The challenge
Reducing and mitigating the UK’s greenhouse gas emissions to achieve net zero by 2050 will require substantial investment. In 2021, the government estimated that an additional £50-60 billion of capital investment will be required each year during the later 2020s and 2030s.[1] Separately, it has been estimated that more than £50 billion will be needed over the next decade to deliver a range of nature-related outcomes such maintaining the quality of water, protecting and restoring biodiversity, and flood management.[2]
Private sector investment in new Green Finance options and Nature-based Solutions (NBS) projects will be vital to the development of the products and services that will deliver these outcomes, as well as to economic growth in the UK. Research consistently shows that investors want their money to be invested responsibly.[3] However, in general intentions are not a good predictor of the likelihood of taking action. There is longstanding evidence of this in the specific context of translating concern for environmental issues into green purchasing behaviour.[4]
Encouraging investment in new NBS projects and other Green Finance options therefore requires a detailed understanding of the priorities and perspectives of those in the finance sector who might create such products, and the factors that may affect individual consumers’ investment decisions once these products become more widely available.
What we did
Our multi-stranded research programme for Defra began with two workshops with representatives from a variety of government stakeholders, including the Financial Conduct Authority (FCA) and National Savings & Investments (NS&I), and a rapid evidence assessment to profile the NBS market.
From these we produced a Theory of Change describing the steps that are likely to be needed from government and the financial services industry to make NBS products available. The Theory of Change also mapped a pathway for normalising green finance as a consumer option through information provision and choice architecture (the different ways in which choices can be presented).
We then undertook depth interviews with financial industry experts (including policy specialists, independent financial advisors and asset managers) to explore motivations and barriers for developing and providing NBS investment products. These interviews were informed by the Theory of Change, to ensure they focussed on the supply-side activities that could lead to desired long-term outcomes.
We also interviewed a range of consumers to understand their financial decision-making behaviours and perceptions of different financial products. Insights from these interviews fed into a prioritisation workshop with Defra to identify key factors driving the uptake of future hypothetical NBS investment products.
Finally, we designed and ran a Discrete Choice Experiment involving 2,400 UK participants to understand the effect of variations in these factors on choices to invest in NBS products: type of bond (i.e. local vs national, woodlands vs biodiversity, green vs traditional), the interest rate, and the length of the fixed term of the bond offered.
What we found
Consumers and industry experts alike expressed interest in NBS products, but risks and competing priorities mean that large-scale roll-out and take-up are likely to be medium-term rather than short-term achievements. In particular, notwithstanding existing government activities to deliver a pipeline of NBS projects at scale, industry experts expected to face difficulties in identifying and developing viable products that would appeal to risk-conscious institutional investors.
Consumers, regardless of their green intentions, are likely to fall back on familiar and comparable metrics such as interest rates, when making decisions about products they do not understand well.
The findings pointed to a need for considerable support from government and regulators to enable the financial services industry to develop and present new NBS products to the institutional and consumer markets, and for education and clear information to allow consumers to make holistic choices about products in order to achieve outcomes in line with their values.
[1] HM Government (2021), Net Zero Strategy
[2] Green Finance Institute (2021), Finance Gap for UK Nature Report
[3] See, for example, Investing in a better world: survey results (publishing.service.gov.uk)
[4] Young, W., Hwang, K., McDonald, S., & Oates, C. J. (2010). Sustainable consumption: green consumer behaviour when purchasing products. Sustainable development, 18(1), 20-31.
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