The UK is committed to achieving net-zero emissions by 2050, with the government’s Net Zero Strategy, published in October 2021, setting out the key policies, initiatives and frameworks that will help us achieve these commitments.
But no matter how committed the government is, or how detailed these plans are, the transition to net-zero cannot happen without finance. Government funding alone will not be nearly enough. The private sector will need to step into to plug the funding gap.
Although this will undoubtedly bring with it a whole swathe of new challenges, forward-looking financial services organisations can capitalise on this opportunity to lead the transformation, as well as playing a critical role in funding the transition of other sectors and guiding capital flow to greener sources.
At KPMG, we see this changing dynamic playing out across four key areas:
Changing expectations and appetite of current investors, owners, and markets
There is increasing recognition that you can’t have good green development without also being nature positive, but how do you achieve this? As a bank or other finance provider, how do you advise your clients on what this actually involves? The EU taxonomy has a ‘do no significant harm’ test for companies, investments or activities to be considered green. Part of this links back to biodiversity - they must cause no harm to biodiversity, ecosystems or water and marine resources, and this must be officially attested.
But many companies struggle to understand exactly what this means in practice, beyond the typical EIA studies and some charitable spend on green projects like tree planting and rewilding. A mature carbon credit market with nature-related credits that can be traded could revitalise this type of lending and investment, but it will need standards, assurance and benchmarking from advisors who understand the context and what it means for finance providers.
Defining your strategic priorities
Innovation will be vital to drive a flow of investment funds to green and sustainable targets. It is only by investing in innovation that we can, for example, solve carbon capture and storage at a reasonable price and scale, develop a hydrogen pipeline system to decarbonise gas heating, or build a better national and local grid backbone carrying green electricity to fast roadside and forecourt chargers, as well as better animal feeds, better recyclable containers and packaging. All these things will need support from expert advisors to change manufacturing processes, create and test new business models, and find the required financing and investment, not to mention guarding against greenwashing by ensuring high standards are set and adhered to. It’s not only about pointing your business in the right direction, you need to understand the timing, understand the pressures and understand the opportunities around that change of direction.
Identifying investments that are both sustainable and commercial
The vast majority of investments must provide a commercial return and be investment grade to attract investor funds. Banks will lend for smaller, riskier projects but charge a risk premium for doing so. Green money, just like brown money, needs to be repaid, but rather than being a negative, this level of scrutiny is positive. Green projects that are non-commercial and subsequently fail have no lasting impact on sustainability and damage the view that green business is good business. Proactive advisors like KPMG can help provide this ‘commercial as well as sustainable’ scrutiny, while also looking at the ever-present political, supply chain and market risks involved in any investment.
Gathering the data to measure performance
As well as driving investment in companies and activities that make a direct contribution to the net-zero transition, it is likely that the UK green taxonomy will allow financing for activities that support the transition to green to also be classed as green. For example, a manufacturer of the masts that wind turbines sit on – the mast itself and its concrete foundations are not green, but without it the turbines that deliver the green impact are useless. In our view, the transition of industry and commerce to a low carbon economy is probably the biggest area that needs lending and investment over the next 5 years. For transition financing to become mainstream it needs the public and NGOs to appreciate that progress is being made, and that the direction of travel is the right one. For this to happen, however, it requires better reporting, more frequently and with more transparency, so it is clear if things are stalling or going backwards before end-of-year results are announced.
2050 may seem a long way off, but the time to act is now. Market leaders in financial services are already thinking about what they need to prioritise and how they can start addressing many of the issues outlined above.
KPMG’s Financial Services team can help you understand the challenges and opportunities, source the data and provide the assurance required to unlock green and sustainable finance.
Contact us for a confidential discussion to ensure your ESG journey is as timely, effective and efficient as possible.