In June 2019, the United Kingdom became the world’s first major economy to set in law a commitment to deliver a net-zero carbon emissions framework by 2050. This means that the emission sources from human activities contributing to the build-up of CO2 in the atmosphere must be offset by sinks that absorb or capture the carbon. The net impact from humans on atmospheric CO2 needs to be neutral, in other words, net zero.
This is a tough, but necessary challenge. The Committee on Climate Change have already provided a response setting out core activities that can contribute to the aim.1 These include: energy efficiency, the shift to low-carbon power, roll-out of electric vehicles and more low-carbon heating, the use of carbon capture usage and storage (CCUS) and electrification in industry, tree planting and on-farm measures, diversion of waste from landfill and the phasing out of fluorinated gases.
Clearly, all of these initiatives have a funding requirement, and this is not insignificant. The UK Infrastructure and Projects Authority estimate an investment requirement totalling GBP500 billion in low-carbon infrastructure to 2021, with a further GBP389 billion up to 2036 required within various sectors such as energy and transport.2 The immediate task for the finance sector therefore is to mobilise the capital needed to fulfil these funding requirements.
One of the reasons that the private sector has not financed some emerging technologies critical for enabling a low-carbon outcome in the past is that these technologies have risk-reward profiles that do not match the needs of investors or appetite of lenders. However, capturing environmental, social and governance factors as well as financial ones during the risk assessment process provides a more comprehensive way of identifying the true risk-reward trade off.
Imperial Business Partners have provided insights on risks assessments for emerging low-carbon technologies in the report “Lending to Low Carbon Technologies.” This report looks at technology readiness levels by considering policy, operational, market, legal, ESG and technical risk. It looks in detail at three technologies that are critical to facilitate the decarbonisation of the economy in the UK, namely solar PV, heat pumps, and carbon capture and storage. The aim is to build a strong knowledge foundation for the financial sector and increase its agility to deploy capital at scale for the transition.
1 Net Zero, The UK’s contribution to stopping global warming. May 2019
2 Accelerating Green Finance, March 2018