Making Green Routine: Government launches green finance recovery plan

October 5, 2020

3 min read

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What's going on here?

On 22 July 2020, UK Prime Minister Boris Johnson announced £350m is being made available to cut emissions in heavy industry and drive economic recovery from coronavirus. This may be remembered as the start of a green economic recovery.

What does this mean?

Boris Johnson stated, “The UK now has a huge opportunity to cement its place at the vanguard of green innovation, setting an example worldwide while growing the economy and creating new jobs.” He is hedging his bets on renewables to turn the tide on the economic destruction resulting from COVID-19.The idea behind a green recovery is that economic activity should be directed in a manner that not only responds to the downturn in global activity, but the world “builds back better” in a sustainable way to meet the environmental needs of the future.

A pertinent example of how prioritising the UK’s environmental targets would benefit the economy is the use of carbon pricing (a cost applied to carbon pollution to incentivise polluters to reduce their emissions). The UK’s price on carbon would need to reach £75 per tonne CO2e (CO2 equivalent) by 2030 if the nation is to meet its 2050 net-zero target – a price which would raise up to £27bn of finance for low-carbon sectors. This alone will roughly cover the cost of two months of the government’s furlough scheme.

What's the big picture effect?

The government hopes to be a catalyst for a sustainable revolution in the private sector. The OECD estimates around €6.3tn will be required each year for the next 10 years to achieve the UNFCC Paris Agreement’s targets. It would be impossible for national governments alone to foot this bill and therefore a large portion of this estimate must originate from the private sector, which has in the past faced criticism for prioritising profit over environmental concerns. Self-interest has often precluded private sector actors from moving towards sustainable practices, for example the manner in which the oil industry has previously talked down the effect of climate change. Nevertheless, the pandemic may be a turning point.

Environmental, social and governance (ESG) funds now experience record inflows. These portfolios of equities and/or bonds have ESG factors integrated into the investment process. Notably, green bond issuances have also risen 50% from the previous year. Even major fossil fuel companies have committed to eventually becoming carbon neutral. For example, BP has taken its first major step into the offshore wind industry with the purchase of a $1.1bn stake in two US offshore wind projects being developed by Norwegian state oil company Equinor.

Elsewhere in the private sector, Riverstone Holdings LLC, one of the oil and gas sector’s largest private equity investors, is planning a blank-check acquisition company that will buy a business in the clean energy industry. This move illustrates how some private equity firms that have placed big bets on hydrocarbons, a sector battered by low oil prices and rising investor awareness of climate change, are increasingly focused on deploying capital into greener projects.

Law firms have recognised this ideological shift in the private sector. US firm Vinson & Elkins recognise that M&A deals in the renewables sector have resumed strongly following the initial downturn due to lockdowns. Investors see renewables as offering stable returns and relatively low risk. In the case of law firms, the main beneficiaries of a green recovery will be those with existing expertise in areas such as M&A and infrastructure. Furthermore, those with venture capitalist clients will see a healthy influx of business as the interest and activity levels of investment in “clean tech” have reached its highest level in over a decade.

The evidence suggests that an ideological shift towards greener activity has already begun within the private sector. There is some merit to the concerns that a second lockdown may weaken the economy further, to the point that the private sector resorts to their traditional practices, scrapping this greener approach. Nevertheless, this ideological shift has been brewing for some time. The economic shock resulting from COVID-19 has just accelerated this welcome change.

Report written by Kasey Cummings

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