Private sector investment critical for UK to meet climate commitments

Sustainable finance expert James Dunham of Pinsent Masons said: “The UK’s adaptation investment needs could increase by as much as £10 billion per year by 2030. The government has a critical role in supporting adaptation investment to help the UK build resilience to climate change, but private sector investment is also important in addressing the current under-investment in adaptation.”

His comments came after the Department for Environment, Food & Rural Affairs (Defra) published the third National Adaptation Programme (NAP3) last month. The NAP3 sets out a strategic five-year plan to boost resilience and protect people, homes, businesses and the UK’s cultural heritage against climate change risks such as flooding, drought and heatwaves – all of which are becoming increasingly evident in the UK and abroad.

Defra said the NAP3 publication marked a “step-change in the UK government’s approach to climate adaptation”. The plan includes a new £15 million programme to invest in research and skills to improve the UK’s response to climate change, as well as a dedicated Local Authority Climate Service pilot, intended to help inform councils about hazards including increased heavy rainfall patterns and extreme heat.

According to the plan, recent building regulations introduced in 2022 will help ensure that residents of new buildings are not exposed to extreme heat, although the regulations do not cover existing buildings. The plan also pledges the government to triple the funding for climate adaptation overseas, from £500m in 2019 to £1.5bn in 2025. The money, part of £11.6bn of international climate finance pledges made by ministers, is intended to help vulnerable countries and to “reduce the likelihood of emerging risks cascading to the UK”.

But in June, the independent Climate Change Committee (CCC) warned that UK policy is not being delivered at a fast enough rate for the UK to meet its climate change targets. In a progress report, the CCC said its confidence in the UK achieving its 2030 target – of reducing greenhouse gas emissions by at least 68% by 2030 compared to 1990 levels – has reduced over the past year and that the government must accelerate its action prior to the next general election.

“The UK government’s aim is to create an enabling environment and provide incentives for private investment in climate resilience through the implementation of 2023 Green Finance Strategy. The NAP3 highlights the role of public-private partnerships not only for the financing, but also the identification and implementation of adaptation projects,” Dunham said.

He added: “While private investors do not typically consider adaptation or climate resilience as a separate asset class, there is an increasing appetite for climate-resilient investments. However, there has to be a clear market signals, supportive policy and regulatory frameworks and both demonstratable risk-adjusted commercial returns and positive outcomes.”

“Innovative financing mechanisms will be critical to attract private capital to adaptation projects, as will the promotion of knowledge sharing and capacity building to improve the private sector's ability to assess and finance adaptation projects effectively. The NAP3 also highlights the consideration of material physical climate risks and opportunities in investment decision-making processes and financial incentives and support mechanisms to encourage private sector investments in adaptation,” Dunham said.

At the same time, new Financial Conduct Authority (FCA) requirements mandate asset managers and certain FCA-regulated asset owners to disclose in accordance with the Task Force for Climate-related Financial Disclosures (TCFD). Sustainable finance expert Dominique Gonsalves of Pinsent Masons said the requirements could create a shift in private sector investing. “This regulatory push compels investors to incorporate considerations for both physical and transition climate-related risks into their decision-making processes,” she said.

“Consequently, investee companies are now under mounting pressure to enhance their understanding of how these climate-related risks materially impact their business. This growing awareness of climate risks and their potential impacts is inherently linked to financing adaptation efforts. By encouraging investors to gain deeper insights into these risks, the FCA requirements can play a vital role in bridging the gap and supporting the UK’s need for increased private sector investment into adaptation initiatives,” Gonsalves added.