Financiers weigh up Labour’s downgraded green plans

Credit: DrimaFilm / Shutterstock.com

the recent media frenzy accompanying Labour’s decision to alter its green strategy was not entirely unexpected given the political prerogatives tied to changing economic circumstances, with a general election looming.  

The party had been discussing altering its £28 billion commitment for a while, notes Simon Goldie, director of business finance and advocacy at the Finance & Leasing Association (FLA). “By the time it was announced, it was no longer a surprise, and in line with the approaches taken in other European countries,” he says. 

What the industry requires is certainty, however. That, he makes abundantly clear. A government’s policies must be thought through and worthy of continued support, and they must stick with it, he emphasises, adding that “one of the biggest obstacles to investment for our members is a government of any political stripe going back-and-forth on its commitments.” 

Those concerns are echoed by Shire Leasing’s corporate development director, Julie Henehan, who says that regardless of the party in government, a consistent long-term plan is vital, with utmost clarity regarding the goals, timelines, and specifics of any support available. That also stands if there is nothing available at all.  

“It is crucial that businesses and consumers can make informed decisions, plan effectively and move forward with confidence,” she says. 

That all being said, funders do appear to be viewing the green revolution with a good deal of optimism, regarding it more as an opportunity to support a strong economy and play a positive role in protecting the planet, than a major problem.  

Although some financiers prefer not to comment on a political topic, Henehan is enthused by the fact the two main political parties have so far shown substantial commitment to renewable energy in their plans. In so doing, she is acknowledging that even Labour’s watered-down proposal is something to be taken as a positive, highlighting a more optimistic tone among funders than environmental groups, trades unions, and the energy sector, bemoaning Labour’s scaled-down plans. 

“This will ultimately create new opportunities for finance and leasing, at the business and consumer level”, she stresses, “whether that’s to support industries with manufacturing and production of green solutions, or to help businesses and homes invest in those solutions more affordably.” 

She goes on to underline that the financing and leasing industry is working together to share knowledge and best practice to capitalise on those opportunities, without it becoming an overtly competitive issue.  

With the emphasis on delivering savings, and helping the environment, she says it is encouraging there is a high level of engagement across the market from funders large and small. Goldie adds that there is little distinction between new technology, and new green technology, arguing that if the demand is there his members will fund it regardless. There is a shared interest, too, in delivering this transformation, noting the FLA’s Sustainability Group and the Leasing Foundation’s Sustainability Initiative. 

It will be important to see the two main parties’ respective manifestos to make a firm assessment of their Green credentials, including what levels of support are available. Labour’s plans are invariably the main focus given that the party presently has a commanding lead in the opinion polls – with around 45% of the vote, compared to 23% for the Tories; even less in one recent poll – and is on course for a parliamentary majority, in the absence of a major shock. 

The original plan, outlined by Shadow Chancellor Rachel Reeves at the party conference in 2021, envisaged an industrial green revolution with £28 billion of fiscal spending, or an additional £18 billion per year, on top of the current government’s plans. This has now been scaled down by 75%, although not so much through a lack of ambition, but a pragmatic concern for the amount of borrowing required. Reeves herself seems to be attempting to balance conflicting aims, to become the greenest chancellor with one that has her hands firmly on the tiller to break with the perception of spendthrift Labour governments of old.  

Still, even the new, scaled-down version is a step-up from that outlined by the Conservatives. The revamped Green Prosperity Plan pledges £23.7 billion over the term of a five-year parliament, in addition to the £10 billion proposed by Sunak’s government, pending anything announced in the spring budget. This translates into £4.7 billion per year of extra green policy spending should Labour form the next government. 

Critically, the party proposed spending £6 billion per year on energy efficiency measures, insulating 19 million homes over a decade. This target has been lowered to £6.6 billion over five years, which now translates into just five million homes insulated. 

However, whereas Prime Minister Rishi Sunak watered down the UK’s climate commitments to put the country in line with its competitors and avoid an unnecessary financial burden on the British public, Labour still seems committed to reaching the goals faster, in theory at least. 

Labour’s plan is still to decarbonise the energy grid by 2030. It says it will set up a national Wealth Fund to invest in electric car production, carbon capture, hydrogen fuel, and other green energy initiatives. It will move to capitalise a state-owned power company (GB Energy) and invest heavily in green steelmaking.  

This will be partly financed by controversially raising the windfall tax on oil and gas from the present levy of 75%, to 78%, and extending it through to 2029, to gain a projected £2.2 billion per year, while resorting to more borrowing to fund the remaining share. 

Despite these changes, John Phillipou, the FLA’s chair, and managing director of the SME lending division at Paragon Bank, believes it is necessary to focus more on the long-term requirement and trend of decarbonising the economy than any short-term vote-winning measures. 

Shire Leasing’s Henehan echoes this view, noting that there has been a clear consumer and commercial shift in behaviour towards improved sustainability and climate action, with demand driving innovation and affordable solutions. This, in turn, creates the demand for business finance and leasing. 

