Pillar Two: Unleashing Investment Capacity

Background

Our members' investment capacity could support up to one-third of the total c£2.7trn of investment needed up to 2035 to hit the UK government's Net Zero target (which assumes a 78% reduction in carbon emissions against the 1990 baseline by 2035) - equivalent to c£60bn of investment from our sector each year.

However, unlocking the full investment capacity requires an increase in the supply of opportunities, reductions in complexity of the investment process and improvements to the financial attractiveness of the available investments.

Despite our sector being well-positioned to invest for the long-term and having capacity to deliver a significant proportion of the required Net Zero investment, barriers exist to full deployment of our members’ investment capacity.

Action is urgently required to address these constraints – the Government has an opportunity to act now to ensure as much of the insurance and long-term savings sector’s investment potential as possible is deployed, but time is running out.

Progress Update: What has been achieved in 2021/22

Alongside our members, we have focussed on making proposals to ensure an environment is created that allows for investment in the infrastructure and innovation we will need to reach Net Zero.

We arranged briefings for several Government departments and other agencies to demonstrate Boston Consulting Group’s research on how to unlock our sector’s investment capacity.

You can read a number of specific case studies showing how our members are driving investment in the green economy on our Sustainability Hub.

We continue to make an evidence-based case for reform to Solvency II. The Government has also acknowledged that reform is needed to unleash our sector’s potential: In February 2022, the Economic Secretary for the Treasury John Glen MP used his speech at our Annual Dinner to announce that the Government intended to proceed with a number of reforms to Solvency II. One of the key reasons he gave for proceeding with these reforms was to allow more investment in green infrastructure:

“any new methodology will need to do a number of things… including boosting incentives to invest in infrastructure and other long-term productive assets, which we think could be a gamechanger…. allowing investment capital to shift, for instance, from bonds to wind farms.”

In April, HM Treasury published a consultation on its proposed reforms, which it believes will “unlock tens of billions of pounds of investment in UK infrastructure and green projects”, while maintaining a high level of protection for policyholders. In tandem, the PRA published a discussion paper on the technical aspects of Risk Margin and Matching Adjustment Fundamental spread reform.

While there is much to digest in these documents, we have long called for meaningful change to the Solvency II regime to free up more capital to help with the Net Zero transition and its wider objective of ‘levelling up’ the UK economy all whilst maintaining high levels of policyholder protection.

We remain committed to working collaboratively with the Government, with regulators and our members to deliver meaningful Solvency II reform that enables our industry to provide the much-needed investment in green infrastructure in support of the wider transition to a Net Zero economy all while meeting the Government’s objectives for this review.

We are currently developing a response on behalf of our members to HM Treasury’s consultation and PRA’s Discussion Paper to ensure the proposed meets the common objectives of both the insurance and long-term savings sector and the Government’s intentions in undertaking this review.

We remain clear that unless the full reform package creates an environment that encourages productive investment, there is a risk that this ‘once in a generation’ opportunity to unlock green investment will not be fully realised.

Actions for 2022/23: Where more progress is needed

The most important action the Government can take remains an effective Solvency II reform agenda. The UK’s vision of Solvency II must align with actions needed to create a decarbonised economy, which will need nimble investors, able to act at scale and at pace.

However, as Boston Consulting Group’s 2021 analysis identified, there are other actions the Government should be taking – especially on the supply-side.

Although the Government’s Net Zero strategy (published shortly before COP26) gives a much clearer picture of the technology and infrastructure that will drive the UK’s transition, we do not yet have enough investable opportunities.

There are a number of actions we want to see the Government (and other key stakeholders driving forward:

Continue to regularly offer green bonds, including at local authority level
Increase the pipeline of investible projects by making the design of long-term investment pathways part of the criteria for approving any Government-enabled financing for green technologies and infrastructure
More collaboration between financial regulators (Bank of England, FCA, The Pensions Regulator) and counterparts in the real economy (especially Ofgem and the Environment Agency)
Consistency on regional and local investment through UK Infrastructure Bank’s Local Authority Advisory Service and the proposed ‘Green Jobs Clusters’
Ensure that infrastructure project planning prioritises resilience to the impact of climate change, not just emissions reduction
Maintain drive to make the UK a leader on voluntary carbon markets – allowing firms to unlock investment while meeting their Net Zero targets and providing transparency on ESG to savers

As the recently published recommendations from UKSIF’s Net Zero inquiry, to which several ABI members contributed, concluded:

“we remain some way off from having clarity over the detailed policy frameworks and policy incentives for various industries that will be required across the board for the UK’s economy to reach net-zero. Many investors remain unsure of the future support that will be provided to a number of key sectors that is necessary to encourage higher investment.”

The ABI and its members remain committed to working closely with the Government to ensure our sector can continue to play its historic role as an enabler of financial resilience and economic growth.

The action HM Treasury has taken so far in this area has already pushed forward consistent reporting and disclosure standards data from across the economy to inform decision making. However, up to now, the main focus from regulators and policymakers has been on transitioning away from the old high-carbon economy.

Now, the Government’s forthcoming updated Green Finance Strategy is an opportunity to make the UK a world leader by rapidly accelerating the low carbon alternatives that will form the new green economy.

The ABI also wants to work with our counterparts in other sectors to drive this agenda.

We have reviewed the Net Zero Strategy and the Climate Change Committee’s analysis carefully.

In particular, we believe the following areas would potentially align well for long-term, productive investment in partnership with our sector:

Regional Green Jobs clusters linked to major Carbon Capture and Storage (CCS) facilities – investment by ABI members could underpin the infrastructure developments to support these clusters, creating the conditions where the innovative businesses based there can thrive.
Low-carbon hydrogen – the certainty provided by the Government’s proposed Net Zero Hydrogen and the long-term nature and relatively predictable usage patterns of this infrastructure makes it a natural fit for institutional investors with longer-term risk appetites. ABI members would also be interested in the infrastructure required to source, transport and store hydrogen.
Low emission HGVs – subject to the success of the Government-backed trials of this infrastructure, we would expect considerable interest from ABI members in scaling up this sector and building the supporting infrastructure it will rely on.
Electric vehicle charging infrastructure – this requires investment in both deployment at scale and regular maintenance. Investment from ABI members could help address regional barriers, providing financing arrangements are designed to align with our sector’s goals of long-term predictable returns.