Report – A reality check on green finance 2.0

April 2024 • Topic: ESG • by Christopher Breen

This report shows that while green finance in Europe has grown rapidly over the past five years to more than €375bn in green capital raising last year alone, there are signs that the growth and penetration of green finance are slowing down.  In the face of critical issues ranging from climate change to energy insecurity, it is essential that Europe redoubles its efforts to achieve net zero and build a clean energy economy.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

Europe has established itself as a world leader in financing the transition to net zero. By building a transparent and dynamic green finance market, it has mobilised green financing totalling more than €1 trillion over the last three years and is approaching the annual amounts of investment needed to achieve its 2030 targets.

This report, published in partnership with Luxembourg for Finance, is the second edition of our reality check on green finance in Europe. It shows that while Europe has mobilised significant amounts of green finance, growth in the green finance market is running out of steam. The value of green capital raising has flatlined over the past few years – and fallen in real terms – while the penetration of green finance as a proportion of all capital markets activity has slipped back. While there is no single reason for this slowdown, we highlight several some significant challenges to green finance that threaten Europe’s net zero goals.

The report also highlights one of the most troubling trends in green finance:  the backlash to ‘green’ and the net zero transition in general. Policymakers in Europe and beyond are starting to pull back on green pledges in response to a difficult economic and political environment. If Europe wants to maintain its place as the world leader in sustainability and green finance, it will need to not just tackle the challenges facing its green finance market: it will also need to provide a more convincing argument to the wider public on why green policy and green finance is needed.

The first part of the report analyses how the green finance market in Europe has evolved over the last five years and provides a unique country-by-country ranking of the value, penetration, and depth of green capital raising (across labelled green bonds, capital markets markets activity by ‘green’ companies or with ‘green’ use of proceeds, and green venture capital investment).

The second part analyses how ‘green’ green finance actually is. And the third part outlines the challenges facing Europe’s green finance market and provides some context on the recent political backlash and recommendations on how to address it.

Here is a short summary of the report:

1) Explosive growth: this report highlights the significant rise in both the value and penetration of green finance in Europe over the past five years. Green capital raising has more than doubled since 2019 to €378bn and the penetration of green finance has more than doubled to 11% of all capital markets activity. For reference, activity in Europe was nearly double the €200bn in green capital raising in the US last year.

2) Worrying signs: there are signs that the growth in green finance in Europe is running out of steam. The value of green capital markets activity has flatlined over the past few years and fallen slightly in real terms, and the penetration of green finance also dropped last year. This suggests that Europe has already scored the ‘easy wins’ and that the political backlash against ‘green’ and ‘ESG’ is taking its toll.

3) Business as usual: for the transition to net zero to be realised, Europe will need to shift financing en masse  from fossil fuels to renewables. The report shows that ‘bad’ companies – or those whose day-to-day activities delay the transition – still receive five times as much financing as ‘good’ or ‘green’ companies.

4) Questions about ‘green’: the biggest driver of green finance in Europe is the labelled green bond market, making up around two-thirds of the total value of green finance. Our unique analysis also includes non-labelled capital raising by ‘green’ companies or with ‘green’ use of proceeds, and green venture capital. However, our analysis shows that not all green financing is as green as it looks.

5) Growing green companies: a big positive note is that the value of green venture capital investment surged over the last few years and reached 18% of all European venture capital in 2023. Supporting innovative green companies and enabling them to scale up will be critical if Europe wants to achieve net zero.

6) A range in depth: while Europe is a world leader in green finance, there is a wide range in the size, depth and penetration of green capital raising activity. Germany is by far the largest market for green capital markets (with a 17% share) ahead of France and the UK. However, the penetration of green finance in these markets is lower than the European average, and Nordic and Benelux countries have the largest green finance markets relative to GDP.

7) Challenges on the horizon: European policymakers and financial institutions have helped create a transparent and vibrant green finance market. There remain issues around data availability, definitions of ‘green’ and ‘not green’, and around the overall narrative of transition financing. Addressing these will be key if Europe wants to continue being a world leader in sustainability.

8) Regulatory overload: regulation has played an important role in shaping Europe’s green finance market, but there is a risk of it becoming too much and too burdensome. There are already efforts to simplify this regulatory regime – a step that could help reverse the slowdown in green finance issuance.

9) Addressing the ‘backlash’: the emerging anti ‘green’ backlash has put policymakers on the back foot. This backlash has been seen from the watering down of the regulations and net zero targets to farmers protesting on the streets of European capitals. We show that there are multiple elements of this backlash – some inevitable, some that can be addressed – and outline its importance, particularly with the upcoming European Parliamentary elections.

10) No time for complacency: the slowdown in issuance and the burgeoning backlash show that Europe has no time for complacency. Leaders from all parts of society have emphasised the importance of the transition to net zero – particularly in the context of Russia’s invasion of Ukraine and its impact on Europe’s energy supply – and it will be up to them to shape the right regulation to accelerate the growth of green finance.

Report – HM Treasury Women in Finance Charter Annual Review 2023

March 2024 • Topic: Driving diversity • by Yasmine Chinwala, Jennifer Barrow & Sheenam Singhal

Our seventh Annual Review monitors the progress of signatories against their Charter commitments and holds them to account against the four Charter principles. This report offers unique insight into what Charter signatory firms – from across the financial services industry – are doing to boost the proportion of women in senior ranks, who has hit and missed their targets, how they are developing diversity data and their different approaches to hybrid working. The data provides important benchmarking for signatories and non-signatories alike.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here.

Highlights of the review

1) Meeting targets: More than a third (36%) of the 202 signatories analysed in this review have met their targets for female representation in senior management, and a further 40% that have targets with future deadlines said they are on track to meet them.

2) Slow and steady uptick: Female representation in senior management edged up to from 34% in 2022 to 35% in 2023. A one percentage point annual rise has been a consistent occurrence on average since the launch of the Charter. If this pace remains constant, signatories should achieve an average of 50% in 2038 – but not for all sectors.

3) UK banks lead the way: For the first time, we analysed average female representation over the past six years across the four largest signatory sector groups. Overall, the four sectors have moved at a similar pace, but the UK banks and insurers were in a better position in 2018 and have maintained their advantage over the investment managers and global/investment banks.

4) Hit and miss in 2023: Target deadlines loomed for 76 signatories, with 44 hitting their targets while the remaining 32 missed. Of the 32 that missed, 27 were close – either within five percentage points or five appointments of hitting their target.

5) Shift in actions focus to retention: While actions related to recruitment are still most frequently mentioned, 85% of signatories are taking actions to develop internal talent, up from 70% in 2022. Our new analysis of signatories that are accelerating the pace of change shows that introducing initiatives sooner, applying them robustly, monitoring impact, and sustaining that effort over years are the key success factors.

6) Expanding diversity data: Signatories are extending diversity data collection, with 85% capturing additional diversity data about their senior managers, up from 45% in 2020. Ethnicity, disability and sexual orientation are the most commonly collected datapoints, and a small but growing number of firms are beginning to analyse more of this expanded dataset.

7) The role of the accountable executive: Accountability is sitting at the highest levels of seniority, with almost all (97%) accountable executives (AE) sitting on the executive committee. AEs are taking a more strategic approach, and some are adding diversity strands to their role.

8) Linking to pay: In 2023, 70% of signatories reported that the link to pay has been effective, up from 49% in 2020. Diversity is positioned in pay as a business issue with clear criteria and expectations of leaders.

9) Strong ambition on targets: Just over half of signatories (51%) have set a target of at least 40%, corresponding with HM Treasury’s desire for alignment with the FTSE Women Leaders review, including one in seven with a target of 50%.

10) Publishing updates: Publishing progress is the Charter principle that has taken the longest to improve, with 86% of signatories posting an update on their progress on their company website. Disclosure is improving, however, the quality and format of reporting varied significantly and only 38% included the details required by HM Treasury.

Research methodology:

This review analyses annual updates from 202 signatories that signed the Charter before September 2022, provided an annual update to HM Treasury in September 2023, and have at least 250 staff. All data has been anonymised and aggregated, and no data has been attributed without consent. The data was analysed by Sheenam Singhal and Jennifer Barrow under the supervision of Yasmine Chinwala. For the full methodology, see the Appendix.

About New Financial: 

New Financial is a think tank and forum that makes the positive case for bigger and better capital markets in Europe. We think there is a huge opportunity for the industry and its customers to embrace change and reform, and to rethink how capital markets work. Diversity is one of our core areas of coverage.

Acknowledgements:

New Financial is proud to be HM Treasury’s data partner for the Charter. We would like to thank Aviva, Santander UK, London Stock Exchange Group and City of London Corporation for sponsoring our work on the HM Treasury Women in Finance Charter, and to all our institutional members for their support.

Report – A mechanical drag on UK equities

March 2024 • Topic: Capital markets • by William Wright & James Thornhill

This short paper highlights the structural shift in the way UK pension funds invest the money they allocate to equities away from their traditional ‘UK centric’ approach to a ‘global equities’ approach. While this shift is self-evident to people working in the industry it is less well known outside of it. It has had a significant impact on the allocation to UK equities and will continue to act as a drag on the UK market for many years to come.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

The dominant narrative in the debate on the decline in the asset allocation by UK pension funds to UK equities over the past few decades has focused on two factors: the relative unattractiveness of the UK stock market, and the shift en masse by private sector defined benefit pensions away from equities as they have matured, de-risked, or closed.

This paper focuses instead on how and why pension schemes have migrated en masse away from their traditional ‘UK centric’ approach (in which they would typically invest 20% to 30% of their assets in UK equities) to a ‘global equities’ approach (in which their investment in UK equities is roughly in line with the UK’s weight in global indices of about 4%, which translates into about 2% of the fund’s total assets).

This shift is self-evident to people working in asset management and pensions, but it is less well known outside of it. While there are plenty of sensible reasons for UK pensions to reduce the domestic bias in their investment, this paper highlights that it has had a significant impact on the allocation to UK equities and will continue to act as a drag on the UK market for many years to come.

This paper is not complaining about this shift or criticising pension funds for making it. It seeks instead to identify the impact of this shift and highlight poor levels of disclosure around asset allocation to better inform the debate on the future of UK pensions and capital markets. Even sensible decisions have consequences….

We analysed the fund-by-fund asset allocation of all 86 local authority pension funds in the £370bn Local Government Pensions Scheme (LGPS) over the past decade and found:

• The overall allocation to UK equities by LGPS funds has more than halved over the past decade falling from 25% in 2013 to around 10% today.
• The number of funds using a ‘UK centric’ approach more than halved from 75 funds in 2013 to 37 today, and the number using a ‘global equities’ approach rose more than fourfold from 11 to 49 funds.
• The allocation to UK equities by funds which switched to a ‘global equities’ approach in the past decade declined by 85% – and these funds accounted for roughly half of the overall decline in investment in UK equities across the LGPS scheme.
• This shift has been mirrored across the pensions industry, and defined contributions are not going to ride to the rescue of UK equities.
• The level of disclosure by UK pensions of their allocation to UK equities is poor and falling: the proportion of LGPS funds that disclose this has virtually halved from 95% in 2013 to 52%.

The paper argues that this shift has acted as a mechanical drag on UK equities and has helped create a negative feedback loop of lower demand, lower valuations, and lower demand.

We welcome the government’s proposal for pension funds to publicly disclose their asset allocation to UK assets and to UK equities in a simple, clear, and consistent way (something we specifically recommended to the government a few months ago). We also recommend that official data across UK pensions should be consolidated and improved, and that DC pension providers should explore offering an alternative ‘UK weighted’ default fund with a higher allocation to UK equities, perhaps similar to the asset allocation of Australian superfunds.

Report – The radical option in UK pensions

February 2024 • Topic: Rebooting UK capital markets • by Toby Nangle

This paper analyses the potential political, fiscal, and economic benefits of shifting the huge unfunded public sector pensions schemes in the UK from a pay-as-you-go model to a funded model. Such a move would enable them to be global investment powerhouses, driving long-term sustainable outcomes for public servants, cheaper finance for the Treasury, better outcomes for taxpayers, higher levels of investment, deeper capital markets, and a more stable international investment position.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

The active debate on the future of pensions in the UK is vitally important for the long-term prosperity of the UK and its citizens: what should the pension system look like if it is to deliver better retirement outcomes for millions of people across the country and – simultaneously – drive more long-term investment in every corner of the UK?

Most of the debate over the past few years on the reform of pensions has focused on the funded part of the system: private sector defined benefit pensions, defined contribution pensions, and the Local Government Pension Scheme. All of these pensions are funded in the sense that the pension contributions paid by employers and employees are invested in a range of assets to generate returns (how and where they are invested has been one of the key topics of debate) and these assets are used to pay the future pensions of members.

But it has largely ignored the elephant in the room: the giant unfunded public sector pension schemes for around nine million current and former NHS workers, teachers, civil servants, and other public sector workers. These schemes are unfunded in the sense that the (generous) pension contributions paid by employers and employees each year are not invested but instead used to pay the pensions of retired members of the schemes (known as a ‘pay-as-you-go’ model).

Part of the solution?

These schemes are huge – the future pension liabilities sit off the government’s balance sheet but are bigger than the national debt – poorly understood, and complex. They have been criticised for being too generous compared to private sector pensions, too expensive, and unsustainable in their current form. But there has been a strong sense running through the policy debate on pensions that they could be part of the solution.

That is why we commissioned Toby Nangle, former senior asset manager and financial expert, to explore the case for transitioning these schemes to a funded model. The paper makes a strong political, fiscal, and macroeconomic case for reform, and explores how Canada successfully shifted its pensions system to a funded model over the past 40 years. He argues that:

• Shifting to a funded model would enable these schemes to become global investment powerhouses – the NHS scheme alone would be the third largest pension scheme in the world.

• They would become more politically sustainable, driving better long-term outcomes for public servants and setting an example for the rest of the UK pension system to follow.

• The cost of funding these schemes would be lower for the government, providing a better deal for taxpayers.

• Transitioning these schemes would lead to higher levels of investment and deeper capital markets in the UK, and a more stable international investment position.

While the potential benefits are clear, such a move would face significant opposition and would require bold political leadership. The best time to have started this transition would have been decades ago. The second best time is now.

Here is a short summary of this report:

1) The elephant in the room: the UK is a a world leader in private pensions with the second largest pool of pensions assets after the US. Private defined benefit schemes are well-funded, and auto-enrolment defined contribution pensions have increased the proportion of UK citizens with a private pension. But the largest pensions schemes in the UK are unfunded public sector schemes. They are poorly understood sleeping giants and have been largely absent from the debate.

2) A question of scale: these unfunded schemes for public sector workers in the NHS, teachers, civil servants, and other sectors are roughly the same size as all private sector defined benefit pensions combined, with notional assets of around £1.3 trillion. The five largest schemes are comfortably in the 20 largest pension schemes globally.

3) A different model: unlike private sector pensions, these schemes operate on a pay-as-you-go-basis, with payments to retired members of the schemes paid each year out of employer and employee contributions with a top up from central government, instead of through investments.

