A National Wealth Fund For A Just Green Transition

Despite the UK financial sector holding trillions of pounds worth of assets, the real economy has suffered chronic underinvestment, particularly in the infrastructure projects required for a just green transition.

A range of interrelated factors have limited private finance’s ability to invest in such projects, such as short-term investment horizons, liquidity preferences, risk appetite, uncertainty over returns, as well as coordination and collective action problems. Public financial institutions have a critical role to play in overcoming these barriers, leveraging the state’s unique advantages in terms of scale, risk-tolerance and longer-term investment horizons.

Existing public financial institutions like the UK Infrastructure Bank (UKIB) and British Business Bank (BBB) have had limited impact in mobilising capital because they have not been empowered to act as true public investment banks that are able to issue their own liabilities and leverage their balance sheet like Germany’s successful KfW. Rather they have acted as funds, only able to deploy a relatively small amount of capital allocated by the government.

A new National Wealth Fund, which would align UKIB and BBB under its umbrella, offers an opportunity to build an enhanced public banking ecosystem to coordinate public and private investment. If empowered to issue its own liabilities, the NWF would be able to meet private finance’s demand for productive safe assets, while crowding-in a much larger quantity of capital towards the real economy and a just green transition.

Recommendations

• The government should embrace the opportunity presented by a NWF to review, consolidate and strengthen the UK’s fragmented ecosystem of public financial institutions.

• The government should empower the NWF to issue its own liabilities across a range of maturities, to meet private finance’s demand for safe assets that support the real economy and the green transition.

• The additional £7.3bn of funding announced by the government should take the form of equity capital, which could allow the NWF to mobilise more than £180bn, or around £228bn if UKIB and BBB’s balance sheets are consolidated under a NWF.

• Over time, the NWF should target an 8% leverage ratio, which would allow it to mobilise £250bn over ten years with £20bn of equity, or to £460bn (the same per-capita size of Germany’s KfW) with £40bn of equity.

• Liabilities issued by the NWF should be excluded from measures targeted by fiscal rules, including public sector net debt (PSND).

• The NWF should be equipped with an investment mandate and objectives that prioritise supporting the government’s industrial strategy and economic missions, including a just green transition.

• The NWF’s governance structures, such as boards, committees and informal advisory mechanisms, must include strong representation from trade unions and wider civil society, as well as industry.

• While funding should be centralised, a NWF should have structures enabling investment decisions to be decentralised, such as a network of regional banks.

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