Funding the journey to net zero: lessons learnt from UKREiiF 2023
Earlier this month industry real estate and infrastructure leaders from across the country came together in Leeds at the UK Real Estate Investment & Infrastructure Forum (UKREiiF). Amongst the familiar showcases, seminars and networking, our conversations kept coming back to the important challenge – how UK industries will support and navigate the shift to a decarbonised economy.
More specifically, how does the industry evaluate the cost of making this critical transition, and how will it be funded?
At our own panel discussion on the topic, we heard of the challenges being faced by local authorities, central government and private sector investors in shaping their responses to this absolutely critical question.
With the UK slowly emerging from a period of constrained growth and high inflation, the scale of the task is immense. The answer lies in aligning interests and maximising resources.
Local government – shaping strategies for net zero
Climate change is a global problem that can only be solved by local action.
This puts local authorities firmly in the frame. The vast majority of all councils in the UK have now formally declared climate emergencies and we heard very positive cases from major city authorities on their progress to net zero.
In the context of the overall climate conundrum, the strength of local authorities lies in their close knowledge of their area and their ability to marshal action on two big priority areas for decarbonisation: homes and transport.
Taking housing first, it has been heartening to see retrofit moving up the local authority agenda – but there is still a great deal to do. Through our own work on programmes with the Greater London Authority and the Department for Energy Security we have been working with local authorities to develop investment and retrofit programmes at scale.
While there is huge ambition and activity in the sector, including £1.5bn of recently allocated government funding, there remain significant challenges around skills and capacity, both for clients and the supply chain.
The critical next step is to turn project thinking into longer term, strategic investment planning for a decarbonised housing stock.
A longer-term view is key to growing market confidence, embedding good practice and delivering cost effectively and at scale. We need to increasingly work in a coordinated way, not only within local authority portfolios, but also between them, and link decarbonisation to ongoing investment planning – so that we retain and embed knowledge in the supply chain for a sustainable and ongoing industry.
This level of policy coordination is also critical when it comes to transport. On the back of the pandemic, local authorities are grappling with shifts in travel patterns that necessitate a re-evaluation of infrastructure business plans.
While this brings challenges, it also provides the opportunity to assess wider policy interventions that can promote the use of new mass transit systems, like those we are seeing introduced in Edinburgh and West Yorkshire, as well as support the switch to battery electric vehicles through the roll-out of charging networks.
Stimulating investment
While local authorities have policy-creation powers, many lack the substantial direct resources when it comes to financing.
At our event, we heard from the UK Infrastructure Bank and its prioritisation of local authority lending when it comes to supporting decarbonisation programmes, including examples in West Yorkshire, Manchester and Bristol.
The bank has a newly established Local Authority advisory team focused on supporting local government to structure decarbonisation programmes in a way that aligns delivery at a local level with future private investment that the bank knows is coming down the track.
In this way the bank can act as the catalyst of private capital. With £1.8bn of capital already committed of a total of £22bn, there are reasons to be optimistic.
Private capital – demonstrating the value of green investment and decarbonising existing assets
An area in which the combination of public policy and private opportunity is coming to the fore is on energy performance for Real Assets. Nationally, the introduction of Minimum Energy Efficiency Standards (MEES) is starting to have a significant impact on private sector investment to upgrade existing buildings and ensure that new developments have higher credentials.
From April this year, landlords have been required to achieve an EPC rating of at least E to be able to legally lease premises. That level then in turn ratchets up in future years, climbing to B by 2030.
While this amounts to a significant burden on asset owners, we are seeing encouraging signs that it is having the desired effect when it comes to greening assets.
Leading investors are recognising the alignment between better environmental performance, higher rental yields and the opportunity to access the growing availability of sustainably linked lending and green finance.
At our panel we heard of a number of positive examples of how institutional lenders are partnering with large asset owners to drive higher energy efficiency standards, such as that being seen between Legal & General and Oxford University.
Cultivating confidence
This kind of activity shows the significant power of policy and regulatory intervention. However, there remains wider calls for targeted subsidy from the government across a number of sectors. The challenge will be to ensure that funding is channelled where it is most needed, and to ensure that it is used to open up the market for private finance to follow.
This style of funding is not only about hard capital but also about confidence. At a national level, there is a need to exhibit a greater commitment to key industries that are seen as critical to the UK’s path to net zero – from advanced manufacturing to nuclear power.
A combination of policy uncertainty, spending reviews and electoral considerations all contribute to hesitation from private investment into these sectors. That not only means from major funds, but also from the supply chain too.
In our conversations at UKREiiF we found common consensus that there needs to be much closer alignment and visibility between subsidy and grant programmes that support the creation of skilled, green supply chains.
Acting local, thinking global
Net-zero delivery is the growth opportunity of the 21st century that will require strong decision-making and a sharp strategic focus. For local authorities and private sector investors to meet their carbon commitments we need to see much greater joined-up thinking across all parties.
As we found in Leeds, taking a place-based approach to net zero will be crucial: building low-carbon infrastructure and coordinating action between levels of local and national government. Events like UKREiiF play an important role in stimulating these discussions; we now need to keep the conversation going.