4) The current system is not broken: despite alarmist calls to the contrary, reforms delivered since 2013 have left the system fiscally sustainable. But moving schemes towards becoming fully funded would deliver a step-change in their political sustainability and address key macroeconomic vulnerabilities in the UK economy, and they could save taxpayers hundreds of billions of pounds.

5) The political case for change: from the perspective of the recipient, an inflation-linked defined benefit government guaranteed pension cannot be improved upon. But in the growing absence of private sector defined benefit pensions, public ones are increasingly portrayed as unfair and unaffordable. Public service pensions have become a political football, and funding them would both put them on a level playing field with remaining defined benefit schemes and link them to substantial fiscal and macroeconomic benefits. This would improve their political sustainability, increasing the security of millions of scheme members.

6) The fiscal case for change: public service pensions are an integral, large, but unscrutinised form of public sector financing. Financing them on today’s market terms (through the gilt market instead of the current system) would save HM Treasury over the next two decades around £70 billion; channelling new employer and employee contributions into investments could save taxpayers over £600 billion.

7) The macroeconomic case for change: funded pensions would increase the stock of savings, deepening pools of capital that can be drawn on to enhance the capital stock and help finance the transition to net zero. Higher national savings rates would help address the UK’s chronic serial current account deficits and deteriorating net international investment position, so improving macroeconomic resilience.

8) A model to follow: Canadian provincial public service pensions began to transition from unfunded schemes at the end of the 1980s. They offer lessons as to how to integrate independent governance, professional in-house investment management, substantial scale, and comprehensive geographic and asset-class diversification. Other markets such as Sweden also provide a potential example to follow.

9) The likely pushback: on-balance sheet government debt is already high; choosing to bring off-balance sheet liabilities on-balance sheet, even if this results in fiscal savings, increases balance sheet risk for the government, and potentially reduces consumption. Shifting to a funded model would increase the ‘financialisation’ of public sector pensions (generating huge fees for greedy bankers and asset managers) and the ‘politicisation’ of pensions, with bad investment decisions made for political ends. We address all these critiques and argue that on balance the potential benefits offset the risks.

10) Seizing the opportunity: the huge unfunded public sector pensions have been largely absent from the recent active political debate on the structure and future of pensions in the UK. At a time when the UK economy and UK citizens need all the help they can get, we think there is an opportunity to be seized in reforming these sleeping giants.

Report – A renewed vision for EU capital markets

January 2024 • Topic: Capital markets • by Christopher Breen, Maximilian Bierbaum, and William Wright

This report paints a renewed and ambitious vision for EU capital markets and identifies the potential for game-changing growth to support investment, innovation, and prosperity.  We estimate that an additional 4,400 companies in the EU could raise an extra €470bn every year in the capital markets, and that an additional €12tn in long-term capital could be put to work in the EU economy to help boost sustainable growth.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

In the debate on the future of EU capital markets it can be easy to focus on the downside: that they are relatively small, fragmented, and under-developed. This report focuses instead on the upside and outlines both the huge growth potential in EU capital markets and highlights the potential benefits of deeper capital markets to EU citizens, companies, and the wider economy in concrete and practical terms.

Instead of a rhetorical debate, we translate this growth potential into concrete terms: how many more companies in each country could potentially access the capital markets, and how much more money would they be able to raise?

To pick one example: we estimate that around 475 additional companies in Germany could benefit from an additional €9bn in venture capital each year. Another way of looking at this is that every year 475 high growth companies in Germany are not getting that investment today.

The highlights of the report include:

• A renewed vision: there is a big opportunity to refocus capital markets union on a smaller number of key challenges. We identify five structural forces that could shape that vision.

• Game-changing growth potential: we analyse the huge but realistically achievable opportunity for growth in selected sectors of EU capital markets and in selected countries. We estimate that an additional 4,400 companies across the EU could raise an extra €470bn every year in the capital markets – nearly doubling current levels of activity.

• How to get there: we outline a roadmap of how to accelerate growth based on a combination of ‘top down’ EU-wide measures to encourage harmonisation and ‘bottom up’ national measures to increase capacity.

With a busy election year ahead and a new European Commission and European Parliament coming in 2024, we hope the report helps stimulate debate and inject a greater sense of urgency and ambition across the EU to develop bigger and better capital markets.

Here is a short summary of this report:

1) A bigger role: this report outlines a bold and ambitious vision for capital markets across the EU. It highlights the potential benefits of deeper capital markets to the EU economy and national economies and shows the huge potential for growth in capital markets in each country.

2) A renewed vision: with a new European Commission and European Parliament coming in 2024, there is a big opportunity to refocus capital markets union on a smaller number of key challenges. Five structural forces that could shape that vision include i) consolidation of supervision ii) a ‘bottom up’ approach iii) the transition to net zero iv) consolidation of market infrastructure v) digitisation and technology.

3) Game-changing growth: there is huge potential for growth in capital markets across the EU. We estimate that an additional 4,400 companies in the EU could raise an extra €470bn every year in the capital markets – nearly doubling current levels of activity. This growth (and any progress towards it) would reduce the reliance of the EU economy on bank lending, drive innovation, and boost investment in jobs and growth.

4) A more sustainable future: our analysis shows the potential to transform pools of long-term capital (pensions and insurance assets) that the EU needs to provide for a more sustainable future. An additional €12tn in long-term capital could be put to work in the EU economy – roughly double today’s levels – with the average value of long-term savings per household rising from around €69,000 today to €128,000.

5) Ringing the bell: there could be an additional 230 IPOs in the EU raising an additional €40bn in capital every year. Italy could see an additional 95 companies that go public every year; the emerging EU (including Poland, Hungary, and the Czech Republic) an additional 45 companies raising €4bn per year.

6) Fuelling the growth economy: the EU does not have a start-up problem but it does have a problem channelling investment into high potential companies that drive job creation. We estimate that 3,245 additional companies in the EU could benefit from an extra €41bn in venture capital funding every year, nearly double current levels, and the number of companies listed on growth stock markets could quadruple.

7) Five big challenges: in the coming decades the EU will need to i) successfully transition to net zero ii) better support innovation and growth iii) give companies better access to more sources of funding iv) support an ageing population v) secure and advance its role on the global stage. These challenges are complex but present a once-in-a-generation opportunity to transform the lives of millions of EU citizens.

8) Not quite there yet: more developed capital markets are not the obvious answer to all of the challenges the EU is facing, but the EU will not be able to address its biggest challenges without them. Relative to GDP, EU capital markets have grown by nearly 50% since 2014 and are deeper than ever, but they are still not as developed as they could or should be.

9) The global perspective: one of the most concerning but often overlooked developments in EU capital markets is that they are shrinking in a global context. The EU’s share of global activity has fallen from 18% in 2006 before the financial crisis to just 10% today. In the longer term, without urgent reform, the EU’s share will shrink to single digits.

10) A new sense of urgency: to build bigger and better capital markets, member states, EU authorities, and the wider banking and finance industry should focus on i) building deeper pools of long-term capital ii) rethinking the supervisory and regulatory framework iii) simplifying market infrastructure iv) ensuring the EU’s international competitiveness and attractiveness v) embedding political support across the EU.

Report – The social and economic value of finance

December 2023 • Topic: Unlocking capital markets • by William Wright, Sheenam Singhal, Seethal Kumar & Katharina Ritter

The banking, insurance, and capital markets industry has a vital role to play in driving long-term investment across the UK – but it needs to make a better and more concrete case for the value of what it does. This report drills down behind the headline numbers to highlight the social and economic value of one financial services company at a regional level and the impact it has on people’s everyday lives in every corner of the country.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

For everyone working in the banking, insurance, and capital markets industry it is self-evident that it plays a vital role in channelling investment into the economy to support jobs and growth, and helping millions of people manage risk and save for their futures. But to most people outside of the sector, what it actually does is complex, abstract, and remote. The further you get from London, perhaps the less relevant the industry may seem. Most people (and many politicians) do not trust the industry, they do not understand it, and they do not engage with it.

An alternative perspective

Too often, the industry talks about itself in terms of itself and focuses on big headline numbers to make the case for the value of what it does. This report takes a very different approach and focuses on what we think is more important: the footprint of the industry’s day-to-day activity at a regional level, and its social and economic value in concrete terms in every corner of the country.

On this report we have worked closely with PIC (Pension Insurance Corporation), a specialist insurer that has insured the pensions of more than 300,000 individuals across more than 250 pension schemes with a combined value of more than £50bn as of the end of 2022, to measure and map the local impact of its ‘day job’ across the UK. For example, nearly £12bn of these assets have been invested in socially useful direct investments in the UK ranging from social and affordable housing in Wales, to student accommodation in the South West, infrastructure investment in the North East, renewable energy off the coast of Cumbria, or urban regeneration in Liverpool.

We think this report is timely for at least three reasons:

• At a time when the UK economy needs all the help it can get the industry has an opportunity to reset its relationship with wider society for decades to come by demonstrating its social and economic value, and how it contributes directly to investment, growth, and people’s everyday lives.

• In the debate on the post-Brexit reform of financial services, it highlights the role that insurers play in investment in productive assets and how they could invest more with appropriate reforms to Solvency II.

• In the current debate on the future of pensions in the UK, it underlines how pension buyouts are an important part of the solution through their long-term investment in socially useful projects.

We hope this report encourages other firms across the industry to rethink how they think and talk about their business and to focus on their local and regional impact.

Here is a summary of this report:

1) Beyond the headline numbers: PIC is a specialist insurer that has insured the pensions of more than 300,000 individuals across more than 250 pensions schemes with a combined value of more than £50bn at the end of 2022. While these are big numbers, this report drills down behind these headline numbers to analyse what we think is more important: the footprint of PIC’s day-to-day activity at a regional level, and the social and economic value of PIC’s business in concrete terms in every corner of the country.

2) Direct investments: over the past decade PIC has invested in nearly 200 projects across the UK with a combined value of nearly £12bn. Each of these projects – from social and affordable housing in Northern Ireland and Wales, to student accommodation in Scotland and the South West, infrastructure investment in the West Midlands or North East, renewable energy off the coast of Cumbria or Humberside, or urban regeneration in Liverpool and London – has a direct social and economic impact on the local communities in which they are based.

3) Concrete terms: we have translated PIC’s investments from big numbers into more tangible terms. We estimate that it has helped fund the construction of enough homes to accommodate 130,000 people (equivalent to the population of Solihull), enough university accommodation for 14,000 students (the entire student population of the University of Hull), and enough renewable energy to power a city the size of Aberdeen. Building these projects has created tens of thousands of direct and indirect jobs across the UK.

4) Policyholders: PIC’s customers are individual policyholders who live in every corner of the UK, with 1,200 living in Northern Ireland, 15,000 in the West Midlands, and 24,000 in the South East. In many cases there are strong local connections between PIC policyholders and the local companies where they used to work. More than 25,000 of PIC’s policyholders have attended more than 50 townhall events up and down the country.

5) Public credit: in addition to its direct investments PIC has invested nearly £4bn in the public bonds issued by companies operating across the UK: from utilities companies in Wales and Yorkshire, to energy firms in the North West and Scotland, and transport and infrastructure firms in London and the South East.

6) The policy debate: in the current debate on the reform of UK financial services, PIC’s local footprint underlines how appropriate reforms to Solvency II could unlock more investment in socially useful projects across the country, and that pension buyouts have a productive role to play in the future of UK pensions.

7) Tax contribution: in addition to the social and economic value of PIC’s investment footprint across the UK, it makes a significant direct contribution to the economy with tax and employment. PIC’s total tax contribution over the past five years was more than £1.2bn from corporation tax, National Insurance, income tax, and VAT (enough to employ more than 7,000 nurses a year).

8) Employees & diversity: PIC business is growing fast and it has quadrupled its headcount over the past decade. It has an unusually high level of employee engagement and better performance on many diversity and inclusion metrics than the rest of the financial services industry.

9) ESG: PIC has more than halved its own emissions and energy consumption over the past four years on a per employee basis and has committed to get to net zero across its entire portfolio by 2050. Many of its new build housing projects are up top 40% more energy efficient than existing housing, and a number of its urban regeneration projects will operate on a net zero basis.

10) The wider industry: the banking, finance, and capital markets industry has a vital role to play in driving growth and investment – and a rare opportunity to reset its relationship with wider society. We hope this report helps the wider industry think about how it can make a better case for the direct social and economic value of what it does to support the day-to-days lives of millions of people in every corner of the UK.

Paper – A £10bn short in the arm for UK equities?

November 2023 • Topic: Unlocking capital markets • by William Wright

This short paper outlines how the UK could unlock an extra £10bn a year of investment into UK equities by reforming the ISA regime to require half of all new investments to be invested in UK equities, and raising the ISA allowance to £25,000 in line with inflation. This would help rebuild a pool of ‘natural buyers’ for UK equities, drive a renewed culture of investment and increase retail participation, and help crowd-in additional investment.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here 

Most of the debate over the past few years on the decline in in UK capital markets and in long-term investment has focused on how the £5 trillion pensions and insurance industry can invest more in productive assets like UK equities, growth companies, and infrastructure. While the reforms to pensions that are already underway are welcome, the problem is that pensions reform is really difficult: it is highly technical, politically challenging, and slow. The benefits of the reforms underway – which are expected to be fleshed out at the Autumn Statement next week – could take years to come through, and even then, the impact on UK equities would be limited.

We think a quicker and easier route could be through ISAs (Individual Savings Accounts), an often overlooked but huge pool of long-term capital: there is more than £460bn invested in stocks and shares ISAs with annual subscriptions of around £35bn. This paper outlines how an extra £10bn a year could be channelled into UK equities by tapping into these annual flows. This additional potential investment is roughly the same as annual flows from pension contributions into UK equities today (of about £9bn) and would represent a significant shot in the arm for the UK stock market.

Here’s how the proposal could work:

>>> Set a threshold of 50% for all new subscriptions to ISAs in future to be invested in UK equities.

>>> Increase the current annual ISA limit from £20,000 (which is unchanged since 2017/18) to £25,000 in line with inflation.

>>> Abolish junior cash ISAs and fold them into junior stocks & shares ISAs.

>>> Simplify the complex ISA framework (there are six different types of ISA) and launch an information campaign to encourage 10% of the annual £31bn of subscriptions into cash ISAs to be invested in stocks and shares ISAs instead.

This paper summarises the problem we are trying to solve; outlines how ISAs could be a better option for boosting investment in UK equities than the current reforms to pensions; and explores the options and limitations of some existing proposals to reform ISAs. It also poses and addresses the most likely pushback to this proposal. We have been at the forefront of this debate for the past few years with recent reports and events on unlocking the capital in capital markets, the parallel crisis in UK pensions and capital markets, and widening retail participation in equity markets.

