Building back better – and greener: what the UK Budget means for driving a green & resilient recovery

19 March 2021

Caroline HaasHead of Climate and ESG Capital Markets

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Michelle GirardManaging Director, Co-Head Global Economics, Head of Strategic Coordination & Business Operations, US

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Jonathan BrandonOnPoint Editor

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The new UK Budget delivered a timely boost to the country’s sustainability ambitions as it looks to rebuild the post-pandemic economy with climate resilience at the core. Our specialists outline how the Budget aims to enlist corporates, financial institutions & institutional investment firms to help the UK adapt to the effects of climate change and build a more resilient future.

Key takeaways:

  • Investment & upskilling will drive net-zero innovation and help create “green collar jobs”: new investments in green tech, energy, and a range of sectors should help fuel new business growth & green job creation.
  • A new national UK lender will deepen the market for infrastructure: by focusing on local projects and bridging the gap left by the private sector, a new UK infrastructure bank will help cultivate expertise at a local level and create new investment opportunities.
  • Reforming the Bank of England (BOE) mandate to include sustainability will bolster the UK green bond market: the new sustainability mandate will help drive down the cost of issuance and increase demand for green bonds.
  • Green gilts & green retail savings are gamechangers for investors & corporates: creating a liquid sovereign green curve & generating more demand through retail avenues will entice more corporate borrowers to issue green and deepen & diversify the market.

The UK government’s plan for a post-pandemic recovery outlined in the 2021/22 Budget includes several notable initiatives aimed at tying its climate resilience & net-zero emissions ambitions to the country’s economic growth and the development of the broader sustainable finance market.

Nascent though they may be, we think these initiatives may have a significant impact across a range of corporate sectors, the investment community and the wider sustainable finance market – creating new opportunities for corporate finance decision-makers and investors.

Innovation & upskilling: new investments should benefit a wide range of businesses & investors

The new Budget cements innovation policy at the core of the government’s long-term economic plan, providing a range of support for UK businesses and creating new opportunities for investors with provisions intended to help commercialise new green tech & business models, create more green jobs, and generate more private investment for high-growth firms as well as businesses in energy, infrastructure, and housing.

This includes a new “Net Zero Innovation Portfolio”, a £1 billion fund to accelerate the commercialisation of low-carbon technologies and business models and a £375 million “Future Fund: Breakthrough” scheme, which will work with the private sector to invest in innovative, high-growth UK businesses in clean tech. These efforts complement the government’s Ten Point Plan for a Green Industrial Revolution announced in November 2020, which aims to attract up to £36 billion in private clean energy investment by 2030 and help create over 120 thousand jobs in offshore wind, hydrogen production, green transport & real estate – cultivating much-needed expertise & upskilling to improve the UK economy’s climate change resilience.

New national UK lender will deepen the market for infrastructure

The Chancellor has confirmed the creation of a UK infrastructure bank, which will drive investment into less-established green industries and local projects, and create a deeper market for infrastructure.

At inception, the Leeds-based National Infrastructure Bank will have £22 billion of financial capacity to deliver on its objectives, consisting of £12 billion of equity and debt capital and the ability to issue £10 billion of guarantees – in the hopes of attracting more than £40 billion in private investment. Available from this summer, funding (at a very competitive rate of gilts + 60 basis points) and advice will be provided to local authorities for complex projects, adding capacity & expertise to local governments – which, given the nature of the projects they lead, are essential for delivering the UK’s net-zero emissions target by 2050.

Crucially, the Bank’s focus will be on participating where its “additionality” is the greatest: investing in projects that would not have happened otherwise or bringing projects forward to meet net-zero or local growth objectives. By focusing on the development of new infrastructure assets and limiting its exposure to projects that could already be fulfilled by the private sector, the Bank should help grow the UK infrastructure market and create new investment opportunities without crowding out or competing with private lenders & investors.