She cites the example of the solar rooftop sector, which shows a post-subsidy record for smaller-scale photovoltaic (PV) installations in 2023, totalling 189,000, close to the all-time record of 203,129 in 2011 at the height of the Feed-In-Tariff scheme.  

Innovation and collaboration are the driving forces and work of this nature is already proving successful, such as Shire Leasing’s support and delivery of financial assistance schemes for clean air zones. These make investing in no- or low-emissions vehicles more affordable. 

She cites the example of the Bath & North East Somerset Council financial support scheme, where around 900 vehicles were upgraded, contributing to a 70% reduction in the number of highly polluting vehicles using the city. As in Bath, a similar scheme in Bristol has contributed to improving the measured air quality. 

Of course, government support is still crucial. However, although Labour has scaled back its green economy commitment – and invariably the added investment in this area would have been important for the financing industry – Phillipou is certain there will be a renewed policy focus on the green agenda after the election.  

The new government will utilise the time and space available to implement the changes that are needed to make a difference, he believes, and it is clear that the UK’s commitment to achieving net zero by 2050 will remain the prime target. This is, after all, a legally binding commitment.  

Besides, voters are becoming increasingly more focused on sustainability, not least as the population ages and the younger cohorts have a say in the political process. 

However, Phillipou states this change cannot be driven by the government alone, it needs a strong economy to do so, a view that is shared by others in the industry. 

“Whilst the intention to invest in green technologies and assets has been there, the ability to do it has been more challenging,” claims Phillipou, adding that, “businesses are also confused about what to invest in and when. With technology evolving so quickly, it can be challenging for them to know when the time is right to make that commitment.” 

Over the longer term, the performance of green assets will improve, delivering tangible business benefits in terms of efficiency and productivity. There will be a shift from doing the right thing to investing because it makes business sense. Being cleaner, smarter and safer will become standard business practice. 

“In future, we won’t be talking about green assets, they will just be assets,” he says. 

Goldie believes there has been a gap between politicians’ ambition and reality, and both the government and opposition have sought to address this in recent months.  

Despite this, it is not clear what the financing and leasing industry is truly facing until the parties’ respective manifestos are published, and even then it will depend on what policies are pursued after the election. This is especially true for the Labour Party because the reality of governing will be different to being in opposition. For these reasons, too, several financing and leasing experts chose not to comment. 

From conversations the FLA has had with government ministers and shadow ministers, both parties seem to agree on the move to net zero, but also accept that fossil fuels will be in use for some time, Goldie states. “My sense is that politicians on all sides are considering the most effective way of achieving these aims,” he says.  

One key policy lever he mentions is the proposed green finance guarantee. As part of the Spring Budget 2024, the Recovery Loan Scheme was extended for two years and renamed the Growth Guarantee Scheme. Established in 2021 during Covid and subsequently expanded in 2022, the RLS entails the government providing a 70% guarantee on loans of up to £2 million in GB (and £1 million in NI) for businesses with turnovers below £45 million. 

Ultimately, for Goldie and the FLA’s members, it all comes down to certainty and the government playing its part. Finance and leasing providers are funding the green transition in various ways, he says, and there is an appetite to do more, but policy certainty and risk-sharing are the key to achieving this effectively. 

Phillipou adds that the asset finance sector will need to adapt. Today, he says, if a bank wants to fund assets that lack a strong historical data stream, they must hold additional capital against those assets until its market valuation and performance is proven. 

“That’s expensive and makes it less appealing for banks to operate in areas of emerging technologies,” he says, adding that the risk is something that financiers must manage carefully. 

Interestingly, Phillipou sees two key trends emerging as the asset finance sector adapts.  

The first is within the sector itself, whereby a broader mix of funders is envisaged, ranging from traditional banks to what are termed “interrupters”, such as new fintechs, or supply chain funding, from Amazon for example. 

He says private equity and peer-to-peer finance, which has had a lower profile in recent years, will return and play an increasing role, supported by institutional debt. “Competition will intensify and lenders will have to be increasingly digitised and data-led to compete,” he says. 

This data will underpin the Corporate Value Chain Standard Scope-3 reporting, enabling companies to assess their entire value-chain emissions impact. This has to be accurate and reflect the environmental benefits. 

The second trend that Phillipou identifies is a greater link-up between innovators and traditional manufacturers. “The innovators have great ideas, but lack the finance, “ he says. “The banks, meanwhile, are risk averse, and manufacturers cannot come up with all of the financial solutions themselves.” 

Phillipou explains that capital-poor startups and innovators partnering with manufacturers gives the innovator the environment to foster growth, the manufacturer the fresh technology, and the funder the confidence to know they are dealing with a financially robust organisation. 

He is certain of one thing though. There will be change, underpinned by legally-binding commitments. For asset finance, that means adapting or losing out to a new breed of funders.