This is not a fully formed policy paper. The data around pensions and ISAs is often patchy and we have had to make some quite big assumptions (some of them no doubt wrong). The main aim of this paper is to stimulate debate about how to unlock more investment from the huge pool of long-term capital in the UK, help kickstart a recovery in UK capital markets, and help boost the UK’s long-term growth, productivity, and prosperity.

Report: HM Treasury Women in Finance Charter: signatory survey 2023

November 2023 • Topic: Driving diversity • by Yasmine Chinwala, Jennifer Barrow and Sheenam Singhal

The fourth signatory survey highlights the impact the Charter is having on signatories, the benefits they are realising from joining the Charter, and the challenges they face in meeting their Charter commitments. Two-thirds of Charter signatories believe the Charter is driving permanent, sustainable change in their organisations and helping them maintain their focus on increasing female representation as they move into the next phase of their diversity efforts.

New Financial relies on support from the industry to fund its work. You can download the full report here

The UK Government launched the HM Treasury Women in Finance Charter in March 2016. The Charter now has more than 400 signatories covering more than a million employees across the sector. In collaboration with HM Treasury, New Financial conducts a survey of Charter signatories approximately every two years.

The purpose of this fourth survey is to learn more about the impact the Charter is having on signatories, the benefits they are realising from joining the Charter, and the challenges they face in meeting their Charter commitments.

The survey data shows that seven years after its launch, the HM Treasury Women in Finance Charter continues to have a positive impact. Of the 195 respondents to the 2023 signatory survey:

• Two-thirds (65%) reported that the Charter had driven permanent sustainable change in their organisations;

• Nearly 60% believe the Charter is changing the face of the financial services sector;

• Almost all (98%) said that increasing female representation was strategically important to their organisation;

• Maintaining focus on improving female representation was the most commonly cited benefit of being a signatory;

• 71% said they are applying the Charter principles to other diversity strands in addition to female representation.

New Financial is proud to be HM Treasury’s data partner on the Charter. Our Charter work is an enormous undertaking, and would not be possible without our sponsors Aviva, Santander UK, London Stock Exchange Group, City of London Corporation and the wider support of New Financial members.
  
Highlights of the Signatory Survey 2023:
 
1. Making an impact on organisations: Seven years after its launch, the HM Treasury Women in Finance Charter continues to have a positive impact. Of the 195 respondents to the 2023 signatory survey, two-thirds (65%) reported that the Charter had driven permanent sustainable change in their organisations, and most of the remaining third expected to see change within the next five years.

2. Industry level change is slower: Nearly 60% of signatories believe the Charter is changing the face of the financial services sector, but another quarter expected it would take another five years, and 15% said another 10 years.

3. A business priority: Nearly all (98%) signatories said that increasing female representation was strategically important to their organisation, with 80% saying it was significantly so. 

4. Reaping the benefits: Maintaining focus on improving female representation was the most commonly cited benefit of being a signatory, followed by promoting discussion of improving female representation at the highest levels.

5. The power of targets: Targets have been the most impactful of the four Charter principles, and now half of all Charter signatories have a target of at least 40% for women in senior management.

6. Link to pay is tricky but rewarding: Respondents to every signatory survey have rated the link to pay as by far the most challenging of the four Charter principles to implement. However, it appears to be less difficult than it used to be, and more signatories are finding the link to pay effective.

7. Using the Charter as a framework: Seventy-one percent of survey respondents said they are applying the Charter principles to other diversity strands in addition to female representation – usually by appointing an accountable executive. Ethnicity is the primary area to which signatories are extending the Charter actions.

8. Challenges remain: Respondents cited a shortage of diverse talent in recruitment pools, sustaining momentum as they approach their target, and an inadequate internal pipeline of women coming through the ranks as the main challenges they expect to face in meeting their Charter targets.

9. Expanding diversity priorities: Female representation and ethnicity were most commonly mentioned as diversity priorities for signatories surveyed, with mental health and socio-economic background in third and fourth place .

10. Levers for change: The top two reasons survey respondents gave as to why more women in senior management mattered were to improve decision-making and to attract and retain talent. They scored employees highest among the stakeholders motivating progress on diversity, followed by clients and society.

Launch event:
The report launched this morning at a virtual event with speakers including:

• Amanda Blanc, CEO of Aviva and the UK Government’s Women in Finance Champion
• Alanna Barber, Deputy Director, Banking and Credit, HM Treasury
• Dr Helen Russell, Head of Social Research Division, Economic and Social Research Institute, representing the Irish Charter
• Tom Theobald, Director for the development of the financial centre, Luxembourg Ministry of Finance, representing the Luxembourg Charter
 
To view the webinar, please click here.

Report – Widening retail participation in equity markets

September 2023 • Topic: Capital markets • by Maximilian Bierbaum and Sheenam Singhal

At a time when technology should enable more people than ever before to invest in the stock market, retail engagement has fallen over the past few decades in the UK and in many European economies.  This report measures the levels of retail participation in equity markets; outlines the potential benefits to households, the economy, and the capital markets; and makes 12 recommendations to increase retail investor engagement.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

Widening retail participation in equity markets – and why it matters

Technology should enable more people than ever before to invest more of their money, but retail engagement has fallen over the past few decades in the UK and most European countries. This may seem like a distraction at a time when millions of people are struggling with a cost-of-living crisis, but this report argues that in the long-term wider retail participation in equity markets could have a positive impact for millions of individuals and for the wider economy.

The decline in retail participation may seem surprising. Investing can be a powerful tool for individuals to improve their long-term financial security and wellbeing, and it has lower financial entry barriers than buying property. But while people can start buying shares with as little as £1 or €1, the cultural, structural, and regulatory barriers to investing in equity markets are significant.

This report – published in partnership with Euroclear and PrimaryBid – argues that there are many good reasons to change this, and technology and digital solutions put us in a good position to change it, particularly as and when we emerge from the current cost-of-living crisis. Many people want to get on the property ladder, but it is time we start talking more about the ‘equity escalator’.

The happy consequence of more people choosing (and being able) to invest more of their money is that it can have a positive impact on the economy. The social purpose of capital markets and the financial services firms that intermediate is to channel money from those that have it to those that need it. Some rightly see wider retail participation in the capital markets and improved access to funding for companies, in particular SMEs, as two sides of the same coin.

Philosophically, this would turn savers into investors, investors into owners that have a stake in the economy, and over time create people that are more engaged and more confident to take more ownership of their financial futures. The first section of this report looks at the value of retail participation in equity markets. The second section measures the levels of retail participation in selected markets. We then discuss barriers to wider retail participation and the growth potential. Finally, we make 12 recommendations for policymakers, regulators, and the industry on how to widen retail participation in equity markets and reconnect households, issuers, and the capital markets.

Here is a short summary of this report:

1) Retail participation in equity markets: in this report, we measure the levels of retail participation in equity markets in key European and global markets, discuss its value, barriers, and growth potential, and outline the main steps that the industry, regulators, and governments can take to increase retail engagement.

2) Defining ‘retail participation’: retail participation can mean a lot of different things. We focus on direct ownership of shares, but many of the themes and recommendations in this report are immediately relevant to indirect investments through investment funds and pensions and to other areas of household engagement with the capital markets.

3) The value of retail participation: widening retail participation in equity markets presents an opportunity for individuals to increase their long-term financial wellbeing, for listed companies to connect with people in a new way, and for capital markets and financial services to reconnect with millions of households.

4) In decline: the share of households in the UK that directly own stocks and shares has halved in the last two decades (from 23% in 2003 to 11% in 2022). In many EU countries such as Germany, Italy, or Poland, less than 10% of households directly owned stocks and shares in the last year.

5) The barriers: issues such as low levels of financial literacy and a lack of an equity culture in many parts of Europe are well known. These need to be addressed, but one of the biggest problems is the gap between those who engage with their money and who have a good overview of their finances and those who do not. Digital solutions and open finance paired with a public information campaign supported by government and other public authorities can help close this gap.

6) All eyes on Sweden: in many respects, Sweden is the poster child for EU capital markets. The country has a highly engaged retail investor base (22% of households directly own stocks) that is powered by high adoption levels of tech, benefits from a simple and low annual flat tax on investments, and provides a healthy ecosystem and supply of capital for SMEs planning to list. Sweden shows what a well-developed capital markets union (CMU) paired with easier cross-border investment in the EU can achieve.

7) Why now? It feels like retail investors are about to have their moment. A few years ago not a lot of people in the industry, in government, or at the regulators spent much time thinking about retail investors, but now the topic seems to be very high up everyone’s agenda. Given the cost-of-living crisis, the industry needs to clearly make the case for how it can help people.

8) Widening retail participation: there are a few essential building blocks that can help reconnect individuals and households with the capital markets, especially as we emerge from the current cost-of-living crisis. We make 12 recommendations to increase retail investor engagement and group them into four themes: i) individuals taking ownership of their financial futures ii) innovation and technology to make investing more accessible iii) providing the right incentives iv) removing structural and regulatory barriers.

9) The growth potential: if households in the UK were a bit more like their peers in Sweden or Australia and invested a quarter of their financial assets in equities and funds it would unlock an extra £740bn of capital. And if households in the EU increased their asset allocation to equities by just five percentage points it would unlock an extra €1.8tn that could support investment, innovation, jobs, and growth. These growth figures are ambitious but realistically achievable.

10) Data challenges: it is surprising how challenging it can be to find reliable figures on the levels of retail participation in different economies. Better data provided by all relevant market participants could help make a stronger case for the value of retail participation in markets and its impact on market functioning.

Report – EU capital markets: a new call to action

September 2023 • Topic: The future of EU capital markets • by Christopher Breen, Maximilian Bierbaum, and William Wright

Member states, EU authorities, and the European banking and finance industry need to inject more urgency across Europe into building bigger and better capital markets. This report identifies five of the biggest social and economic challenges facing the EU, analyses whether EU capital markets are in a position to address these challenges, and outlines a small number of high-priority steps to accelerate capital markets development.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

A new sense of urgency

At New Financial we have been making the case for bigger and better capital markets in Europe for nearly a decade. This annual benchmarking report on the size and depth of EU capital markets – published in partnership with Deutsche Bank – helps us track progress. The good news is that we can measure some welcome developments: capital markets in the EU are bigger and deeper than they were ever before. The not-so-good news is that they are still not as developed as they could or should be.

This year our report focuses on three simple but vital questions:

>>> What are the big social and economic challenges that the EU needs capital markets to help address? (including financing the transition to net zero, financing innovation at scale, and supporting an ageing population)

>>> Are EU capital markets in their current form in a position to address them?

>>> And if not – and in most cases the answer is ‘not’ – what are the big levers that the EU and individual member states can pull to change this?

After many years of talking, drawing up strategies, and developing action plans, Europe now needs to step up its game. It is high time for individual member states, EU authorities, and the wider European banking and finance industry to inject more urgency across Europe into building bigger and better capital markets. Member states in particular need to start taking some of the tough decisions required to develop their own capital markets and to build capacity from the bottom up.

The potential benefits are huge: more developed capital markets in Europe could increase the financial wellbeing and security of millions of EU citizens now and in the future; finance the sort of innovation, growth, and high potential companies that Europe needs; help finance the transition to net zero; and help the EU play a bigger and more impactful role on the global stage.

On the flipside, there would be dire consequences if Europe does not get its house in order and further delays building bigger and capital markets.

The first part of the report first discusses how capital markets can help the EU to address some of the biggest challenges it is facing. The second section includes our annual benchmark of EU capital markets and measures their size and depth in 2022. We then analyse what has (and has not) changed in EU capital markets and provide a call to action to decision makers at all levels to help them develop capital markets at a national and at an EU level.

Here is a short summary of the report:

1) A new call to action: the EU economy needs all the help it can get in the wake of Covid, Russia’s invasion of Ukraine, the energy crisis, global economic slowdown, rising interest rates, and stagnating growth. Building bigger, deeper, and more integrated capital markets in Europe is more urgent than ever.

2) Five big challenges: in the coming decades the EU will need to i) successfully transition to net zero ii) better support innovation and growth iii) give companies better access to more sources of funding iv) support an ageing population v) secure and advance its role on the global stage. These challenges are complex but present a once-in-a-generation opportunity to transform the lives of millions of EU citizens.

3) Not quite there yet: more developed capital markets are not the obvious answer to all of the challenges the EU is facing, but the EU will not be able to address its biggest challenges without them. To develop European capital markets, member states, EU authorities, and the wider banking and finance industry should focus more on ‘capital markets’ than ‘capital markets union’; more on outcomes than legislative initiatives; and more on what individual member states can and should do themselves than on EU-wide solutions.

4) Bigger and deeper: EU capital markets have rapidly grown in the past few years. Relative to GDP they have grown by nearly 50% since 2014 and are deeper than ever – but they are still not as developed as they could or should be. In the face of economic headwinds it will be challenging to maintain this growth.

5) An uneven picture: every year this report measures the depth of EU capital markets in different sectors of capital markets activity in all EU member states, and every year we see a huge range in depth that shows little sign of narrowing. The range in depth of capital markets across the EU is far greater than the difference in depth between the EU and the US, or the EU and the UK, and is one of the reasons why harmonising EU capital markets is necessary but challenging.

6) A concentrated market: after Brexit, France and Germany have become the largest and second largest (or vice versa) EU markets in 13 out of 21 capital markets sectors in terms of value. Given the size of the two economies, this is unsurprising and demonstrates the potential if France and Germany get serious about developing their capital markets and building further capacity.

7) A focus on Sweden: in many respects, Sweden is the poster child for EU capital markets. For the first time since we started working on this annual report, capital markets in Sweden are deeper than they are in the UK. Over the past few years, the depth of capital markets has grown much faster in Sweden than in the rest of the EU. This growth has been driven by venture capital and private equity activity as well as strong equity markets.

8) The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding despite some progress over the past decade. In the face of economic headwinds, structural challenges, and regulatory reform, banks will be unable to provide the necessary funding for European companies on their own.

9) Capital markets without capital? Deep pools of long-term capital such as pensions, insurance assets, and direct retail investment are the starting point for deep and effective capital markets. But pensions assets in the EU are much smaller than in comparable markets and concentrated in just three EU economies. Shifting more savings from bank deposits to investments would deploy more capital to support the economy, jobs, and growth.

10) A burning platform: it is time to inject more urgency across Europe into building bigger and better capital markets and there would be dire consequences if Europe does not do so – lower financial security and wellbeing for millions of EU citizens, a smaller economy, a slower transition to net zero, and a smaller Europe on the global stage.

Report: UK capital markets – a new sense of urgency

September 2023 • Topic: Rebooting UK capital markets • by William Wright

This report highlights the emergence of two separate but related structural problems in UK pensions and capital markets that are undermining the long-term prosperity of the UK. Addressing inadequate pensions for millions of people in the next few decades and rebuilding a virtuous circle of investment and growth in capital markets will require a renewed and concerted focus in government, regulators and the industry.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

A parallel crisis in UK pensions and capital markets

Over the past few decades, layers of well-intended regulatory reform have created a framework and culture in UK pensions and investment that seems actively designed to eliminate risk and discourage long-term investment. Pension funds have had their risk appetite kicked out of them, and companies have been incentivised to reduce volatility in their pension schemes, shut them down, and offload them. This has sucked hundreds of billions of pounds of natural demand out of the UK market, leaving the UK reliant on overseas investment in some critical sectors. And millions of individuals saving for their pension have been left facing a future pension penalty.

