Green Finance

The green transformation, and achieving Net Zero in particular, was never expected to be easy or quick. The Treasury and the Department for Business, Energy and Industrial Strategy (BEIS) have estimated it as £70bn per year, or over £1 trillion by 2050.  Whatever the estimates are, one thing is certain:  the longer the delay in implementing the NZ transformation is, the higher the cost of the transition will be.

A few years ago, the UK government declared that the UK will be the world leader in the NZ transition. At the same time, however, the government made it clear that it is not going to finance NZ transition and that the main funding will be met by the private sector and households. This is not as controversial as it may seem, because at the end of the day, the government’s coffers are filled by taxpayers’ money, thus, ultimately the private sector and households will meet the cost either way. Moreover, it may be more efficient to have investors being involved directly, rather than the government imposing additional taxes, which opens up the risk that some of the proceeds will be diverted elsewhere and not be spent on greening and NZ. Furthermore, if households spend money directly on green-friendly products and activities, then their awareness of the need of change and trajectory towards achieving it may increase which, itself, can be beneficial. Thus, the policy of the government not acting as an intermediary may not be as problematic as may initially appear.

Yet, for the private sector and households to get involved, it is essential for there to be clarity and commitment around the policies supporting and stimulating such involvement. It is well recognised that uncertainty about the direction of policy development contributes greatly to the risk of projects and, therefore, to the cost of capital of the projects, which in turn impacts the expected returns and their attractiveness to potential investors. The greater the uncertainty then the greater the value in waiting for the uncertainty to diminish before committing investment. Hence, the more U-turns and stop-start policies from the government, then the bigger the option value of waiting, so the more rational investors delay committing resources and the harder it is to move the NZ transition process forward. 

The last couple of decades have shown that there has been great interest in green investing. In the period 2019-2022, $1.6T green bonds were issued worldwide. In 2020 alone, sustainable investment assets amounted to $35.3T. However, currently, this trend seems to have stagnated. Investors have started to be more cautious about putting money in projects that advertise themselves as green. This is, in part, because returns delivered by many green projects have been poor (which in the world of high inflation is particularly problematic), and, even more worryingly, the evidence is growing that many green investments have not been green at all. Green-washing has become a plague of sustainable investing.  In addition, there is growing evidence that the declarations of commitment to sustainable investing by big institutional investors (e.g., banks, insurance companies) and corporations have not been translated into their actions.

The Green Finance Group will consist of experts specialising in a wide range of issues who can provide (i) assessment of the impact of policy changes on the risk of green projects and their attractiveness to investors, (ii) valuation of green projects’ performance in absolute and relative terms (i.e., in comparison to non-green projects’ performance), (iii) assessment of retail and of institutional investors’ attitudes towards green investing, (iv) scenario modelling and analysis with the assessment of socio-economic impact, (v) assessment of the quality of corporate commitments to green investing, (vi) understanding the determinants of corporate commitment to green investing, and (vii) assessment of the quality and informativeness of corporate reporting of the impact of companies on biodiversity and soil health, and potential improvements. 

Understanding the above will provide the rigorous and essential basis to inform and influence policy debates and relevant regulatory changes. Note, the research will require the use of a variety of advanced econometric and statistical techniques.