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Budget: A commitment to green growth

Looser regulations around workplace pensions could see the arrival of venture capital products as the UK seeks to spur growth, especially in green opportunities
March 3, 2021 and Nilushi Karunaratne
  • £12bn of capital investment for the National Infrastructure Bank which is due to launch in Leeds
  • NS&I gets its first green savings product 
  • Venture capital in workplace pensions

In a boost for the construction industry, the chancellor has announced an initial £12bn of capital investment for the National Infrastructure Bank (NIB). The NIB was unveiled in the November Spending Review and is due to launch in the spring in Leeds. It will help fund both public and private projects across the UK as part of the government’s ‘levelling up’ agenda and the commitment to reach net zero carbon emissions by 2050.

Providing funding through a mixture of loans, guarantees and equity stakes, the idea is to de-risk infrastructure projects and encourage more private investment across sectors such as transportation and renewable energy. The NIB will also replace some of the funding that could previously have been secured from the European Investment Bank as a member of the EU. The Chancellor says that the NIB could support at least £40bn in total infrastructure spending.

Much has been made of emerging from the Covid-19 pandemic through a green recovery and using this as an opportunity to accelerate the energy transition. The NIB will support more established sources of renewable energy such as offshore wind, but will also help advance newer technologies such as green hydrogen production.

Sunak talked up the possibilities of a high-tech centre at the Teesside freeport, referring to offshore wind, carbon capture and innovative manufacturing capacity. He made much of this being down the road from the NIB but didn't give much detail on government funding support.  

It’s worth tempering expectations as we have seen something similar to the NIB before. The Green Investment Bank was set up in 2012, only to be sold to Australian private equity group Macquarie five years later.

First green government bond

The government will start to offer a green retail savings product through NS&I from the summer of 2021. This product will be closely linked to the UK’s sovereign green bond framework and will give all UK savers the opportunity to take part in the collective effort to tackle climate change, benefiting from the innovative reporting standards planned for the green gilt programme.

“The new NS&I Green bonds are likely to sell like hotcakes, seeing as environmental concerns are really beginning to take hold with savers and investors,” says Laith Khalaf, financial analyst at AJ Bell. “The product is expected to land in summer, hopefully enough time for NS&I to sort out the administration problems it has encountered of late, before it’s hit with a fresh wave of demand. The interest rate paid on the bond will be a key determinant of its success. Too low, and it won’t put bums on seats, too high and there are inevitably questions about costs to the taxpayer, as there were with George Osborne’s NS&I Pensioner Bonds. The green bond doesn’t form part of NS&I’s finance target for next year, which suggests the Treasury has high hopes for its popularity.”

Proceeds from this product will not contribute towards NS&I’s 2021-22 financing remit. NS&I will have a net financing target of £6bn in 2021-22, within a range of £3bn to £9bn.

The government will also issue its first green gilt in the summer with a further issuance later in 2021. Planned green gilt issuance for the financial year 2021-22 will be at least £15bn. The green gilt framework, to be published in June 2021, will detail the types of expenditures that will be financed to help meet the government’s environmental objectives. 

Chris Holmes, co-lead investment adviser, JLEN Environmental Assets said, “the opportunity to purchase the world’s first green savings bonds is a positive development. Investors are increasingly looking for greater choice in the world of sustainable investment, allowing them to earn an ecological return as well as a financial one. Renewable energy and clean transport in particular offer an attractive long term opportunity, given the government’s repeated commitment to greening the UK’s economy and reaching net zero carbon emissions by 2050.

Workplace pensions and venture capital

Meanwhile, the government is set to examine whether more could be done to allow the inclusion of racier assets such as venture capital in workplace pension schemes.

A paper released alongside the Budget, “Build back better: our plan for growth” noted that government and regulators had already removed “a range of regulatory barriers to ensure that pension savers can access the returns offered by venture capital and growth equity, as part of a balanced portfolio”. The government will now consult on whether a 0.75 per cent charge cap on the default arrangement of defined contribution (DC) workplace pension schemes is limiting their ability to buy a broader range of assets.

The Department for Work and Pensions will also come forward with draft regulation to make it easier for affected schemes to take up such opportunities by smoothing certain performance fees over a multi-year period.