This report, published in partnership with abrdn and Citi, argues that most of the debate around UK pensions and capital markets has been looking at this problem from the wrong end of the telescope. Instead of asking ‘how can we get more money from UK pensions into more productive investment?’ we have reframed the essay question to instead ask ‘how do we enable the pensions industry to do a better day job of providing a secure and comfortable retirement for millions of people in every corner of the UK?’.

The more closely we have analysed this problem, the more it has become clear that there is not one crisis but two related crises. First, while the UK pension system looks robust at first glance, there is a storm brewing for millions of people in the coming decades in terms of an inadequate income in retirement. Despite the success of auto-enrolment, nearly a third of the UK workforce are not saving for a pension at all; the majority of people are not saving enough; and structural and cultural challenges embedded in the UK pension system (such as fragmentation and the focus on cost rather than value) add up to smaller pensions in future.

And second, the structural decline in UK capital markets and long-term investment by UK investors has now reached the point of crisis. Despite having highly developed capital markets and deep pools of long-term assets, the UK stock market has stagnated over the past decade; UK growth companies are increasingly reliant on overseas investors; and the UK has among the lowest rates of investment, productivity, and economic growth of its peers.

What to do about it

There is a unique window of opportunity to address this problem. In the short term, the UK should rapidly increase pension contributions; push ahead with consolidation and the Mansion House reforms; urgently review how to shift the regulatory and cultural mindset in pensions and approach to risk; and launch a new pensions commission to design a pension system fit for the next 50 years. In the longer term, it should embrace more radical ideas such as the consolidation of DC pensions from over 3,000 schemes to just a few dozen; or start to shift the huge unfunded public sector pension schemes such as the civil service and NHS to a funded model.

The potential prize is huge: hundreds of billions of pounds in investment in productive assets could be unlocked with relatively minor reforms; millions of individuals could look forward to a more comfortable retirement; and the UK could have a giant state pension fund with more than £2 trillion in assets at its disposal within 25 years. The best time to have tackled this would have been a few decades ago. The second best time is now.

Summary of ‘UK capital markets – a new sense of urgency’

1) A parallel crisis: this report analyses what we see as a parallel crisis in the UK. First, a crisis in future pensions provision driven by structural problems in the UK pensions industry; and second, a separate but related crisis in UK capital markets, particularly the collapse in long-term domestic investment in productive assets. This combined crisis is of critical importance to the long-term growth and prosperity of the UK.

2) The crisis in UK pensions: the structure and regulation of the UK pension system in terms of patchy participation rates,  low contributions, fragmentation, a focus on ‘costs at all cost’, narrow asset allocation, and mediocre returns has undermined the risk profile of pensions and is storing up trouble for millions of individuals over the next few decades who will face an inadequate income in retirement.

3) The crisis in UK capital markets: the structural decline in UK capital markets over the past few decades has reached a crisis point. The number of listed companies has virtually halved over 25 years, new issue volumes have collapsed, valuations have stagnated, and the UK’s share of global markets has fallen. The appetite among UK investors for long-term investment in UK productive assets has shrunk, and the UK is increasingly reliant on overseas investors to provide growth capital and investment in critical infrastructure.

4) Reframing the essay question: in light of this parallel crisis and the often-challenging debate over the past year we have reframed the essay question from ‘how do we get pensions to invest more money in UK growth companies and infrastructure?’ to ‘how do we ensure that the pensions industry can do a better day job of providing a secure and comfortable retirement for millions of people in every corner of the UK?’.

5) A social contract: the asset allocation of UK pension funds should not be mandated. However, given the generous £48bn in net tax reliefs paid by UK taxpayers on pension contributions in 2021 (more than the entire defence budget), it is not unreasonable that there should be some form of quid pro quo in return.

6) Economic sovereignty: in a globally-connected economy you can argue that it should not matter where companies get investment from or where they choose to list. However, raising capital from non-UK investors or on overseas markets should be an active choice – not the only available option. The risk is that the jobs, investment, growth, and returns companies generate migrates overseas.

7) A good start: the UK government has made a good start on pensions reform with the Mansion House reforms outlined last month and the programme of Edinburgh Reforms for capital markets last year. There is a need to go a lot further on pensions reform and to learn from other highly-developed pensions systems such as Australia, Canada, Sweden and the Netherlands as to what does and doesn’t work.

8) Reforming pensions: in the short term the UK should remove obstacles to wider participation and agree a glidepath to higher pension contributions. Given the long-term nature and critical importance of pensions there is a strong case for a pensions commission with cross-party support. While corporate DB pensions are the largest part of the market and may offer some scope for reform, efforts should focus more on DC pensions (with more radical consolidation into a series of ‘super trusts’) and on public sector pensions.

9) Reforming capital markets: the UK has all the right building blocks in place to develop bigger and better capital markets. The government and the industry should work together across sectors to further the Edinburgh Reforms and develop a more strategic plan that joins up the dots and builds on these strengths.

10) Reforming the wider economy: ultimately, the best way to boost long-term investment in the UK is to make the UK a more attractive investment proposition. Beyond pensions and capital markets reform, the UK) will need to develop a clearer and more consistent industrial strategy focused on delivering better infrastructure (in the broadest sense) and on a handful of key sectors and priorities.

Acknowledgements:

Thank you to the many firms and individuals who have fed into this project with their ideas and expertise over the past year. Thank you to the team at New Financial for their hard work and patience, to Toby Nangle for his exhaustive and diligent research, and to our members for supporting our work in making the case for bigger and better capital markets. And thank you to abrdn and Citi for their generous support for this important project. The recommendations in this paper are mine and New Financial’s alone and should not be taken as representing the views of our partners on this project.

Report: financing innovation – earlystage investment in the EU

August 2023 • Topic: Capital markets • by William Wright & Christopher Breen

Innovative growth companies are a vital part of rebuilding a more resilient, dynamic, and sustainable economy in the EU.  This report highlights the challenges faced in funding this important sector, analyses the rapid growth in early stage investment in the EU over the past five years, and outlines an ambitious but achievable growth opportunity that could unlock nearly €25bn a year in additional investment to support nearly 5,000 companies in reaching their potential.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here.

This report was prepared for and presented at the Informal Ecofin meeting of EU finance ministers and central bank governors in Stockholm in April.

Financing innovation: early stage investment in the EU

In the wake of the Covid crisis, the Russian invasion of Ukraine, and the recent turmoil in banking and financial markets, the EU needs all the help it can get to build a more resilient, more dynamic, and more sustainable economy. In particular, the EU needs to develop more financing of innovation at scale – an area where the EU has traditionally lagged behind other developed economies – to help support the sort of companies the EU needs to drive investment in jobs, growth, productivity, and prosperity.

This short paper was prepared for the Informal Ecofin meeting in Stockholm in April 2023 hosted by the Swedish Presidency of the Council of the EU. It frames early stage investment in the EU in the context of the state of wider capital markets, and compares early stage investment in the EU with comparable markets like the US, UK, and Canada. It highlights the welcome and rapid growth in activity over the past five years; analyses the wide range in the level of activity in different member states; and provides a directional indication of the potential growth opportunity at an EU and country level in concrete terms. It also presents some questions and suggestions for consideration at a member state and EU level as to how to achieve this growth.

Here is a summary of the key points from this paper:

1) The wider context: capital markets in the EU are under-developed and fragmented but they are heading in the right direction and have made steady progress since the launch of capital markets union. Activity has grown in absolute terms and relative to GDP in virtually every sector, and EU capital markets are deeper than ever before. But there is a wide range in development across the EU, and the EU’s share of global activity has halved in the past 15 years.

2) Financing innovation: the gap between early stage investment in the EU and other developed economies is stark. Over the past five years activity in the US has been more than six times larger than in the EU (€845bn compared with €131bn). The market is highly concentrated (with Germany, France, and Sweden accounting for 70% of activity) and investment is not evenly distributed across the EU. This suggests that many high potential companies in some markets may not have access to the capital they need.

3) Rapid growth: the good news about early stage investment in the EU is that it is growing rapidly. Over the past five years activity has increased fivefold, and after explosive growth in 2021 investment held up well in 2022 despite the wider market downturn. Last year, activity in the US was just four times larger than the EU, compared with 12 times larger as recently as 2018.

4) Growth opportunity: the wide range in development between member states and rapid recent growth suggests there is huge growth potential in early stage investment in the EU. Using a simple analysis to benchmark EU member states with each other, we estimate that early stage investment in the EU could realistically grow by nearly two-thirds. This would unlock an additional €24bn in investment in an extra 4,800 high potential companies across the EU every year.

5) Seizing the opportunity: there is no magic wand that the EU or individual member states can wave to achieve this growth potential, and early stage investment may struggle to adapt to rising interest rates. Enabling this growth will require a combination ‘top down’ initiatives at an EU-level to reduce barriers and ‘bottom up’ measures at a national level to drive capacity. Ultimately, innovative companies will thrive in markets with well-developed ecosystems that incentivise, attract, and retain the best talent.

Working paper: capital markets in the UK – a new sense of urgency

June 2023 • Topic: Rebooting UK capital markets • by William Wright

This short paper is a summary of the key themes in our current work on the urgent need for more structural reform of pensions, capital markets, and long-term investment in the UK. It includes some key points from a recent dinner hosted by New Financial with C-suite representatives from across the industry, as well as conversations with senior politicians, policymakers, and market participants over the past few months. We will be publishing a more substantial report outlining the case for reform and how to deliver it in September.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here

The paradox of UK capital markets

The starting point for discussion is the paradox of UK capital markets: on the one hand, there is an abundance of long-term capital sloshing around the UK in the form of pensions and insurance assets (at nearly £5 trillion, the UK has the second largest pools of long-term capital in the world after the US). But on the other, there is a drought of UK capital being invested in long-term productive assets in the UK such as equities, infrastructure, and growth companies.

The structural decline in long-term domestic investment in UK capital markets and companies over the past few decades has significant implications for the UK’s long-term growth, productivity, and prosperity. In an increasingly challenging geopolitical environment, the UK is now disproportionately reliant on overseas capital for investment in its critical infrastructure, in sensitive technologies, and scale-up capital for early-stage businesses.

The UK has a good start-up ecosystem, world class research and ideas in its universities, a concentration of finance and risk management expertise in the City, and a deep pool of capital. To misquote the late Eric Morecambe, we are playing all the right notes – but not necessarily in the right order.

A structural shift

Our recent paper on Unlocking the capital in capital markets highlighted the dramatic shift in the risk appetite and asset allocation of UK pension funds and insurance companies over the past few decades.  

In theory, investors with long-term time horizons and long-term liabilities like pension funds should be ideally placed to invest in long-term productive assets such as listed and unlisted equity to both generate returns for their members and to support the UK economy. In practice, we found that:

• Over the past 25 years, UK pension funds have reduced their allocation to equities from 73% to 27% – and they have slashed their allocation to UK equities from 53% to just 6%.
• Over the same period, they have quadrupled their allocation to bonds to 56%. UK pensions now have the highest allocation to bonds and lowest allocation to equities of any comparable pension system in the world.
• Since 2000, the share of the UK stock market owned by UK pensions and insurance companies has fallen from 39% to just 4%. And just 1% of the £4.6 trillion in pensions and insurance assets is invested in unlisted UK companies.

Why should we care?

To most people, how UK pensions and insurance companies invest their money is a remarkably dull and remote debate. And besides, why should we worry about UK pensions when overseas investors seem perfectly happy to invest here? But there are many tangible reasons why everyone should care about it and why addressing it demands a new sense of urgency:

• A more resilient economy: the starting point for long-term growth and prosperity is long-term investment. In light of the pandemic, the invasion of Ukraine, and the energy crisis, the UK needs to build a more dynamic and resilient economy, and this will require a huge amount of investment, a change in mindset, and a change in risk appetite. ‘Why does nothing work in the UK?’ is a common and powerful question. Investment is a big part of the answer.
• Financing the transition: the transition to net zero over the next 25 years requires a huge amount of investment over and above what governments and bank lending can provide.
• The Wimbledon effect: there is nothing wrong with non-UK investment and no-one is suggesting that the UK should pull up the drawbridge to international capital. But it should be an active choice, not the only available option. For a country with so much capital at its disposal, the UK should not be so heavily dependent on the kindness of strangers for whom investing in the UK may turn out to be a purely transactional affair if things turn sour.
• Relocation, relocation, relocation: the recent decision by Arm Holdings to list in New York rather than London, and news that UK-listed firms CRH and Flutter are reconsidering their UK listing, has highlighted the problem. But in many cases this relocation happens much earlier in a company’s life cycle: many high-growth firms rely on US venture capital to fund their growth, which often means the company (along with its future growth, jobs, investment, and returns) shifts to the US as well.
• A matter of national security: in an increasingly challenging geopolitical environment, outsourcing investment in critical infrastructure to SWFs from sometimes questionable regimes raises direct concerns for national security. And, under a broader definition of national security, the longer-term prosperity of the UK and its citizens is also under threat from low investment, low returns, and low growth.
• A tangible cost: the structure, regulation, and mindset of the pensions industry means that millions of people are missing out on the benefits of investing in a wider range of assets and paying over the odds for the inefficiencies embedded in the system.
• A vicious circle: the withdrawal of such a huge pool of natural demand for investing in UK companies over the past few decades has undermined valuations and risks creating a self-fulfilling doom loop for UK companies. This has flattened returns in the UK, exposed more UK companies to foreign takeovers, reduced the risk appetite and investment time horizons of UK plc, and reduced growth, investment, and job creation. Rinse and repeat.
• A social contract: banking and finance relies more than most industries on an unwritten social license. The more remote individuals and communities across the UK feel from their pensions and from ‘the City’, the more stretched that license will be become (with potentially negative political consequences). The inter-generational contract in the UK is already under pressure and could become untenable without significant reform of inadequate pensions.
• Squeezed in the middle: the Inflation Reduction Act in the US and the EU’s likely response will unlock a huge amount of investment on both sides of the Atlantic. Without a bold investment-led strategy of its own, the UK could end up being squeezed in the middle between two much larger trading and economic blocs.
• A holistic approach: while many of the reforms already underway are welcome, a piecemeal approach will hardly dent the challenges outline above. A bolder approach that joins up the dots and approaches the problem from the whole chain of banking, finance, and capital markets rather than a series of individual sectors might have a chance.

To request a full copy of this paper, please click here

Report: Benchmarking ESG in banking and finance

March 2023 • Topic: A reality check on ESG • by By Maximilian Bierbaum, Christopher Breen, and Seethal Kumar

This is our second report that measures the penetration of ESG in different sectors of banking and finance around the world and highlights the challenges ahead for the industry. While there has been significant growth in ESG activity in the past years, in most sectors and regions it is still a small fraction of the total. Europe is a long way ahead in most areas of activity, but the US and APAC are catching up.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here.

