UK’s transition-focused SWF gets green light

The UK’s new Chancellor of the Exchequer Rachel Reeves didn’t waste any time approving the £7.3 billion National Wealth Fund aimed at funding the herculean costs of the energy transition and creating green jobs. Senior UK pension executives including group chief executive of the Universities Superannuation Scheme, Carol Young, and David Vickers, CIO of Brunel Pension Partnership have begun helping shape the new fund. Top1000funds.com takes a closer looks at the new sovereign wealth fund.

The fund aims to seed investments in green industries like steel, hydrogen and batteries. This will then crowd in  private sector finance by de-risking projects where investor peril ranges from technology maturity risk to revenue uncertainty and unknowns in the upstream supply chain.

“Building a green economy requires a step-change in coordination between the government and investors, so that the policy and regulatory environment is truly enabling for long-term investors,” said Vickers who has long advocated for engagement between government and investors to achieve net zero and for policy to create the best environment for the transition.

Structuring a SWF

According to a report  the new SWF will have an investment mandate rather than fixed sectoral funding allocations. Its strategic objectives and investment priorities are comparable to the Canada Growth Fund and Australia’s Clean Energy Finance Corporation.

Policy makers are weighing how to manage the fund. This could include creating an in-house operation that prioritises appointing individuals with private sector investor expertise and market credibility; relaxing pay constraints and building a culture which enables and encourages risk taking. This structure could lead to the partial outsourcing of funds.

In an alternative approach, the SWF could be managed by one or more of the existing public development finance institutions.

Another suggestion floats having it managed by a public pension fund in line with the Canadian model where the Canada Growth Fund is a subsidiary of the Canada Development Investment Corporation (CDEV) but is actively managed by PSP Investments.

GLIL Infrastructure (a joint venture founded by the Greater Manchester Pension Fund and London Pensions Fund) represents the closest equivalent to PSP in a UK context. The Pension Protection Fund, whose mandate is to protect the pensions of those on defined benefit schemes in the case that their pension becomes insolvent, is another example of an institution that could have responsibility for management of a portion of the capital.

Governance

The report has also highlighted the importance of arm’s length governance from government with independent operations and decision-making capabilities. This will include an independent investment committee to make investment decisions and an independent board – government should be represented on the board, providing an ability to influence but not veto, it suggests.

Amid industry enthusiasm for the initiative, critics flag concerns. Like the belief that slow investment in the transition and green innovation isn’t a consequence of a lack of capital, but more a lack of supply or opportunities for investors to put their capital to work.

“I’m not totally sure the problem is a lack of available capital,” says Neil Lee, Professor of Economic Geography at the London School of Economics who points to the dearth of projects coming to market, and blames a lack of capacity at a local level and difficulties bringing projects to a level whereby they become investable.

Lee also raises the risk of investments becoming pet projects that don’t attract institutional capital, like investment in green steel.

Investors always voice unease if they are told where to invest or subject to regulation that steers allocations to particular assets, arguing they need the freedom to invest where they think best captures the winners and losers of the transition.

The SWF fund is designed to jump start the market and illustrates the government taking risk, but tax payers will also question what the government is doing with their money if it fails to make a return, concludes Lee.

The UK’s new fund, which is part of a push by the new Labor government to focus on building the investment sector in the UK, shows that SWFs are no longer the preserve of resource-rich countries and is comparable to a Sovereign Development Funds (SDFs) that seek to catalyse investment and growth in their own economies. For example, Ireland’s €15 billion ($16.1 billion)  Strategic Investment Fund (ISIF) was established in 2014 with a double bottom line to both invest commercially and support economic activity and employment in Ireland.

Elsewhere, India’s government-seeded National Investment and Infrastructure Fund (NIIF) crowds in infrastructure investment in a unique model that rests on a GP/LP structure whereby anchor LP investors are also NIIF’s majority owners.

In a statement Reeves said: “We need to go further and faster if we are to fix the foundations of our economy to rebuild Britain and make every part of our country better off… Britain is open for business – and the work of change has begun.”