, etc.

Carbon credits

Effectively granting ‘Permits to emit’ various greenhouse gases within a constantly decreasing cap over time, and which are normally government mandated.

Venture capital and private equity

Forms of finance for small and growing green businesses, in particular those developing innovative clean technologies e.g., hydrogen fuels, biofuels, graphene, carbon capture and storage, batteries and smart grids.

Asset management

The management of large pools of funds from institutional investors such as public and private pension funds, insurance companies etc., that falls into two main categories:

• Large, global and diversified asset managers, where the challenge is to encourage them to develop Environmental, Social and Governance (ESG) investment products and strategies, which has increased enormously in recent years.
• Smaller, specialised Green/ESG Funds which manage diversified portfolios of green and sustainable development projects. The UK has many successful examples of these types of funds which increasingly operate globally.

Insurance-related products

Insurers are on the front line of understanding economic damage and knock-on effects arising from climate change, providing traditional natural catastrophe insurance policies. They also provide ancillary services such as risk modelling, and newer solutions such as catastrophe and resilience bonds, all based on reduced premiums and coupons linked to reducing risk. Centred on Lloyds of London, the UK is the world’s leader in this sector.

Professional Business Services

UK professional and business Services clean growth offer

The Professional and Business Services (PBS) sector comprises of a broad range of subsectors including: Accountancy, Actuarial, Advertising, Architecture, Consultancy, Engineering, Law, Recruitment and Surveying.

As diverse as they are, these PBS subsectors described above have a crucial enabling role in supporting businesses of every size and in every location on their journey towards Net Zero and in developing green solutions themselves.

With the PBS sector already a proven UK exports leader, providing a third of the UK’s total services exports and globally second only to the US, Clean Growth represents a major opportunity for the sector to demonstrate its credentials and strengthen its exports footprint.

Many of the services provided by PBS firms are not necessarily new, but PBS firms are evolving and expanding their services to meet the needs of Clean Growth.

As a major investor in, and trainer of, its people, the PBS sector has the skills, capacity, and agility to innovate quickly and bring the best talent to deliver projects across public and private sector domains. Often working to complement to each other, many PBS services combine to enable projects to be delivered sustainably and successfully.

UK Export Finance

UK Export Finance (UKEF) is the UK government’s export credit agency (ECA).

Its mission is to ensure that no viable UK export fails for lack of finance or insurance from the private sector, while operating at no net cost to the taxpayer.

UKEF helps UK business win, fulfil, and get paid for international business by providing guarantees, insurance and loans to support export activities.

It helps UK companies:

• win export orders by providing attractive financing terms to their buyers.
• fulfil contracts by supporting working capital and trade finance.
• get paid by insuring against buyer default.

UKEF supports the global transition to a low-carbon economy by responding to the evolving needs of UK companies with products that can help UK exporters take advantage of the global appetite for renewable energy.

Being a global financial hub and with its experience of providing the backing and services clean businesses and projects require, the UK is attracting an ever-increasing number of domestic and international investors and customers.

Clean Growth: Green Finance and Professional Services

As desirable as it is, the transition to clean energy is a commercial enterprise, and one which requires high level finance and appropriate services to fund its progress.

Finances and services that must not only reflect the values of sustainability but implement them throughout the financial supply chain.

If your business or government could benefit from utilising the financial products and services available from the UK in achieving the transition to clean energy, visit Great.gov.uk.

UKEF can help find the right solution for your business.