The penetration of ESG in banking and finance

ESG has risen to the top of the agenda of policymakers and the global financial services industry in the past few years. When taking a look at a few websites of asset managers or pension funds, some may think they have landed on the website of a climate NGO instead. ESG seems to be everywhere – so it is surprising that it is still relatively difficult to find consistent and comparable data to measure the level of penetration of ESG in banking, finance, and the capital markets.

This is why in 2021 New Financial and Luxembourg for Finance set out to provide the first clear and consistent benchmark of the progress so far in sustainable finance, and we are glad to publish the refined, second edition of this report now.

There have been a few welcome developments in the last two years. First, the value of labelled ESG finance has significantly increased: from 2020 to 2021, ESG activity in all markets virtually exploded, and in 2022 penetration remained relatively stable. Second, more firms from all sectors have committed to applying ESG principles. And third, we are now able to better measure the implementation of ESG in different parts of the banking and finance industry.

But there are also a few things that have not changed: Europe remains the heartland of ESG with other regions catching up, the majority of capital markets activity remains non-ESG, and it is still difficult – if not impossible – to find clear data on ESG activity in a lot of important areas of banking and finance.

We think this report captures the penetration of ESG in banking and finance in an even clearer, more consistent, and more accessible way than our 2021 report. But it is still not perfect: for example, the fact that many sectors are missing indicates that the overall level of ESG penetration is probably still overstated. We are planning to further revise and improve this benchmark, and any feedback would be most welcome.

Here is a short summary of the report:

1. Measuring penetration: in this report, we measure the penetration of ESG in banking, finance, and capital markets by looking at the industry’s commitment, the levels of labelled ESG financial activity, and the implementation of ESG across the industry. In some areas of the industry, there are welcome levels of activity, while in some others there is virtually no activity at all. For all the noise around ESG, there are still relatively few areas of capital markets activity where there is clear, measurable, and comparable data.

2. A growing pledge: the commitment to ESG in the finance industry is growing. Almost half of 2,000 of the world’s largest banking and finance firms have signed up to at least one ESG initiative. But there is a wide range of public commitment between sectors – from 84% of all asset managers to just 24% of global insurers.

3.Serious money: in those areas of the capital markets where we can clearly measure ESG labelled finance, activity is growing. In 2022, the value of global ESG bond issuance reached $900bn (+46% since 2020), the value of ESG loan issuance reached $500bn (+255% since 2020), and the value of sustainable investment funds was a remarkable $2.5tn (+85% since 2020).

4.A breakout year: 2021 was the breakthrough year for ESG labelled activity. From 2020 to 2021, activity in all markets virtually exploded, and it was the first time that penetration of ESG labelled activity across the bond and loan markets in Europe reached penetration levels of between a quarter and a third of all capital markets activity. Despite 2022’s wider market downturn, penetration levels of ESG labelled issuance remained stable.

5.More than just the ‘E’: green bonds remain the primary type of ESG labelled bond issuance, but other types of ESG bonds are increasing in popularity. More and more corporate issuers worldwide are making use of sustainability-linked bonds, and the Asia-Pacific region is the leading market for corporate social bond issuance.

6. All eyes on Europe: other markets are playing catch-up, but Europe remains the heartland of ESG – likely due to a combination of the European industry having had a headstart in ESG matters and stronger regulation. Europe continues to capture the majority of global ESG activity across all areas of activity, more than one-third of all corporate bonds issued in Europe in 2022 were ESG labelled, and European sustainable investment funds account for more than 70% of the global ESG investment fund value.

7.The good and the bad: not all ESG activity in the capital markets is labelled. When analysing the share of capital markets activity by ‘good’ (a solar panel manufacturer) and ‘bad’ (an oil refinery) companies, we see that capital markets as a whole are still directing large amounts of funding to ‘bad’ companies. The good news is that things are getting better: the ratio between ‘good’ and ‘bad’ activity has improved in recent years.

8. Walking the walk? The uptick in finance firms that are signing up to ESG initiatives is a welcome development. They now need to walk the walk. Early implementation data by the Transition Pathway Initiative, the Science-based Targets Initiative, the Net-Zero Banking Alliance, and the Net-Zero Asset Owner Alliance indicates that firms are starting to do what they set out to do, but that there is still a lot of room for further progress.

9. Data challenges: while in some areas of banking and finance, such as investment funds or bond issuance, ESG finance is clearly labelled, in many others there is no clear distinction between ESG and non-ESG activity, and data is not comparable, does not exist, or is only limited to anecdotal examples. This could indicate a relative lack of activity, but it could also mean that data is just not recorded well.

10. Much work ahead: ESG has risen to the top of the agenda in the past few years, but there are questions on whether the current framework is still fit for purpose. There will need to be an honest discussion about whether ESG is adaptable and flexible enough to respond to a changing world, and whether it really is the best framework for the banking and finance industry to play its important role in supporting and driving this change.

Acknowledgements

With thanks to Christopher Breen, Seethal Kumar, and Katharina Ritter for collecting and analysing much of the data that underpins this report, William Wright for his support and feedback, Dealogic, The Banker, S&P Global Market Intelligence, and Morningstar Direct for providing access to their data, and Luxembourg for Finance for once again partnering with New Financial on this fascinating project.

Report – Unlocking the capital in capital markets

March 2023 • Topic: Rebooting UK capital markets • by William Wright

This report highlights the dramatic shift over the past 25 years in the risk appetite and asset allocation of nearly £3 trillion in UK pension funds. The sharp drop in their allocation to the UK stock market since 1997 -from 53% to just 6% -is one of the fundamental structural challenges facing capital markets in the UK and it will require a renewed and concerted focus to change course.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here.

Upstream vs downstream

Over the past few years, a huge amount of work has been done by the UK government, regulators, and the industry to reboot the framework for banking, finance, and capital markets to ensure that it is both competitive on the global stage and better able to support the UK economy. Much of this work – such as the listings review, the secondary capital raising review, and the Edinburgh Reforms package -and much of the debate around it has focused on what we call ‘downstream’ issues, such as changes to regulations to remove obvious barriers to more effective capital markets.

While this work is hugely valuable, the underlying challenges facing UK capital markets and the UK economy are much further ‘upstream’ than the detail of the listings regime. These embedded structural issues have been decades in the making -and none more so than the dramatic shift in risk appetite and investment by UK pensions over the past 25 years away from equities (and away from the UK stock market in particular) into bonds.

In our view, this structural shift -effectively sucking huge amounts of natural demand out of the UK market -has been one of the main causes of the challenges faced by UK capital markets today. While it is important to address the ‘downstream’ issues, they are not the root cause of the problem so addressing them will not solve it.

This short paper outlines the scale of this shift; compares the UK with other developed pension systems around the world; drills down into the asset allocation of different types of pension to uncover some positive news; identifies some of the main drivers behind it; and outlines some potential solutions. In theory, investors with long-term time horizons and long-term liabilities like pension funds should be ideally placed to invest in long-term productive assets like listed and unlisted equity to both generate returns for their members and to support the UK economy. In practice, we found that:

> Over the past 25 years, UK pension funds have reduced their allocation to equities from 73% to 27% -and they have slashed their allocation to UK equities from 53% to just 6%.

> Over the same period, they have quadrupled their allocation to bonds to 56%. UK pensions now have the highest allocation to bonds and lowest allocation to equities of any comparable pension system in the world.

> Since 2000, the share of the UK stock market owned by UK pensions and insurance companies has fallen from 39% to just 4%. And just 1% of the £4.6 trillion in pensions and insurance assets is invested in unlisted UK companies.

To be fair, pension funds and insurers have not so much lost their risk appetite as had it kicked it out of them over the past few decades by the cumulative impact of well-intended reforms to accounting standards, regulation, and tax. At every turn, they have responded rationally to the incentives and disincentives in front of them. It is also important to stress that there is no silver bullet to reverse course, and that much of the pensions money that has been sucked out of the UK equity market is not coming back.

While the headline numbers look bleak, we think there is a huge opportunity ahead to build on the strong foundations for pensions and insurance in the UK (the second largest pool of long-term capital in the world) and restructure the system to incentivise, enable, and empower pensions to invest more in productive assets. Given the importance of driving investment in every corner of the UK, it is vital for government and the industry to work together to develop a long-term sustainable plan -ideally with cross-party support -that may well need to include more radical reforms than have so far been proposed.

In this paper we have tried to reconcile different definitions and taxonomies across a wide range of complementary but sometimes conflicting data sources, building on our first attempt a few years ago to map out the problem. Our estimates may well be a few percentage points out here and there, but the direction of travel is clear. We have made some quite big assumptions, and no doubt some quite big mistakes, which are entirely my own. The data in this report was prepared for the UK’s Capital Markets Industry Taskforce, but the report and analysis should not be taken as representing its views.

Report: HM Treasury Women in Finance Charter – Annual Review 2022

March 2023 • Topic: Driving diversity • by Yasmine Chinwala, Jennifer Barrow And Sheenam Singhal

Our sixth Annual Review monitors the progress of signatories against their Charter commitments and holds them to account against the four Charter principles. This report offers unique insight into what Charter signatory firms – from across the financial services industry – are doing to boost the proportion of women in senior ranks, who has hit and missed their targets, how they are developing diversity data and their different approaches to hybrid working. The data provides important benchmarking for signatories and non-signatories alike.

New Financial is a social enterprise that relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here.

Highlights of the review:

1.Meeting targets: A third (34%) of the 235 signatories analysed in this review have met their targets for female representation in senior management, and a further 47% that have targets with future deadlines said they are on track to meet them.

2. Bounce back from 2021: After a plateau in progress in 2021 (when the average level of female representation remained flat at 33%), signatories have recovered lost ground, reaching an average of 35% in 2022.

3. Leaders breaking through 40%: For the first time, the top quarter of firms (52) signed up to the Charter that conduct regulated financial activities have achieved at least 40% female representation in senior management. But the gap between the top and bottom quartile is getting wider, and is clearly split along sector lines – with building societies and UK banks at the top and global/ investment banks and asset managers at the bottom.

4. Fewer misses in 2022: Of the 73 signatories with a 2022 deadline, 44 hit their targets and the remaining 29 missed, down from 31 in 2021. Of the 29 that missed, 22 were close – either within five percentage points or five appointments of hitting their target.

5. Data and hybrid core to actions: The 2022 reporting shows a significant shift in how signatories are using data to monitor actions undertaken to pursue targets and to understand their impact, particularly hybrid working. Post-pandemic, 91% of signatories are exploring some form of hybrid working, and more of them are on the lookout for potential negative impacts on women.

6. Rapid expansion of diversity data: Signatories are extending diversity data collection, with 80% capturing additional diversity data about their female senior managers, up from 53% in 2020. Ethnicity, sexual orientation and disability are the most commonly collected datapoints. However, most firms are at the early stages of analysing this expanded dataset.

7. Accountable at the top table: Accountability is sitting at the highest levels of seniority, with almost all (98%) accountable executives (AE) sitting on the executive committee. AEs are taking an increasingly strategic approach, and their role is expanding by adding diversity strands and/or new topic areas, such as gender pay gap reporting and flexible working.

8. Linking to pay: More signatories are finding the link between diversity targets and pay is making a difference, with 64% reporting that they believe the link to pay has been effective, up from 53% in 2021. Having a link to pay means diversity is increasingly positioned as a business issue, rather than voluntary or owned and led by HR and D&I teams.

9. Strong ambition on targets: Half of signatories (50%) have set a target of at least 40%, corresponding with HM Treasury’s desire for alignment with the FTSE Women Leaders review, including one in six with a target of parity.  Average targets rose across all signatory sectors and sizes.

10. Publishing updates: Publishing progress is the only Charter principle that has not consistently improved over the years. While 77% of signatories posted an online update on their progress by the required deadline, only 36% included the required details, and the quality and format of reporting varied significantly.

Research methodology:

This review analyses annual updates from 235 signatories that signed the Charter before September 2021, provided an annual update to HM Treasury in September 2022, and have at least 100 staff. All data has been anonymised and aggregated, and no data has been attributed without consent. The data was analysed by Sheenam Singhal and Jennifer Barrow under the supervision of Yasmine Chinwala. For full methodology, see p32 of the Appendix.

About New Financial: 

New Financial is a think tank and forum that makes the positive case for bigger and better capital markets in Europe. We think there is a huge opportunity for the industry and its customers to embrace change and reform, and to rethink how capital markets work. Diversity is one of our core areas of coverage.

Acknowledgements:

New Financial would like to thank Aviva, Santander UK, London Stock Exchange Group and City of London Corporation for sponsoring our work on the HM Treasury Women in Finance Charter, and to all our institutional members for their support.

Report – Building EU capital markets from the bottom up

March 2023 • Topic: The future of EU capital markets • by Maximilian Bierbaum

Building bigger and better capital markets in Europe needs a combination of EU-wide ‘top down’ measures to encourage harmonisation and national-level ‘bottom up’ measures to increase capacity.  This report is the first in a new series and identifies the key building blocks for deeper pools of long-term capital in individual EU member states,  the starting point for deep and effective capital markets, with a focus on pensions.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here.

This paper is the first in a series of reports and events that identify the essential building blocks for developing strong capital markets at a national level, analyse how different countries have built successful capital markets in different sectors over the years, and assess the different steps and reforms being taken in different countries.

Deep capital markets provide a more diverse, flexible, and resilient source of funding for the wider economy, but capital markets are nothing without the ‘c’ – capital. This is why we are starting our ‘Building EU capital markets from the bottom up’ series with a focus on pools of long-term capital in the EU. They are the starting point for well developed capital markets, and they are a good example of an area of the capital markets that is entirely a national political and social issue.

One of the biggest challenges for capital markets in the EU is that there is not enough long-term capital in the form of pension and insurance assets. Behind the headline numbers, the real problem is not so much with long-term capital in general, but with pensions. Insurance assets, representing two-thirds of long-term capital in the EU, are comparable in scale to other developed economies. This is an important source of long-term capital, but the problem with insurance assets is that there are too many restrictions around the sort of projects they can be invested in.

The thing that can really move the dial is pensions, which in the EU are just a fraction the size of comparable economies. There are a number of economies in the EU with well developed pension systems and high levels of pension assets that can serve as a playbook for other countries to develop their capital markets, but we also recognise that pensions reform is a huge political challenge.

Here is a short summary of the report:

1.From the bottom up: building bigger, deeper, and more integrated capital markets in Europe requires a combination of EU-wide ‘top down’ measures to encourage harmonisation and, more importantly, national-level ‘bottom up’ measures to increase capacity. Bigger and better capital markets will not be built in Brussels but in each and every member state. It is a long-term game and will take decades to become a reality.

