First announced in 2022 as a key priority of the Labour Party’s policy agenda, the £7.3bn National Wealth Fund (NWF) was formally launched by the new Government shortly after this year’s general election. To deliver the NWF, Government will need to deploy the right combination of policy, regulation and subsidy to deliver optimal outcomes for investors, policymakers and communities alike. With Parliament now back from recess and with expected policy announcements this autumn, we take a look at what we already know about the NWF, our learnings on its blended finance model and its role in supporting communities.
What do we know about the National Wealth Fund?
Against a backdrop of the Climate Change Commission’s call for the annual net zero investment gap of £50bn to be addressed predominantly by the private sector, the new government’s focus on economic growth and a fragmented development finance landscape in the UK, a flagship green investment fund is being established. The NWF forms part of the Labour Party’s Green Prosperity Plan which outlines a strategy for the UK to achieve clean power by 2030 and energy independence through GB Energy, reducing energy bills and creating hundreds of thousands of new ‘green’ jobs. It is also intended to help deliver any new industrial strategy to drive the UK’s competitiveness.
The NWF will manage the deployment of £7.3bn of government money over five years and aim to generate £3 of private sector investment for every £1 of this public investment (1), so intending to raise a further £20bn for investment into low-carbon industries. This would see the NWF deploying “catalytic capital” and supporting the development of a market against a broader investment mandate. Five priority sectors in which money from the NWF could help catalyse private investment have been identified so far: green steel, green hydrogen, industrial decarbonisation, gigafactories and ports, but there is potential for this remit to be expanded.
The NWF’s money will be distributed through the existing UK Infrastructure Bank so investments can start being made immediately, supported by the British Business Bank through upcoming reforms. The Green Finance Institute (GFI) is providing the chair and secretariat of the NWF Taskforce, a group of institutional investors tasked with supporting the NWF with fund design and structure, engaging with potential investors and putting together an implementation roadmap.
It is worth clarifying that the NWF is not a ‘traditional’ sovereign wealth fund, whose funding derives from the surplus revenues from a country’s natural resources (such as oil) and which invests in a range of financial products, with assets under management totalling in the hundreds of billions or even trillions of dollars. Instead, the NWF is positioned as a “green catalytic fund” which would be initially capitalised by government borrowing and a planned windfall tax on oil and gas companies (2), with subsequent revenues generated from returns on investments. A central tenet of the initiative is that by investing in high-growth sectors and green infrastructure, the NWF would not only pay for itself through future returns for the taxpayer but also create a more resilient and productive economy, helping to rejuvenate Britain’s industrial base.
It is also still unclear what the relationship between the NWF and GB Energy will be. The latter is the state-backed company which will fund new and existing clean energy projects as well as deploying capital to municipal and community energy projects through the Local Power Plan, so we expect further details to be announced in due course.
The blended finance model
In terms of the NWF’s model, the proposed structure by the GFI is a single pot of money intended to crowd in private capital at the deal (rather than the fund) level. This approach, also known as “blended finance”, intentionally uses public resources to attract in private money, and is used to make investing more attractive to private commercial investors who may otherwise be apprehensive about the risks involved, in particular those related to large-scale infrastructure projects. There are various financial instruments which could be used in blended finance transactions, including:
- Equity: The GFI has put forward recommendations for the potential role of the NWF in equity financing of projects such as smaller ports or battery recycling technologies, where the investments have higher risk profiles. Under a blended finance model, the NWF could make an equity investment to help reduce the risk and stabilise returns for private investors as well as crowding in additional private capital.
- Concessional debt: The GFI has also proposed the provision of concessional debt, or loans below standard market rates, to support the development of portside infrastructure.
- Guarantees: Guarantees, through loan schemes such as the Growth Guarantee Scheme through the British Business Bank, can be powerful for de-risking investments and mobilising investors (3) as they provide an agreement that a third party will repay the lender a proportion (up to 100%) of their capital if the borrower defaults. The GFI suggests the use of loan guarantees through Power Purchase Agreements (PPAs) to support renewable power developers raise finance and mitigate costs.
- Tax reliefs: It is worth also noting the importance of tax reliefs which are designed by policymakers to incentivise investors through certain activities, often particular types of investments, by offering individuals or organisations a reduction in their tax obligation. Examples include the now-defunct Social Investment Tax Relief (SITR) to encourage investment in social enterprises and the Community Investment Tax Relief (CITR) encouraging investment into disadvantaged communities through CDFIs.
There are lessons to be learned for the NWF from the social impact investment sector’s use of blended finance which balances risks, returns and impact. Since our establishment in 2012, Better Society Capital has worked with a wide range of social impact investment partners including our sister organisation Access – the Foundation for Social Investment (“Access”) to build blended capital structures and support the provision of blended finance products. For every £1 that BSC invests, we attract an additional £3 of private investment from socially motivated investors including pension funds, charitable trusts and foundations and philanthropists to co-invest alongside us. Together with Access and Save the Children, we also established the Blended Finance Collective to facilitate learning and foster connections between 150 practitioners. To find out more or get involved, visit their website here.
Social policy and the NWF
In terms of desired outcomes for the NWF, analysis by the GFI has focused on the contribution of the five priority industries and their value as economic sectors, or Gross Value Add, and estimated growth in the number of jobs created by these industries (4). This focus on job creation, and therefore increased productivity and economic growth depending on the sectors of these jobs, should be welcomed and is hugely positive for the communities in which these projects will be delivered.
Over the long term, the design of the fund could also consider other indicators of success, particularly as the GFI recommends that “the fund design should factor in potential for private capital to flow into the wider economy.”(5) For instance, there are examples of public funds and investment strategies targeted towards low emissions technology which tackle local community and social challenges. Looking at an international example, the European Commission’s Social Climate Fund was designed to support measures for and investments in more efficient buildings and low carbon mobility, but also has dedicated funding to support the most vulnerable communities, such as those in energy poverty. Similarly, the Wales Infrastructure Investment Strategy sets out a series of social and cultural wellbeing outcomes, alongside the economic and environmental ones, which investment in a particular infrastructure sector should deliver6. There could also be a broader role for the private sector to play in intentionally developing social infrastructure, such as the physical spaces in a community which can strengthen social capital and economic outcomes, in the areas in which these large infrastructure projects are being developed, as highlighted by recent research from the Bennett Institute of Public Policy (6).
The GFI also identifies “local delivery entities such as the Combined Authorities” which could benefit from the deployment of catalytic capital. Using a place-based approach by working with local partners to identify shared outcomes, increase capital flows to and strengthen the social economy of specific places could also be a consideration for the future strategy of the NWF, anchored to places’ Local Growth Plans.
Next steps
A National Wealth Fund Bill is due to begin its passage through Parliament, which once completed will set up the NWF on a permanent, statutory basis to allow it to operate, and more details on the NWF are also due to be announced ahead of the Chancellor’s Global Investment Summit on 14th October. The GFI also provides further recommendations on the design and structure of the Fund, including on the need for: a formal assessment of market failures and the spectrum of interventions; developing thinking on how to catalyse pension fund investment; clarifying the institutional and governance structures underpinning the NWF; an agreement around its priorities and investment mandate, and the clarification of KPIs, so there is still much to be confirmed.
[1] Note this mobilisation rate target of 3:1 would likely be a portfolio average and not an outcome of every transaction.
[2] https://labour.org.uk/change/labours-fiscal-plan/
[5] https://www.greenfinanceinstitute.com/programmes/national-wealth-fund-taskforce/