The Bank of England (BOE) is joining the greenification push, which could bolster demand for green debt & direct the financial system towards sustainability

In a significant move, the remit for the BOE’s monetary and financial policy committees has been expanded to focus on environmental sustainability and the drive towards net-zero emissions, both in growing the supply of green finance and in fostering a financial system that enables the transition to a net-zero economy and better climate resilience.

The most immediate impact is likely to be found in the BOE’s asset purchasing programme, or quantitative easing (QE). According to reports, the Bank of England has already said it will start “greening its corporate bond-buying programme” from the end of this year by taking climate risks into account when buying corporate debt, but it could build on that by buying more certified green bonds and sustainability-linked debt. Stronger demand for green assets from the BOE could entice a wider range of issuers to come to market, and – much like the effect of quantitative easing on conventional assets bought by central banks – apply downward pressure on bond yields (and therefore reduce costs for borrowers).

Longer term, the BOE’s greener financial policy committee mandate could provide a strong platform to build on its recent efforts to make the financial system more resilient to climate change. The BOE has asked financial institutions (banks and insurers) to carry out their first in-depth climate “stress test” in June to assess the impact of climate-related risks on the UK financial system, while the government looks set to introduce new climate-related corporate disclosure requirements later this year (built on the Task Force on Climate-related Financial Disclosures (TCFD), of which the BOE is a member & key proponent).

But the BOE’s newly greenified financial policy mandate also gives it new impetus to consider a wider range of tools to support a net-zero economy through the structure of the financial system: for example, by tweaking banking capital regulations (like adjusting how banks’ risk weighted assets are measured to account for climate resilience) to help banks accelerate green & transitional lending and pass on pricing benefits to borrowers that embrace low-carbon technologies; or adjusting institutional investment portfolio exposure requirements to incentivise capital allocation towards companies that are more resilient to climate change & other sustainability risks. These kinds of changes could dramatically affect how (and to which companies) capital gets allocated across the UK financial system, and if anything, underscore the importance of managing exposure to climate – and other environmental, social & governance (ESG) – risks.


Green gilts are on the menu – which could be a gamechanger for investors, corporates and the sustainable finance market

The UK government confirmed it will make its first foray into the sovereign green bond market this summer, allocating up to £15 billion in issuance this year – one of the largest green bond programmes in Europe – with the first sale pencilled in for June. The green gilt programme is being complemented by a green retail savings product to be launched around the same time.

More detail on how the green gilt proceeds will be spent should arrive in June, and early indications suggest these bonds will help finance projects that tackle climate change and other environmental challenges. But beyond funnelling billions of public funding into green & environmental projects, this could be a game-changer for the UK’s sustainable finance market more broadly by helping to create a liquid sovereign green bond curve, an important pricing benchmark for corporates and others looking to issue green in Sterling. The UK’s sovereign green debut could also entice more corporate borrowers to market. A recent analysis of European bond markets by NatWest has shown that when sovereigns take the lead on green borrowing, corporates tend to follow, often leading to more domestic corporate green bond issuance and greater diversification among the domestic green issuer base.

As the programme evolves and issuance grows, it would also help create a wider pool of investable assets for domestic and global investors active in sustainable finance markets, where demand continues to outstrip supply. Similarly, the retail green savings product should help familiarise more savers & investors with sustainable products, leading over time to more demand – via pension funds and the like – for green assets, a trend we only see accelerating as more sustainability-conscious millennials exert more influence over capital allocation.


A positive step forward

While it’s too early to measure their effectiveness, we think these initiatives represent a positive step forward in the UK government’s bid to build a more climate-resilient future and achieve its net-zero goal. They have certainly generated interest among clients (and the wider market), and if carried through, have the potential to reshape the UK sustainable finance market.

Click here to visit our environmental, social & governance (ESG) hub for news, views and analysis on everything ESG and sustainable finance related. To speak with us about this article, get in touch with your NatWest Corporate & Institutional representative or contact us here.

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