2. The ‘C in CMU’: deep pools of long-term capital such as pension and insurance assets are the starting point for deep and effective capital markets, but pools of capital in the EU are much smaller than in the US, UK, Canada, or Australia. Shifting more savings from bank deposits to investments would deploy more capital to help create jobs, fund innovation, and support wider economic growth in the EU.

3. The European pensions problem: the EU does not so much have a long-term capital problem as a pensions problem. Insurance assets in the EU are roughly comparable in size to other economies and account for nearly two-thirds of the long-term capital in the EU. The real problem is that pension assets – which face far fewer restrictions on what they can invest in – are tiny in the EU. Bigger pension assets could move the dial, but today they only represent 31% of EU GDP, a fraction of the scale in markets like Canada, Australia, or the UK.

4. The perfect example: pensions are a good example of what it means to build EU capital markets from the bottom up: the level of pension assets in any given EU member state is entirely a national political and social issue. There is nothing at an EU level to stop Italy, Spain, or Austria from developing the same sort of pension system and eventually having the same sort of scale of assets as the Netherlands, Denmark, or Sweden.

5. The poster children: it can be politically challenging for EU member states to try and take inspiration from the UK or US. The good thing is that they do not need to: there are plenty of examples of countries in the EU itself that have developed deeper pools of long-term capital. The Netherlands and Denmark together account for more than half of the EU’s total pension assets, but only 8% of EU GDP.

6.The role model: pension assets in the Netherlands are more than twice the size of Dutch GDP. Participation in occupational pension schemes is quasi-mandatory, contribution rates are adequately high, management fees are low, and they have a collective approach to risk-sharing. The cross-industry structure of the system means that Dutch pension funds are huge, which significantly increases efficiencies and lowers costs.

7.A lot of potential: relative to GDP, the size of funded pensions in the two largest EU economies – Germany and France – is only a fraction of those in the Netherlands and Denmark. Pension reforms are underway in both Germany and France, but they will likely not move the dial, and more significant changes will be needed.

8.Looking east: there are a number of high-potential markets in the east of Europe, but not all have identified capital markets development as an urgent issue. Poland, for example, has a dedicated capital markets development strategy, whereas recent reforms have left Hungary with an unfunded, pay-as-you-go one-pillar pension system that fully relies on the government budget’s ability to pay future retirement incomes.

9.Key building blocks: you cannot copy and paste a pension system from one country to another market, but there a few common essential building blocks that can make a difference such as starting reforms sooner rather than later; introducing mandatory funded pensions and auto-enrolment; offering good incentives; adopting a collective approach with efficient vehicles; and building political and public support for reform.

10.Tough decisions ahead: there is no silver bullet or magic wand that can create bigger and better capital markets in Europe out of thin air, and we would like to see more debate among national governments, finance ministries, and regulators about the sort of measures individual member states can and should take.

Acknowledgments:

I would like to thank William Wright for his support and feedback and our members for supporting our work on bigger and better capital markets. Any errors are entirely my own.

Paper – From Big Bang 2.0 to the Edinburgh Reforms

January 2023 • Topic: Rebooting UK capital markets • by By William Wright and Maximilian Bierbaum

It was not that long ago that the UK government was hailing Big Bang 2.0 as a radical programme of reforms to unleash the City of London and turbocharge the economy. After the short and chastening premiership of Liz Truss, the end result was the ‘Edinburgh Reforms’, a package of more than 30 reforms published with a lot less fanfare last month. This short paper drills down into the reforms, outlines the journey from Big Bang 2.0 to Edinburgh, and looks ahead to the long and complicated process of rebooting UK banking, finance, and capital markets to better support the UK economy and strengthen London’s post-Brexit competitiveness as an international financial centre.

New Financial relies on support from the industry to fund its work. If you would like to enquire about receiving a copy of the report, please click here.

Depending on your perspective, the Edinburgh Reforms are either ‘a bold collection of reforms’ (Jeremy Hunt); ‘a missed opportunity’ that is ‘too slow, too narrow, and too timid’ (The Daily Telegraph); a risky ‘bonfire of burdens on the City’ (Robert Peston); or ‘an extremely dangerous and wrong path to follow’ (Sir John Vickers). We think the reality is more prosaic.

>>> In summary

• A sensible package: the Edinburgh Reforms represent a broadly sensible but sometimes disjointed collection of mainly evolutionary measures to rework the post-Brexit framework for banking and finance in the UK.

• A political pivot: the reforms mark a welcome shift in rhetoric away from Big Bang 2.0 and de-regulation without a significant shift in substance. While some people have criticised the package as ‘déjà vu all over again’, it is hard to argue that they would have been improved by the addition of some big political surprises.

• A technical exercise: the reforms reflect the huge amount of often complex, important, and technical work that has been done over the past few years with more than 30 reviews and consultations in every corner of the industry.

• The tip of the iceberg: the reform package manages to look at first glance like an extensive laundry list of proposals with a little bit of something for everyone, while simultaneously disguising some genuinely ambitious and wide-ranging reforms where a lot of the heavy-lifting has already been done or is being done elsewhere.

• Full speed ahead? Many in the industry may find the pace of change frustrating, but the reforms highlight that even when politics, regulation, and the industry align, reform is a lot harder and takes a lot longer than most people might like. The Future Regulatory Framework that is embedded in the reforms should enable this process to accelerate.

• A clearer strategy: the danger with a package of 31 measures is that it looks like a long ‘to do list’ that would benefit from a clearer strategic plan to prioritise them, connect them, implement them, and measure them.

• A bonfire of regulation? Disappointing though it may be to cheerleaders and critics alike, the reforms do not represent any sense of a bonfire of regulation, ripping up the rulebook, or putting the UK back on the path to another financial crisis.

• The Brexit effect: in many cases they do not represent a significant ‘Brexit dividend’. Roughly half of the measures have nothing to do with the EU or Brexit, and in many of the areas that do, the EU is also reviewing its own rules or has already done so.

• The end of the beginning: in many cases, they are not so much ‘reforms’ as ‘promises to think about potential reforms’. We counted 16 new reviews, consultations and taskforces, and many of the measures will include additional consultations in future. This process of reform has a very long way to run.

• More radical thinking: while the reform package answers the immediate exam question of how to reform the UK framework, we think an opportunity has been missed to outline some more radical structural solutions that would have a more substantial long-term impact.

Report – Financing the transition

December 2022 • Topic: A reality check on ESG • by Christopher Breen

Energy companies require more than $1 trillion per year in ‘transition finance’ to decarbonise their operations and hit their net zero targets by 2050.  This report shows that transition finance as it stands is a long way short of raising the required amounts to clean up the energy sector; analyses why transition finance has not taken off in the same way as green finance; and outlines some ideas on how issuers, investors, investment banks, and policymakers can move the dial on transition finance.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the paper, please click here.

Since the Paris Agreement was adopted in 2015 to limit global warming, companies, governments, and markets have been trying to direct finance and investment to projects that will decarbonise society and create a more sustainable economy. While much of the current debate focuses on ‘green finance’, this report focuses on the less popular but important issue of ‘transition finance’ and the role of capital markets in helping the most polluting companies in the energy sector reduce their impact on the environment and support the transition to net zero by 2050.

Transition finance is an inconvenient truth in the debate on climate change: in order to ensure a stable and orderly transition, energy companies and other high-emitting companies will need to be become greener before they can become genuinely green. This means more investment in ‘light brown’ projects focused on reducing their environmental impact. The current energy and cost-of-living crisis – a direct outcome of Russia’s invasion of Ukraine – shows what happens when society and the economy are too dependent on carbon-intensive fuels. But most oil and gas companies are resisting the transition and are still channelling the vast majority of the funding they raise in the capital markets into ‘business as usual’ activities.

The value of transition and green finance – which, combined, we call ‘low-carbon finance’ – raised by the total energy sector has doubled in nominal terms since 2015. But for fossil fuel companies, which account for two thirds of carbon emissions in the sector, low-carbon finance only represents a fifth of their capital raising. The majority of financing is still going towards ‘business as usual’ projects such as oil exploration and coal extraction, and the majority of fossil fuel companies are a long way short of the sort of investments they would need to meet their net zero targets by 2050.

This report defines what we mean by ‘transition finance’ and ‘green finance’; gives an overview of the state of low-carbon financing across the energy sector; and zeroes in on the most carbon-intensive companies. We then provide a breakdown of transition finance by instrument and offer insight into oil and gas companies’ capital expenditure commitments. The final section offers some perspectives on why the labelled transition bond market has failed to take off, and what steps investors, asset managers, and policymakers can take to move the dial on transition finance.

To measure green and transition finance, we base our definitions on the EU Taxonomy’s definitions of green and transitional activities. We define ‘business as usual’ and ‘bad’ company operations as those that delay, rather than accelerate, the transition to net zero.

Here is a short summary of this report:

1) Steady growth

Since the Paris Agreement in 2015, the value of low-carbon capital raising by the energy sector (including ‘transition’ and ‘green’ finance) has doubled in nominal terms to more than $550bn a year. The share of low-carbon finance that was raised by ‘bad’ companies in the energy sector (or those that cause the most carbon emissions) has also increased to just over a third of low-carbon finance from energy companies last year. This growth in low-carbon finance is a welcome development as the world faces an energy crisis and a climate emergency. But nearly 60% of capital raising by energy firms (and 80% of capital raising by fossil fuel companies) is still being channelled into ‘business as usual’ activities.

2) Reaching net zero

Although low-carbon investment in the energy sector is increasing, it is nowhere near where it needs to be. Of the total $558bn low-carbon finance raised in 2021, transition finance made up $284bn – a figure that needs to quadruple (and quickly) to reach the levels required for a stable and orderly transition to net zero. Given that organisations like the Intergovernmental Panel on Climate Change (IPCC) argue that no further development of fossil fuel facilities can be made if the world wants to reach net zero by 2050, it is a worrying sign that there are still very high levels of ‘business as usual’ financing. Turning the tables and transforming ‘business as usual’ financing into ‘transition’ and ‘green’ financing will require issuers, investors, investment banks, and policymakers to reassess the transition in the energy sector.

3) A lack of clarity…

One of the biggest challenges for transition finance is that it is not as clearly defined as green finance. The aim and urgency of transition finance are clear – to help finance rapid change in high-emitting sectors and accelerate the path to net zero. But the lack of a detailed taxonomy for transition finance and a lack of clarity over the commitment of energy firms to the transition has held back the market. One example is the failure of labelled transition bonds to take off: while energy firms issued nearly $250bn in labelled green bonds between 2015 and 2021, they raised less than $10 billion from labelled transition bonds over the same period.

4) …and a lack of ambition

The failure of labelled ‘transition bonds’ is accompanied by an apparent lack of ambition and commitment to ‘transition plans’. We analysed the transition plans of 20 of the largest oil and gas majors: three quarters of those plans do not address the majority of emissions from these companies, and provide little detail on how companies will achieve their targets. The recent work by the Transition Plan Taskforce is promising, but it is up to the companies to set more ambitious and detailed targets.

5) Uneven investment

Although the worst polluting companies make up more than two-thirds of emissions and three-quarters of capital raising by energy companies, they raised only a fifth of total low-carbon investment between 2015 and 2021. The remaining four-fifths of low-carbon financing was raised by companies that we have labelled ‘transitional’ and ‘green’. For low-carbon investment – and in particular, transition finance – to work, the majority of it must go toward the worst polluting sectors and help replace fossil fuels.

6) Still ‘business as usual’

Of the total capital raising by the global energy sector between 2015 and 2021, almost a third was low-carbon finance, split roughly equally between green and transition. But for ‘bad’ companies – or those that are the worst polluters – less than 10% of their total capital raising was green or transition finance. More than 90% of financing for ‘bad’ companies was ‘business as usual’, with much of that financing marked for ‘general corporate purposes’ like oil exploration and coal extraction.

7) A shift in capex?

One tiny step in the right direction when it comes to financing the transition is the increase in the share of capital expenditure (capex) that is being allocated to low carbon investments by the most carbon intensive firms. Our analysis of capex at 20 of the largest oil and gas majors shows that they allocated $12bn in capex to low carbon projects last year, nearly double the level of previous years. Their own projections show this increasing to $42bn by 2030. However, it is important to note that this only represents 6% of their combined capex last year and will still only represent 16% of their total projected capex by the end of the decade. This is nowhere near where it needs to be to transform the sector.

8) On the rise or plateauing?

Based on preliminary data for 2022, it looks like the record-breaking value of low-carbon capital raising in 2021 has already plateaued. Growth in 2022 has stalled and the overall shares of ‘business as usual’ and low-carbon financing from the energy sectors are set to remain about the same as last year. This is particularly worrying given that oil and gas companies are enjoying a record year in profits. Firms are returning money to shareholders at a rate of more than $10 for every $1 invested in green or transition finance. This may give the impression that fossil fuel companies are not fully committed to the transition – perhaps not entirely surprising given that the return-on-investment projections on ‘business as usual’ projects are higher than on low-carbon projects at current prices. To paraphrase St Augustine’s famous prayer: ‘Lord make me sustainable, but not yet’.

9) Small but important role for equity

The loan market is the biggest source of transition finance in the energy sector, accounting for just over 50% of all transition-related capital raising, closely followed by the corporate bond market with 45%. While equity markets make up only a small share of transition finance, more than half of all equity raised in the energy sector was by green or transition companies, and equity markets are an important source of transition finance for smaller and medium-sized renewable energy firms.

10) The challenges ahead

While there has been a steady increase in the value of transition and green finance, it is nowhere near enough to transform the worst polluting companies. In order to get back on track, these companies will need to demonstrate a stronger commitment to the transition, integrate their transition plans into their strategy, and provide investors with more detailed and coherent transition plans. Investors and intermediaries will also need to develop a more consistent and robust framework for engaging with energy companies on transition finance. Without significant progress – and fast – it is unlikely that the energy sector will be able to reduce its impact quickly enough, which is in turn likely to prompt policymakers and investors to penalise the sector.

Acknowledgements

I would like to thank Maximilian Bierbaum for his support on this report, William Wright for his insight and feedback, Dealogic for providing access to much of the data, and our members for supporting our work on sustainable finance. Any errors are entirely my own.

The mystery of the missing jobs in UK banking and finance

December 2022 • Topic: Capital markets • by William Wright

Something funny seems to be going on with the banking and finance industry: the number of jobs in the ‘jewel in the crown’ of the UK economy is shrinking. As the industry prepares for ‘Big Bang 2.0’ the number of people employed by the industry has fallen to its lowest level since shortly after Big Bang 1.0 more than 35 years ago.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the paper, please click here.

In June 2022, the financial services industry employed 1.068 million people in the UK, according to the latest available data from the ONS. That’s a lot of people – just under 3% of the total UK workforce – but it’s the lowest level since September 1987. The number of jobs in the industry has been falling for the past three years and the rate of decline appears to be accelerating.

The industry employs 76,000 fewer people today than as recently as September 2019; 61,000 fewer than when the UK left the EU at the end of 2020; and 51,000 fewer than in June 2016 when the UK voted for Brexit (a decline of between 4.5% and 6.6% depending on which period you choose). This wasn’t supposed to happen to one of the UK’s most successful and important sectors after Brexit.

