Queen's Speech: The Government should create a dedicated responsible finance fund
Whilst the shift to a sustainable economy in the UK will boost prosperity, there will be transitional challenges for workers, writes Responsible Finance.
The UK is transitioning to net zero greenhouse gas emissions by 2050 in response to the burgeoning climate crisis. It is essential that this transition is just:
‘A just transition is one that ensures that climate action and efforts to build a sustainable economy are designed and delivered so that they improve social justice, with the interests of workers, communities and consumers particularly in mind.’
Whilst the shift to a sustainable economy in the UK will boost prosperity, there will be transitional challenges for workers and communities and the gains will not be automatic. The Government must support the responsible finance industry to help local economies adapt and build resilience, to ensure a transition which is fair and inclusive.
Ethical finance is a key enabler of sustainable economic development, and responsible finance providers exist to create a more inclusive financial services system by lending to those excluded from mainstream sources. Small and medium enterprises are particularly significant in deprived areas. They contribute to local regeneration, employment, innovation and social cohesion , but can often lack capital and support.
Responsible finance providers have a flexible approach in determining the viability of a business and a different risk appetite to banks, which allows them to lend to those which may otherwise be rejected. Responsible Finance’s mapping work in partnership with the University of Bristol has shown that responsible finance providers lend in areas of the UK which have the highest levels of deprivation, thereby boosting local economies and helping create a more equal society.
The Grantham Research Institute on Climate Change and the Environment’s report ‘Banking the just transition in the UK’ states that important measures of success of the economic transition will be the extent to which the shift delivers ‘fairness, social justice and greater wellbeing’. The Government therefore has a renewed impetus to work with responsible finance providers to implement sustainable development within localities and regions across the UK. In the wake of the Queen’s speech, we are calling on the Government to support responsible finance’s role in the just transition in the following ways.
The Government should create a dedicated responsible finance fund.
A responsible finance fund is needed to properly address under-capitalisation of the responsible finance sector, which is a significant constraint on growth. The creation of a dedicated responsible finance fund of £150 million would unlock significant private sector investment and scale the responsible finance sector’s impact on excluded and underserved communities. The United States Government invests $200 million annually into its CDFI (Community Development Finance Institutions) Fund. The Fund is essential to allowing US CDFIs to operate sustainably by providing them with equity and first loss capital.
The Regional Growth Fund is a precedent for a wider responsible finance fund. The Regional Growth Fund (RGF) programme aims to increase access to finance for small businesses in the wake of the financial crisis. £30 million was allocated to the responsible finance sector, matched by £30 million from Unity Trust and the Co-operative banks. By 31st December 2018, this fund of £60 million, delivered through responsible finance providers, had supported over 2,450 businesses and created or saved over 10,500 jobs, easily meeting the targets set by the Government.
91% of the fund was lent outside of London into sectors that provide goods and services to the economy or support local supply chains. The Government cost per job supported (safeguarded or newly created) was £2,837, compared to the programme average of £37,400. The Government cost per job will continue to fall as responsible finance providers recycle repaid capital into new loans, representing good value for the Government.
Responsible finance providers have supported businesses across a range of industries through the RGF programme, including manufacturing, clean energy, engineering, software and retail, all of which would otherwise not have accessed the finance they needed to succeed. The fund was successful because it was delivered through responsible finance providers – a sector with local reach that specifically focuses on underserved markets.
This type of targeted, good value for money and high-impact initiative is necessary to drive growth in small-scale ventures that do not feel confident or are unable to engage in mainstream finance.
Shared Prosperity Fund
In addition, the Government must Ensure that the Shared Prosperity Fund channels funding through a diverse range of innovative, local third sector and private organisations in addition to larger players.
The new fund should not be biased to favour delivery partners based on their capacity to deal with large administrative burdens. Accessible, adaptable, grass-roots organisations such as responsible finance providers are most suited to deliver interventions on the ground.
In addition, the fund must replace EU facilities which incentivise commercial investment into the responsible finance sector and facilitate business support activities, namely EaSI, COSME and ERDF.