A report from the UK’s long-term saving industry draws up an action plan to generate more private investment in support of public infrastructure spending from the UK’s new National Wealth Fund and other sources.
Insurance and pensions companies are urging the UK’s new Labour government to push ahead with plans to make greater use of blended finance to attract the long-term private investment needed to help fund costly low carbon and other green infrastructure, such as electric vehicle charging networks and nuclear power development.
The long-term savings industry has set out a 10-point action plan centred on a model, under which public support from sources such as the government’s new National Wealth Fund, would help mitigate the early-stage risks of investment in new infrastructure that private investors are currently unable to make due to regulatory rules designed to protect policyholders.
“We are optimistic that the possible scale of catalytic finance, leveraging the expertise of London’s financial centre and the pools of capital we have in the UK, could be transformative for triggering a tsunami of blended finance which simply cannot be done by the public purse alone,” Rebecca Lea, the Association of British Insurer (ABI)’s manager for investment and climate, told Impact Investor.
The plan is contained in a report from the Investment Delivery Forum (ID Forum), which was established by the ABI in mid-2023.
The ID Forum comprises seven insurance and long-term savings firms with an interest in large-scale infrastructure investment: Aviva, Just, Lloyds Banking Group, M&G, Phoenix, Rothesay and Royal London. Its advisory panel includes representatives of state-backed infrastructure banks and organisations among others.
The report outlines progress made by the ID Forum over the last year in making good on a commitment by insurers and the long-term savings industry to channel £100bn (€118bn) into “productive assets” over the next 10 years.
Productive assets are defined as those contributing to the real economy, expanding productive capacity, or furthering sustainable growth, though work continues on establishing on what precisely would qualify.
Solvency UK regime
The commitment was triggered by investment potential opened up by the Solvency UK regime, a post-Brexit adaptation of Solvency II, the EU regime for its insurance industry introduced in 2016. Like Solvency II, Solvency UK aims to ensure adequate protection for policyholders and beneficiaries in keeping with Solvency II. But it also includes measures that should enable UK institutions to make a much wider range of investments, including those in long-term productive assets needed to drive economic growth and speed up the energy transition. Solvency UK regulations are currently being phased in with the entire regime due to be in place by the end of 2024.
The ID Forum continues to work with the Prudential Regulatory Authority, the industry regulator, on ‘sandbox’ mechanisms to amend the way in which novel assets are treated on balance sheets to incentivise insurers to invest in those assets, without affecting protections for policyholders.
The European insurance sector will be keeping a close eye on how these efforts to mobilise more private capital for public infrastructure projects in the UK progresses, though the differing mechanism deployed by the two regimes means there are limitations on the extent of crossover, Lea said.
Promising avenues
Although more work remains to be done, the report does identify possible models for collaboration between private institutions and government, and looks at sectors where they could best be employed.
The Forum outlines two near-term opportunities, which it regards as promising.
One is the use of a Green Transition Fund it has developed in partnership with the Green Finance Institute to finance infrastructure such as vehicle charging points, which are still lacking in many parts of the country, hampering the switch to electric vehicles.
According to the report, up to £20bn of private investment in the charging network could be generated using less than £1bn of public investment spread over 15 years.
“Given the National Wealth Fund is only targeting a three-to-one ratio of private to public money, we think that there are big opportunities here to really accelerate and crowd in this financing to really important strategic issues for the UK,” Lea said.
The report also looks at using Regulated Asset Base (RAB) models to encourage investment in infrastructure projects such as the Sizewell C large-scale nuclear reactor on the east coast of England, a project given the green light earlier this year by the Conservative government that lost power to Labour in the UK’s July 4 general election.
An RAB model for a nuclear plant effectively allows risk-sharing between investors and consumers, with consumers contributing towards construction cost by paying a small extra charge amount on their bills. This allows investors to get a steady, reduced-rate income stream during the early stages of plant development that would be absent under other investment models.
“Those RAB models can work really well for this sort of long duration 15-to-30-year debt, which is investment grade and has highly predictable returns,” said Lea.
In the medium and longer term, the industry sees possible investment opportunities in areas such as floating offshore wind, carbon capture technology and green hydrogen, once these industries have matured and costs have fallen.
Retrofitting challenge
One major element of the UK’s energy transition that remains particularly challenging is the urgent need to retrofit the country’s ageing housing stock to improve energy efficiency, given it requires substantial investment, homeowners are reluctant to pay for it, and it does not lend itself easily to generating the revenue streams required by long-term private investors.
The ID Forum says the Net Zero Neighbourhoods model, pioneered by public-private body 3Ci – the Cities Commission for Climate Investment – could provide a blueprint, if financing structures can be developed to provide investment grade ratings and adequate policyholder protections. This uses blended finance-backed place-based investing to incentivise homeowners to carry out retrofits, while providing a reliable income stream for investors.
“Institutional patient investors who aren’t looking for massive returns, but need them to be stable, and underpinned by local authorities or assets could be good partners for this type of investment,” Lea said. Other aspects of the action plan include widening regional engagement by the forum, and tracking and reporting on investments made under the Solvency UK regulatory regime from January 2025.