On our calculations, if employment in financial services had kept up with the growth in jobs in the rest of the economy over these time periods, there would be something like 85,000 to 105,000 more people working in the industry today than there actually are. So, what’s going on? And where have these jobs gone?

The global financial services industry has had a bruising few years, but this effect is not happening in most other comparable markets. Employment in banking and finance has grown over the past six years in the US, Canada, Australia, France, Switzerland, and Japan, although it has shrunk in Germany and Italy.

There is no single reason why the number of jobs in financial services in the UK has been falling for the past few years, but we think there are a number of interconnected factors at work: the direct impact of Brexit in terms of relocations; reduced inward investment in financial services over the past few years; more firms ‘off-shoring’ support staff to cheaper markets such as Poland; advances in IT, systems, and productivity; retail banking branch closures and the shift to online / app-based finance; and the success of UK fintech (successful fintech companies destroy jobs in traditional finance).

We don’t know the answers but we’ve written short paper outlining the facts. To request a copy of the paper please contact us on info@newfinancial.org and please let us know your thoughts on what is going on and what we may have missed in the comments below.

Report – A New Narrative: how (not) to talk about banking and finance

November 2022 • Topic: Making a better case for capital markets • by William Wright

At New Financial, we believe that banking, finance, and capital markets can and should be a force for social and economic good. At a time when the economy needs all the help it can get, the industry has a powerful role to play in supporting a recovery. But in order to fulfil that potential, it needs to better engage politicians and the wider public. A good place to start is a new narrative that frames the value of the industry in terms of the impact it has on the wider economy, customers, and the everyday lives of millions of people in every corner of the UK.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the paper, please click here.

>>> What is the problem?

For everyone working in the industry, it is self-evident that it plays a vital role in channelling investment into the economy to support jobs and growth, and helping millions of people manage risk and save for their futures. But to most people outside of the industry, what goes on in the City of London every day and what the industry actually does is complex, abstract, and remote. The further you get from London, the less relevant the industry may seem. Most people and most politicians do not trust the industry, they do not understand it, and they do not engage with it. This presents a huge political and economic risk – and a big opportunity. To ensure the industry can fulfil its potential and perform its important ‘day job’ of supporting the wider economy, it will need the buy-in and support from politicians, customers, and the wider public. A good question to start with is ‘why should my mother care about what this industry does?’

>>> What is wrong with the current narrative?

The industry has traditionally talked about itself in terms of itself (‘we make an important contribution to the UK economy because we employ a lot of people, and we pay a lot of tax’) and prefers talking about big abstract numbers than smaller but more relatable ones (‘there are £10 trillion of assets under management in the UK’). Of course, the industry is a vitally important sector in its own right and is a rare example of a world-leading industry based in the UK. It employs around 1.1 million people across the UK and generates more than 10% of tax receipts.

But this narrative can reinforce the abstract nature of the industry and a sense of ‘otherness’ to many people. It suggests that the industry sees its business as an end in itself and misses the opportunity to engage with people about what investment banks, or insurers, or asset managers actually do, and the impact they have on people’s everyday lives. Less charitably, it can sometimes sound too much like ‘you may not like us, but we pay for your hospitals’.

>>> Why should you care?

It may be tempting for the industry and for individual firms to think they can keep their heads down, focus on the day job, or adopt the ‘Millwall defence’ of ‘nobody likes us, we don’t care’. That would be dangerous. Changing the way in which the industry talks about itself goes way beyond putting a positive spin on what it does. Finance operates in a highly regulated and politicised framework, and that framework is set by politicians who are in turn influenced by the views of their voters and social norms. Like it or not, much of the public’s sense of inequality and anger with capitalism, big business, and the elite is channelled towards ‘the City’. This makes the industry an easy political target.

>>> Why now?

During the Covid crisis, the industry showed for the first time in more than a decade that it was part of the solution rather the problem in supporting millions of companies and individuals through the pandemic. The economy needs all the help it can to rebuild, and the industry has a rare opportunity to reset its relationship with politicians and wider society for decades to come. In the midst of three crises – the economic crisis, the cost-of-living crisis, and the climate crisis – the industry has an opportunity to demonstrate how it can make a tangible difference. It also needs to think about how best to engage with a potential Labour government with a different political agenda in the next few years.

>>> What would a new narrative look like?

A new narrative would be far more focused on the industry’s day job, its underlying purpose, and the impact of what it does on the everyday lives of millions of ordinary people in every corner of the UK. It would highlight how the industry oils the wheels of the economy more than how it benefits from doing so. It would be framed in terms of how the industry helps its customers and clients achieve their goals rather than on the headline outputs from the industry, and it would be more focused on outcomes for the industry’s customers and end users than on outcomes for the industry itself. It would reference the industry’s direct contribution in terms of employment, contribution to GDP, and tax receipts, but more as a happy consequence of its day job than as an end in itself.

It would use simple, accessible language rather than jargon; smaller and more tangible numbers instead of abstract billions or trillions; and include concrete, local examples that people across the country can relate to. In short, it would engage people by showing them – rather than just telling them – why the industry matters to the UK economy, to their local community, and to their everyday lives.

>>> A starting point for discussion

One challenge for the industry is the ‘Tale of Two Cities’. It is important to separate the ‘domestic’ role of the industry (supporting UK companies and investment) from the separate but related international role of the City (as a host or venue for ‘international activity’). This poses two separate issues: first, a lot of the international activity has a less obvious societal benefit (beyond direct employment and tax receipts); and second the industry often conflates the two when it is convenient to do so (‘we need to make London more competitive to drive investment across the UK’). The thrust of this paper is on the domestic side of the business, and here is a headline draft of what the new narrative might look like:

The banking, finance, and capital markets industry touches virtually every aspect of millions of people’s daily lives. It directs capital into the real economy to help companies raise money to invest in jobs, innovation, infrastructure, growth, and prosperity in every corner of the UK. The industry helps millions of individuals across the country to save and invest for their future and for their retirement by investing in these and other assets, creating a virtuous circle of investment and growth.

The narrative for London’s role as a leading international financial centre is harder to frame in these terms – we would be keen to hear your suggestions – but it might focus on how the City enables overseas investment in the UK, connects the UK to the global economy, and generates high levels of direct employment, exports, and tax receipts that directly fund public services for the benefit of everyone in the UK.

>>> A note on this paper

This paper deliberately simplifies the problem and the industry’s approach to it, but I hope it is not too simplistic. It is at times deliberately challenging and provocative, without being too critical. In the past few years, the industry and many individual firms have made significant progress in how they think and talk about what they do, but there is still a lot of scope for improvement. The paper is a work in progress and we look forward to improving and updating it with your feedback and suggestions. Of course, a new narrative on its own will not be enough, but it is a good place to start: the industry will have to walk the walk as well. If the industry talks about itself in a different way, it will start to think about itself in a different way, and ultimately operate in a different way. At New Financial, we are developing a model to help firms and industry sectors measure the social and economic value of what they do in a different and more engaging way. We would be delighted to discuss it with you.

Report – A reality check on Big Bang 2.0

November 2022 • Topic: The politics of capital markets • by Maximilian Bierbaum and William Wright

For a few brief weeks, the UK government had a new tone towards financial services and a new sense of ambition, with a focus on ‘Big Bang 2.0’ and wanting to turn London into the ‘world’s leading financial centre’. While this reaffirmed commitment to the sector was welcome, this paper aimed to cut through some of the noise and provided a reality check on reforming UK banking and finance.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the paper, please click here.

It is not controversial to say that the Chancellor’s ‘mini budget’ and the market reaction to it made quite some noise. In this short paper, we are not trying to provide an economic or political assessment of those announcements. Instead, this paper aims to frame some of the new and not-so new announcements on reforming UK banking and finance in the context of recent events.

Our original thesis was that most of this new tone was a political rhetoric rather than substance. We argued that government was promising reforms in the name of ‘international competitiveness’ that most of the industry had not been asking for (such as scrapping the bonus cap) while not giving the industry what it would really like or what it thinks would really move the dial (such as changes to the taxation of banks).

Since we published the paper in October the government has descended into chaos: the Prime Minister and Chancellor of Exchequer have been replaced, and the government has rowed back on almost all of the pledges in the ‘mini budget’ except the bonus cap and the rise in national insurance.

There is no question that reform is needed to enable the industry to better support the UK economy and to strengthen London’s attractiveness as an international financial centre. At New Financial, we have long argued that post-Brexit the UK has both the opportunity and the imperative to adjust the framework for banking and finance that it had inherited from the EU. However, not all of the recent and expected announcements are quite what they seem, and many of them will be easier said than done. We hope this paper provides some helpful context for these reforms to ensure that the UK reforms the right things, in the right way, for the right reasons.

There are several recurring themes running through this paper:

• The UK economy needs all the help it can get in the wake of Brexit, Covid, and the war in Ukraine, and the banking and finance industry can play a vital role in supporting a recovery.
• In thinking about reforms, it is important to separate the domestic role of the City of London and its role as a host for international activity – and it is important to focus on outcomes for customers and the wider economy more than outcomes for the industry itself.
• Competitiveness should not become an end in itself, and competitiveness is not merely the mechanical output of reforms to tax and regulation.
• And, while many of the immediate solutions may seem obvious, many of the problems are far more ‘upstream’ in the economy and embedded by decades of well-intended regulatory reforms. Every change at one point in the chain of capital markets has a knock-on and often unintended consequence elsewhere in the chain.

Rebooting UK capital markets and rethinking the future of the City of London has been a big part of our work at New Financial over the past few years. We have published reports and hosted events on stock markets, the listing review, the secondary capital raising review, unlocking productive
investment, and Solvency II.

Here is a 10-point summary of this paper:

1) A reality check: this paper provides a reality check on reforming UK banking and finance. It frames the reforms that have already been announced and those which are expected in the next few weeks in the context of recent events, the challenges the UK is facing, and the different roles of the City of London to help ensure the UK reforms the right things, in the right way, for the right reasons.

2) The problem: the framework inherited from the EU was designed for 28 member states and is not tailored to the unique dynamic of UK markets and its role as a global financial centre. Brexit provides opportunity and imperative to rethink this framework, but there is no silver bullet to reinvigorate UK capital markets. Brexit has damaged parts of the City, and the UK needs to make up lost ground.

3) A new tone: in the first month since the new government has been in office, ushering in ‘Big Bang 2.0’ and wanting to make London the ‘world’s leading financial centre’ have been high on its agenda. This reaffirmed commitment is welcome, but many of the reforms will be far less headline-grabbing.

4) A ‘tale of two cities’: reforms that would help boost the ‘domestic’ role of the City – supporting the real economy – need to be clearly separated from reforms that would boost the (much bigger) ‘international’ role of the City as a host and venue for international activity. Bundling up or conflating the two would lead to fuzzy and less effective policies.

5) The work so far: over the past few years, the UK government and regulators have published more than 30 major reviews and consultations. There are currently more than 130 live regulatory briefs underway in the UK. With the next election due in the next few years and added pressures from external shocks, the government should move quickly to implement agreed proposals.

6) A political disconnect: the government seems to be running ahead of the industry politically. It is promising reforms in the name of ‘international competitiveness’ that the industry has not been asking for (such as scrapping the bonus cap) while not giving the industry what it would really like (such as changes to the taxation of banks). Over and above the reforms embedded in the Financial Services and Markets Bill, the list of what the industry did not get is longer than what it did.

7) Institutional strength matters: competitiveness is not merely the mechanical output of reforms to tax and regulation. The reaction in the past few weeks to the ‘mini budget’ shows how quickly reputation and trust can be damaged. In pushing through reforms, the government should be careful
not to undermine the credibility of the UK or of the City of London in areas such as financial discipline, political predictability and stability, and the independence of key institutions.

8) The EU angle: all regulation is political, and there are still many areas of friction between the UK and the EU. While the UK is now free to reform the framework it inherited from the EU, any reforms and any sense of ‘deregulation’ will likely be met by an equal and opposite response from the EU in areas such as clearing, delegation for asset management, or the recent desk-mapping exercise.

9) Part of the solution: the UK economy needs all the help it can get in the wake of Brexit, Covid, and the war in Ukraine. Banking and finance have a huge role to play in fuelling a recovery – but the industry needs to address its poor reputation, low levels of trust, and low levels of understanding. It
would help if the industry made a more constructive and tangible case for what it does.

10) Some more radical ideas: most of the ideas for reform have already been trailed but we think the government should consider five more radical ideas to help reinvigorate UK banking and finance:
i) abolishing the debt/equity tax differential, ii) creating a sovereign wealth fund, iii) exploring a hybrid market that would sit between private and public markets, iv) adopting a collective approach to DC pensions, and v) the introduction of financial health checks.

Report – The politics of EU capital markets

September 2022 • Topic: The politics of capital markets • by Christopher Breen, Maximilian Bierbaum, and William Wright

The report shows that building bigger and better capital markets in Europe is a long, complex, and technical project – but above all it is a political project.  This report identifies more than 20 specific types of political resistance to developing capital markets in Europe, and outlines some of the tough political decisions that European and national authorities will need to take to unlock the potential benefits of capital markets for the EU economy and its citizens.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the report, please click here.

The politics of EU capital markets

This is our eighth annual report on the state of EU capital markets, and this year it focuses on the politics of capital markets. It identifies more than 20 different but interconnected types of political resistance to the capital markets union (CMU) project and outlines how to address them.

European capital markets are heading slowly in the right direction, but they are still not as developed as they could or need to be. CMU needs a combination of EU-wide ‘top down’ measures to encourage harmonisation and national-level ‘bottom up’ measures to increase capacity. While the main achievement of CMU so far is to have put capital markets on the political agenda across Europe, it is not a political priority in most member states and faces many political hurdles ahead. Member states often resist ‘top down’ efforts to drive progress, while simultaneously shying away from or delaying the introduction of their own ‘bottom up’ initiatives. 

In light of Brexit, Covid, Russia’s invasion of Ukraine, and the subsequent energy crisis, it is understandable that EU governments do not always have enough bandwidth or political capital to focus on CMU. However, we think strong capital markets would strengthen Europe’s economic resilience, help fuel an economic recovery, and help address systemic challenges such as demographic change and the transition to net zero.

With this report and our unique analysis of the size, depth, and growth potential of capital markets across Europe, we hope to underline to European policymakers the urgency and benefits of developing bigger, better, and more integrated capital markets. The good news is that European capital markets are bigger and deeper than they have ever been. The not-so-good news is that companies in the EU are still heavily reliant on bank lending for their funding, and there is a stubbornly wide range in the depth of capital markets across the EU.

Here is a short summary of the report:

1.A long-term game: building bigger, deeper, and more integrated capital markets in Europe requires a combination of EU-wide ‘top down’ measures to encourage harmonisation and national-level ‘bottom up’ measures to increase capacity. CMU will not be built in Brussels but in each and every member state. It is a long-term game and will take decades to become a reality.

