An opportunity to look back in order to look ahead
The Hutton Series on Climate Change has been set up to add important impetus to climate efforts in 2021. As a participant in the financial sector session, alongside senior figures from the investment and financial regulation worlds, it offered an opportunity to look back in order to look ahead.
Shifting the tanker of the financial sector so that it works to bolster rather than undermine climate endeavours has gained considerable momentum since Paris. Mark Carney, as then Governor of the Bank of England, propelled this into the mainstream in the lead up to Paris with a speech that made explicit the existential risk that climate change posed to the financial sector itself and the ‘tragedy of the horizon’ – by the time those risks are apparent it will be too late to avert climate change. Coming from a leading Central Bank that galvanized a huge range of activities needed to move that tanker.
However, that in itself will not trickle down to the actions on the ground to save the climate, as it were. Tackling climate - keeping temperature rise to well below 2C and pursuing efforts to keep that to 1.5C, as agreed under Paris, is a mammoth effort of pace and scale. And we must keep the focus on 1.5C, as global citizens and in our communities not least as young people look ahead at the world they are inheriting: a 10-year-old today will only be 40 in 2050.
So back to pace and scale. Sometimes this is articulated as a volume of capital: X trillion by Y date, or a subset of that, but the reality of ‘landing’ already available capital into climate solutions on the ground needs the context of active national and local plans and policies – these remain an essential part of achieving outcomes in the timescale required. They are also important in shaping the growth opportunities investors look for in any given area, and with enough detail to provide confidence that the government is serious about achieving those. Not least as sectors such as energy and transport are undergoing significant change and require investment in infrastructure and overall system operation. The ‘energy transition’ is certainly on the radar of mainstream investors, with one trade press editorial describing it as the biggest global investment opportunity of the century. 2020 saw a 9% increase to $500 billion invested notwithstanding the buffeting from Covid. Yet that will not be enough to deliver climate outcomes. For those deploying capital, an ecosystem from someone using their savings locally to large institutions investing pension or insurance payments through infrastructure funds, still need to understand the risk and return of actual investments.
Back in 2004 renewable energy financiers articulated the characteristics of ‘good policy’ as ‘loud, long and legal’: loud - incentives that made the bottom line work (reflecting the economics of renewables at the time); long - to provide visibility over project horizons; and legal – to provide confidence in the rules. At that time, policymakers, for the most part, did not engage with financiers and investors or understand risk from this point of view, and vice versa, that was the stepping off point for trying to bridge that gap. The intention was not to put financiers and maximising financial returns in the driving seat (‘making out like bandits’ as one policymaker put it) but to ensure that where there were expectations that private capital or ‘the market’ was going to deliver objectives, then that had a sound base. If government policy was essential – renewable energy policy a clear example in energy world at the time – then the devil was in the detail - it also had to be well-designed, it had to work on that front – ‘investment grade’ policy. And if there were gaps where private capital would still not come in, if risks were too high for example, then public finance would be needed: in the UK we’ve seen the emergence of the Green Investment Bank (now sold), the Scottish National Investment Bank, and new ‘intermediary’ institutions like the Green Finance Institute providing independent insight, analysis and stakeholder engagement – local as well as national.
So fast forward - where does that leave us now? I can’t cover the tremendous breadth of progress (and work still to do) on pulling the whole tanker round. But having spent 15 years aiming to bridge the gap between finance and policy objectives and engaged in an energy sector that has undergone massive change during that period – I’ve been asking myself what is an enduring outcome, even with this one specific aim? One answer I’ve come to is that factors around investment need to be embedded systematically into decision-making. We have to be able to make decisions that are sharper and with more accuracy to deliver outcomes (and ensure we know that we are achieving this). There’s no point in having an extensive debate about ‘the trillions’ in one corner but disconnected from the realities of scaling capital into renewables, EVs, renewable heat or hydrogen.
It’s more complex than that - attracting capital is clearly only one of the factors that secure success long-term as Covid and these turbulent times have thrown into sharp relief.
So having been in a debate over the last couple of years where there was a proliferation of trending Ds: decarbonisation, decentralisation, digitalisation and so on, I’ve added to the list, refactoring this as re-wiring decision-making – practical ‘decision-infrastructure’ to better secure pace and scale:
Detail: policy has to get to the right level of detail for investors (used in a fairly broad way to mean the relevant ecosystem of capital providers). This means assessment and tools that reflect risk and where that is occurring, not just costs and benefits important as those are.
Dialogue: with financiers and investors has to be transparent and systematic and build in both to policy design and to monitoring – whether national or local tiers of government.
Docking in: it’s not only about finance, if we re-wire decision-making, the tools and metrics used must be able to dock-in with those being used or developed in other areas, not least just transition and changing societal expectations about long-term value. Otherwise, the world of trade-offs might get very messy. In this theoretically better system, you do your thing sharply but with an active view on how it’s going to work in with other areas.
Delivery [monitoring]: this is important - we need to get more responsive and agile. We need to understand whether finance is arriving as anticipated – we need to know that before it goes wrong – so a forward-looking ability to monitor risk / emerging risks in any given area. Metrics and data means we should be able to do this, but we still need to design this system.. Tools from the finance sector itself can be used and pooling expertise will be essential - this is something I’m grappling with at the moment – so feedback, please.
So from 2004’s ‘loud, long and legal’ I’ve ended up thinking about ‘investment confidence’ - a two way street– both for investors and policymakers. Policymakers too need to be confident that what they do will bring in the investment as anticipated otherwise we can’t deliver climate outcomes. This is needed while the financial sector itself is in the process of system-level change to ensure we value things for the long-term. This is definitely more benthic than big vision but I can’t escape from the fact it still needs to be done.
 Back in 2018 a trade press editorial from Infrastructure Investor described it as “no exaggeration to call the on-going energy transition the biggest global investment opportunity of the century”.
 Bloomberg New Energy Finance, Energy Transition Investment Trends, January 2021.