What is green finance?
04 May 2021
In response to the government’s ‘Green Industrial Revolution’ 10-point plan, the question of ‘what is green finance?’ has become more prevalent. Put simply, this key feature ensures that many future projects can be built effectively while minimising a negative impact on the environment.
The final point of the government’s plan is based on green finance and how this will be utilised to ensure that the UK is part of a greener future. Although green finance is a concept that is becoming more prominent as the world is becoming increasingly environmentally conscious, it can be an unclear concept to define.
In this blog post we explain the concept of green finance and its role by focusing on the following topics:
- What is green finance?
- How does it contribute to the zero-carbon emissions target?
- The planned ‘£1 billion Net Zero Innovation Portfolio’ and its purpose
- What are the government’s green finance plans?
- Key aims and dates
A sensible starting point is to have a clear understanding of the concept of green finance.
Green finance definition
Despite ‘green finance’ not having an official definition, it is generally agreed to be any financial initiative – either a product or service – that has been designed to protect the environment or to manage how the environment impacts finance and investments. This can cover a range of loans, debt mechanisms and investments that are used for the sole purpose of encouraging the development of green projects, minimise the impact on the climate of regular projects, or both.
These projects are financed by what are known as ‘Green Bonds’ which have proven to be an effective means for investors to make a measurable positive impact on the environment. To qualify for green bonds, you must adhere to the criteria set out by the Green Bond Principles (GBP) which include following rules on the use of proceeds, have a process for project evaluation and selection, ensure proper management of any proceeds, and offer detailed reporting.
These Green Bonds can then be used towards financing projects that fall under the government’s 10-point plan.
How does it contribute to the net zero-carbon emissions target?
The influence of Green Bonds is such that they are used to finance projects that are related to the government’s long-term plans of becoming a zero-carbon emission nation. Many of these projects fall under the following fields:
- Renewable energy
- Energy distribution
- Energy storage
- Emissions reduction and capture
- Energy efficiency
Other projects include green buildings and transport, water conservation, and pollution control. Waste reduction and management are also key areas of focus in addition to biodiversity and habitat protection, and afforestation/reforestation.
The planned £1 billion Net Zero Innovation Portfolio and its purpose
The government are aiming to accelerate the commercialisation of new low-carbon technologies, systems and processes in the power, building and industrial sectors by launching the £1 billion Net Zero Innovation Portfolio. This will focus on ten priority areas that correspond with the 10-point plan which include: floating offshore wind, nuclear advanced modular reactors, energy storage and flexibility, bioenergy, hydrogen, homes direct air capture and advanced CCUS, industrial fuel switching and disruptive technologies such as artificial intelligence for energy.
The government have already begun the first phase of a £100 million investment in greenhouse gas removals including direct air capture in November 2020, which captures carbon dioxide emissions directly from the air. The government will also provide £100 million for energy storage and flexibility innovation challenges. This has become increasingly important as the nation has moved towards an increasingly renewables-heavy system allowing energy storage over hours, days and years.
This leads on to the governments overarching plans in relation to green finance.
What are the government’s green finance plans?
The government are looking to make green finance meet the net zero target by raising total R&D investment to 2.4% of GDP by 2027. Developments of this began in July 2020 as they published the ‘UK Research and Development Roadmap’. The plan is for the next phase of green innovation to help bring down the cost of the net zero transition, nurture the development of better products and new business models and influence customer behaviour.
The long-term vision is for the UK to be a global leader in the technologies required to decarbonise our economies and transition to net zero. Specific green policies will be backed by a record increase in public investment in research and development to provide scientists with the resources to assist the nation’s path to net zero.
The ‘Green Finance and Innovation’ section of the government’s 10-point plan also outlines the following:
- Providing £222 million for the STEP programme (Spherical Tokamak for Energy Production) by 2040 and £184 million for new fusion facilities, infrastructure and apprenticeships
- Investing £3 million in the Tees Valley Hydrogen Transport Hub
- Investing £20 million across trials of zero emission heavy goods vehicles, testing technologies at scale
- Committing £170 million to support green recovery across Latin America, Africa and Asia since June 2020
- Issuing the UK’s first Sovereign Green Bond in 2021
- Introducing mandatory reporting of climate-related financial information across the economy by 2025
- Positioning the UK – and London – as a leader in the global voluntary carbon markets, responding to recommendations of the ‘Taskforce on Scaling Voluntary Carbon Markets’
- Implementing a green taxonomy that defines which economic activities tackle climate change and environmental degradation to help better guide investors
- Launching the ‘Green Jobs Taskforce’ to ensure a skilled workforce to deliver the net zero target with access to ‘green jobs’ by 2030
Key aims and dates
The government’s ‘Green Finance and Innovation’ plan aims to deliver:
|The potential for
hundreds of thousands
of jobs by 2030
of government funding in net zero innovation with
of matched funding and potentially
of follow on funding from the private sector
across low carbon sectors
- 2020 - Publish priorities within the Net Zero Innovation Portfolio
- 2021 - Remaining priority innovation challenges within the Net Zero Innovation Portfolio launched
- 2022 - Start vessel trials in Orkney, work towards a hydrogen port in Tees Valley, and launch feasibility studies for several clean maritime clusters across the UK
- 2022 - Announce the site for UK fusion power plant demonstrator
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