Significant investment will be required over the coming decades to achieve the UK’s emissions reduction targets, and mobilising private investment will be critical to achieving this.

However, there is currently limited consolidated evidence on the level of investment in net zero activities, including how private investment is being mobilised in terms of the sources of finance and the types of instruments being used.

Frontier Economics was commissioned by the Department for Energy Security and Net Zero (DESNZ) to develop and apply a methodology for a UK Landscape of Climate Finance (UK LCF). The UK LCF aims to test how flows of direct private and public sector investment could be tracked for climate-related activities.

Drawing on a wide range of data sources, this initial version of the UK LCF estimates the level of direct private and public capital investment in selected net zero sectors (power, transport, heat and buildings, and hydrogen) between 2018 and 2021, and links this to the corresponding instrument and source of finance.

The following graphic provides a snapshot of flows of finance to net zero sectors in 2021; from the source of finance, via the financial instrument used, through to the net zero sector. The summary report below additionally follows these flows into net zero subsectors.

Flows of finance to net zero sectors in 2021

Source: Frontier Economics

Note: 2022 prices. Diagram shows the amount of finance flowing from a particular source via a particular instrument (e.g. corporate financing through equity), or the amount being invested in a particular sector via a particular instrument (e.g. equity investment in hydrogen). It does not fully illustrate the amount of finance flowing from a particular source to a particular sector – e.g. that hydrogen investment is financed through equity from corporations. Grant funding is expected to be an underestimate of total government green financing support. Green gilt proceeds over 2021-2022 do not correspond with funding reported in the UK LCF for a range of reasons including: only the 2021 calendar year is captured in the UK LCF, and some green gilt allocations go to expenditures which are not within the scope of the UK LCF.

Some of the potential benefits the UK LCF offers could include:

• Priority sectors: Evaluation of investment gaps through the comparison of historical aggregate flows with the forecast level of investment needed to achieve net zero could help identify major gaps. For example, if there are sectors that are critical to the delivery of net zero but do not appear to be attracting sufficient capital.
• Policy effectiveness and investment efficiency: Comparing investment flows to investment required may help to inform investment decision-making and provide information on the effectiveness of policy.
• Leverage private finance: Understanding financial flows to net zero investments could help identify barriers that finance providers face in specific sectors, and facilitate future policy development, solutions and innovations to overcome these barriers. 

The full team who created the UK LCF were Claire Thornhill, Paula Papp, Freya McCormick, Emma Kearney and Riccardo Barnard Zoboli.

Click here to read the UK Landscape of Climate Finance: Summary Report.