Phoenix Group, the UK’s largest long term savings and retirement business, is today setting out its recommendations for increased investment in regional growth to help the UK stay on track with its net zero ambitions. The recommendations are being made as part of a forthcoming policy paper, Charting the UK’s Net Zero Future: Policy recommendations to unlock investment, which provides key net zero policy priorities that government should focus on in the early days of a new Parliament.

The soon-to-be-published policy paper builds on proposals contained in Phoenix’s November 2023 report, Unlocking Investment in Climate Solutions, which found that with the right reforms on the right terms for pensions savers, UK pensions funds could quadruple their investment in UK climate solutions to up to £1.2 trillion of their UK asset allocation. This level of investment has the potential to account for half of the gross capital investment in climate solutions required by 2035 for the UK to remain on track with its net zero transition.

The key government policy interventions recommended by Phoenix Group to catalyse net zero transition at the regional and local level in its forthcoming policy paper are as follows:

1. Create an investor advisory body to work with the Department of Energy Security and Net Zero (DESNZ) to collectively build the skills and capacity in local authorities needed to build an investible deal pipeline of climate solutions.
2. Endorse the Local Area Energy Plan Guidance as the national framework for place-based whole energy system decarbonisation planning, to encourage regions to develop consistent local transition plans.
3. Simplify funding pots and encourage use of financing mechanisms to crowd in private sector capital.

Bruno Gardner, Head of Climate Change and Nature, Phoenix Group, said:

“We believe that the UK pensions industry has the potential to play a key role in accelerating the UK’s progress towards net zero but the adoption of ambitious regional investment policies by the next Parliament will be crucial in catalysing investment in the transition.

 “Around 80 percent of the UK’s overall greenhouse gas emissions lie within scope or influence of local authorities, and much of the investment in the net zero transition is needed in local infrastructure and services such as the built environment and transport. Phoenix Group wants to work with local and national government to help unlock this investment in a way that supports good outcomes for our customers, whilst also playing a part in helping the UK reach net zero by 2050. “

The policy paper directly addresses several barriers identified in the November 2023 report which also recognises that there is a limited deal pipeline of investible opportunities for institutional investors to support regional investment specifically aimed at the net zero transition.  

These barriers include:

• Lack of sufficient capacity within many local authorities to support the national aim of reaching our net zero goal. A Local Government Association (LGA) survey found that 79 out of 90 respondents thought a lack of workforce capacity was a barrier to tackling climate change and 70 respondents identified skills and expertise as a barrier¹.
• Lack of certainty on regional investment opportunities: Many local authorities do not have detailed net zero transition plans.
• Inconsistent access to funding and financing mechanisms to grow the deal pipeline: The National Audit Office identified 21 funds that local authorities can apply to, and there is often a lack of resource to manage this process².
  
  

Shareholder Assets & Private Markets Sustainability Lead, Anand Rajagopal, Phoenix Group, added:

“Institutional investors, such as Phoenix Group, have a long track record of supporting regional investment in productive and capacity-enhancing assets such as social housing and regeneration projects across the UK.  This is consistent with the principles laid down by the Productive Finance Working Group, i.e. productive finance does not solely refer to net zero-accretive assets; the intent here is to also include broader social infrastructure that can help plug key productivity gaps alongside creating economic capacity.”

“However, there are some limitations to the pipeline of investment opportunities to specifically support regional investment in net zero transition, especially when various asset eligibility requirements for insurance balance sheet investing are taken into consideration. Further, the funding routes and processes for local government authorities are numerous and in need of simplification, and there is room for greater efficiencies and scale here.”

Notes to Editors

With regard to the key government policy recommendations proposed by Phoenix Group in its forthcoming policy paper:

1. The creation of an investor advisory body to work with the Department of Energy Security and Net Zero (DESNZ) to collectively build skills and capacity in local authorities will be required in order to build an investible deal pipeline in climate solutions that would enable closer collaboration to build capacity within local authorities to design projects from first principles, increase ability to identify projects for investment, and understand requirements from institutional investors. In conjunction with this body, advisory capacity within the UK Infrastructure Bank should be scaled up to further support regional growth.
   
   
2. The adoption of Local Areas Energy Planning (LAEP), will permit local authorities around the UK to identify projects and investment more consistently across the country. Examples of UK local and combined authorities placing net zero at the heart of regional growth include, the West Midlands Combined Authority, which has invested around £707m in various initiatives to support the net zero transition; and Bristol City Council, which has invested £7.5m and over two years of planning to attract up to £1 billion of investment in the city’s energy system over the next 20 years.
   
   
3. The simplification of funding pots and encouraging the use of financing mechanisms to crowd in private sector capital will be required to catalyse private sector investment. The focus of government funding for local authorities should be on de-risking investment and reducing volatility of returns through mechanisms such as loan guarantees, and blended finance schemes that utilise capabilities of the UK Infrastructure Bank. The scale required will be significant: it is estimated that to develop projects to attract £100 billion of capital investment, £5 billion of initial development funding is required³.

References

1. 'The role of local government in delivering Net Zero' (2023)
2. 'The role of local government in delivering Net Zero' (2023)
3. 'Mobilising local net zero investments: challenges and opportunities for local authority financing' (2022) UKRI