2. The politics of capital markets: there is noticeable political resistance to CMU in member states across Europe. Driving CMU forward requires understanding and addressing five different but interconnected types of political obstacles: deeply rooted philosophical, cultural, and political scepticism; a desire to protect domestic markets; a fear of loss of sovereignty and control; tension between Brussels and member states; and the limited political bandwidth available for longer-term and unpopular projects.

3. Bigger and deeper: EU capital markets have grown consistently since the launch for CMU in 2015 and, relative to GDP, are now deeper than ever before (overtaking their previous peak in 2007 before the financial crisis). In the EU, capital markets are moving in the right direction, but they are still not as developed as they could be.

4. A wide range in depth: every year this report measures the depth of EU capital markets in different sectors of capital markets activity in all EU member states, and every year we see a huge range in depth that shows little sign of narrowing. The range in depth of capital markets across the EU is far greater than the difference in depth between the EU and the US, or the EU and the UK.

5. A Franco-German duopoly: after Brexit, France and Germany have become the largest and second largest (or vice versa) EU markets in 14 out of 20 capital markets sectors. In terms of size, France and Germany combined account for more than 50% of EU activity in five sectors, and for more than 45% of activity in another four.

6. A rising star: after a bumper few years in equity markets activity, capital markets in Sweden are now almost as deep as in the UK. Over the past few years the depth of capital markets has grown much faster in Sweden than in the rest of the EU and it has overtaken the Netherlands as the poster child for EU capital markets. It remains to be seen whether Sweden can maintain this depth, but it shows what is possible.

7. The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding despite some progress over the past decade. In the face of economic headwinds, structural challenges, and regulatory reform, banks will be unable to provide the necessary funding for European companies on their own.

8. Deeper pools of capital: deep pools of long-term capital such as pensions and insurance assets – as well as direct retail investment – are the starting point for deep and effective capital markets. But pensions assets in the EU remain less than a third as big relative to GDP as in the UK. Shifting more savings from bank deposits to investments would deploy more capital to help drive a more sustainable recovery in the longer term.

9. Game-changing growth: there is huge potential for growth in capital markets across the EU: an additional 4,800 companies could raise an extra €500bn per year in capital markets and an additional €12tn in long-term capital could be put to work in the economy. Progress towards this growth would significantly reduce the reliance of the EU economy on banks, boost growth, innovation, and jobs, and provide a more sustainable future for EU citizens.

10. Tough decisions ahead: there is no silver bullet or magic wand to address the many types of political resistance to CMU. To drive more growth and integration in European capital markets, CMU needs a political reset to inject new urgency into the project, a new narrative, and a consistent and enduring framework based on core principles.

Methodology & acknowledgements

We analyse the size and, relative to GDP, the depth of capital markets across pools of capital, equity markets, bond markets, loans & securitisation, assets under management, corporate activity, and private equity, venture capital & crowdfunding in all 27 EU member states. In each sector and country we also estimate the growth potential in terms of the number of additional companies that could get funding, how much they could raise, and as a percentage increase on the current level of activity.

With thanks to Christopher Breen for collecting and analysing the wealth of data that underpins this report, William Wright for his support and feedback, Dealogic and Invest Europe for providing access to their data, and our members for supporting our work on bigger and better capital markets.

Report – A reality check on green finance

June 2022 • Topic: A reality check on ESG • by Christopher Breen

This report shows that while green finance in Europe has grown rapidly to more than €300bn last year alone, it is still a long way short of the sort of levels required for Europe to meet its net zero targets – and still only represents about 12% of all capital markets activity. The report drills behind the headline numbers, analyses the growth and trends in different sectors and types of green finance over the past five years, and highlights some of the challenges ahead.

New Financial is a social enterprise that relies on support from the industry to fund its work. Download a copy of the infographic here and request a copy of the report, please click here.

For a UK-specific version of the report, drills down into activity in the UK market, and highlights some of the big differences in green finance between the UK and EU please click here.

The growth and penetration of green finance

In recent years, the climate emergency has risen to the top of the global political, business, and financial agenda. In response, the EU and the UK have established themselves at the forefront of building clean and more sustainable economies. The recent invasion of Ukraine has increased the urgency of addressing this problem: while many European governments have (temporarily?) turned back towards fossil fuels, the war has focused minds on energy security and the potential for renewables and other forms of clean energy to reduce Europe’s dependence on fossil fuels and accelerate the shift towards a more sustainable and resilient energy supply.

One of the most critical tools to enable this transition is finance: if Europe is to invest anything like the sums needed to meet its net zero commitment by 2050 it will need massive funding from the capital markets. The broad estimates of the sums involved range from around €600bn to €1 trillion per year in green investment. This report provides a ‘reality check’ on Europe’s progress so far in green finance and shows that while it has grown rapidly, it is still a long way short of where it needs to be.

Green finance is about a lot more than green bonds. We estimate that European capital markets raised more than €750bn in green finance from 2017 to 2021 across bond, equity, and loan markets, with more than €300bn raised in 2021 alone. While our estimate is higher than others, these numbers probably need to double or triple again – and quickly – to enable the sort of investment required. In addition, our report raises questions about the role of carbon intensive industries in driving the transition and the role of the capital markets in funding them.

This report addresses the following questions:

• What is the growth, value and penetration of green finance in Europe from over the past five years?
• What types of issuers and companies are the main users of green finance?
• What types of instruments (ie. bonds, loans, equity) are being used to channel funding to green investment?
• What is the composition of corporate green finance, and what types of companies are raising capital?
• And how ‘green’ is green finance?

Here is a short summary of this report:

1) Rapid growth

The value of green finance raised in the capital markets in the EU and UK has risen significantly over the past five years to over €300bn last year. Since 2017, green finance activity has increased fivefold across bond, equity and loan markets, and it doubled last year alone. We estimate that more than €750bn has been raised by corporates, financials, and governments in green finance over the past five years, with corporate activity playing the leading role. Green finance is about a lot more than labelled green bonds, which account for about two thirds of overall green finance activity. Our headline estimate is higher than some other estimates because we have included our estimate of explicitly green activity in equity markets, loan markets, and venture capital.

2) Towards net zero

Although green finance is big and growing fast in Europe, the level of activity is a long way short of the sort of investment that European governments, corporates, and financials need to fund the transition to a clean energy economy and meet their net zero targets. The range in annual investment required in Europe is between €600bn and €1 trillion, which suggests that green finance activity will have to double or even triple again – and quickly – to ensure that the European economy is on track to reach net zero.

3) A lack of penetration

For all of the noise around green finance and the urgency of addressing the climate emergency, green finance still only represents a relatively small proportion of capital markets activity in Europe. Overall, we estimate that green finance accounted for just 12% of capital markets activity across bond, equity, and loan markets last year. The good news is that this penetration is increasing: over the five-year period it was just 7%, but the overall penetration of green finance doubled last year. Penetration is highest in the corporate bond market (16%), slightly lower in loans (12%), and much lower in equity markets (5%).

4) An important metric

Despite the growth in green finance there is a disconnect between the amount of capital being raised by ‘good’ companies whose primary business activity is actively trying to address climate change (such as renewable energy firms), and ‘bad’ companies whose primary business is actively delaying the transition to net zero (such as fossil fuel companies). Over the past five years, ‘bad’ companies have raised 18 times as much money in capital markets as ‘good’ companies, although this ratio fell last year for the first time below 10 to one. This (perhaps simplistic) ratio reflects the difference in scale and maturity of these companies, but we think it’s an important metric to watch.

5) Playing catch up

The UK is lagging behind the EU in green finance: UK issuers raised €106bn in green finance over the past five years, representing 14% of all green finance in the capital markets in Europe. This share is significantly lower than the UK’s share of over 20% in all capital markets activity in Europe. This is reflected in the lower penetration of green finance in UK capital markets: over the past five years, green finance accounted for just 5% of all capital markets activity in the UK, roughly half the level as in the EU and roughly where the EU was four years ago.

6) A debt-driven market

The vast majority – over 95% – of green finance activity in Europe comes from the bond and loan markets. Labelled green bonds are by far the biggest single component of green finance, raising €425bn over the past five years and nearly €200bn last year alone. Companies raised a further €225bn in green finance in the loan markets, including nearly €100bn last year. Corporates are the biggest issuers in the bond market, representing about 40% of all activity over the past five years, ahead of governments (35%) and financials (25%). Across all green finance, corporates account for 60% of activity.

7) A small role for equity

Equity markets – including public equity markets and venture capital investment in cleantech – have raised just €26bn in green finance. This is less than 4% of all green finance and reflects the relatively small scale and immaturity of the standalone green sector in public equity markets. However, activity is growing fast: green equity has increased from €1bn to €13bn over the past five years and doubled last year alone.

8) The good, the bad, and the neutral

The profile of companies that are driving the green finance market is perhaps surprising. Using our taxonomy of ‘good’ and ‘bad’ companies from a climate perspective, just over a fifth (22%) of all green capital markets activity by corporates came from ‘good’ companies such as standalone renewable energy firms. ‘Bad’ companies accounted for more than a quarter of activity (27%) and this green finance adds up to just 12% of their total capital markets funding. Perversely, green finance probably needs more ‘bad’ companies to raise money (because these companies have the highest impact on emissions) and more ‘good’ companies to raise money to accelerate change.

9) How ‘green’ is green finance?

Not all green finance is created equal. We estimate that around 40% to 50% of green bonds are ‘dark green’ and are being invested in projects that will play a significant role in actively driving the transition to net zero. In the loan market, we estimate that only around 40% of all SLLP loans (based on Sustainability Linked Loan Principles) are green in terms of their use proceeds. It is also important to avoid the trap of double counting green finance: more than 50% of the money raised in the green bond market can be allocated by issuers to (re)financing existing projects, and issuers are able to apply this funding retrospectively to projects that are more than two years old.

10) The challenges ahead…

One of the main findings of this report is that while green finance in Europe is growing fast, it is still not enough to meet the required levels of investment for Europe to fulfil its net zero commitments. Policymakers and issuers alike will either need to adjust their targets and expectations (not a great idea) or find new ways to raise more green capital at scale. An essential part of this will be improving the transparency and clarity of green finance, including: better and more consistent definitions of green and not green activity; more information about use of proceeds from green finance; and more robust KPIs, transition plans, and targets. Perhaps the biggest challenge is going to be designing a sensible transition framework: companies that play a significant role in driving climate change need access to capital need to invest in net zero, but they need to be held accountable for their progress.

Methodology & acknowledgements

This report focuses on the size, growth, and penetration of green finance in Europe, which for the purposes of this report is the EU and the UK. We define ‘green finance’ as capital which funds projects that progress the transition to a clean energy economy, such as solar farms, wind turbines, hydroelectric projects, and electric vehicles. In addition to ‘labelled’ green bonds, we analysed activity in the equity, loan and venture capital markets to identify ‘green finance’ based on the use of proceeds of the capital raised. We also split corporates into three (perhaps simplistic) buckets from a climate perspective of ‘good’, ‘bad’, and ‘neutral’. Each bucket relates to a company’s primary activity and whether it is progressing or delaying the transition to net zero. This helps us better understand how different types of companies are using different types of green finance.

With thanks to Sheenam Singhal and Seethal Kumar for their research on this report, William Wright for his support and feedback, and Dealogic and Preqin for providing access to much of the data.

Report: HM Treasury Women in Finance Charter – Annual Review 2021

June 2022 • Topic: Driving diversity • by Yasmine Chinwala, Jennifer Barrow and Sheenam Singhal

This report offers unique insight into what Charter signatory firms – from across the financial services industry – are doing to boost the proportion of women in senior ranks, who has hit and missed their targets, how they are monitoring the impacts of Covid on their workforce and increasing their collection of diversity data. The data provides important benchmarking for signatories and non-signatories alike.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the report, please click here.

2021 was another big year for the Charter, with a third of signatories due to hit their targets.

Highlights of the review:

1. Meeting targets: More than a third (37%) of the 209 signatories analysed in this review have met their targets for female representation in senior management, and a further 41% that have targets with future deadlines said they are on track to meet them.

2. A flat picture overall: For the first time, the average level of female representation has remained flat, at 33% in 2021 compared to 2020.  While two-thirds of signatories (66%) either increased or maintained their proportion of women in senior management, at the remaining third the proportion fell – the highest number of signatories (70) to report a drop in female representation since the launch of the Charter.

3. Fewer misses in 2021: Of the 76 signatories with a 2021 deadline, 45 hit their targets and the remaining 31 missed, down from 44 in 2020. Of the 31 that missed, 19 were close – either within five percentage points or five appointments of hitting their target.

4. A step change in ambition on targets: Signatories’ ambitions for their targets have leapt forward with nearly half (48%) setting a target of at least 40%, corresponding with HM Treasury’s desire for alignment with the FTSE Women Leaders review.

5. Top actions driving change: Signatories still place the greatest emphasis on altering recruitment practices, but they are increasingly focused on developing their own female talent. Some firms are applying the Charter principles of setting targets, introducing accountability frameworks and monitoring progress to drive momentum across their initiatives.

6. Getting to grips with diversity data: Signatories have taken strides forward to expand the diversity data they collect. Nearly three-quarters (72%) of signatories are capturing additional diversity data about their female senior managers, up from 53% last year. Ethnicity, sexual orientation and disability are the most commonly collected datapoints.

7. Monitoring impacts of Covid-19: Signatories reported on how they are adapting as the worst of the Covid-19 pandemic recedes. Priorities are plans for returning to the office, different approaches to hybrid working, and how arrangements are being integrated into business as usual.

8. Accountable at the top table: Accountability is sitting at the highest levels of seniority, with almost all (98%) accountable executives being executive committee members. AEs are taking an increasingly strategic approach, and their role is expanding into new areas, such as sustainability.

9. Linking to pay: After a marked improvement in the quality and quantity of signatory reporting on the link between pay and targets in 2020, this year’s data indicates signatories’ increasing confidence in implementation. Just over half (53%) of signatories believe the link to pay has been effective, and the link is getting more granular, incorporating both personal and corporate goals for a wider group of employees.

10. Publishing updates: Only 59% of signatories published an online update on their progress by the required deadline, and the quality and format of reporting varied significantly. Publishing progress is the only Charter principle that has not consistently improved over the past five years.

For more information on the Annual Review or on New Financial’s diversity programme, please contact Yasmine Chinwala on  yasmine.chinwala@newfinancial.org   

Methodology

This review analyses annual updates from 209 signatories that signed the Charter before September 2020, provided an annual update to HM Treasury in September 2021, and have at least 100 staff. Of these 209 signatories, 16 are reporting for the first time, 32 for the second, 76 for the third time, 33 for the fourth time, and 52 for the fifth time. All data has been anonymised and aggregated, and no data has been attributed without consent. The data was analysed by Sheenam Singhal and Jennifer Barrow under the supervision of Yasmine Chinwala and Panagiotis Asimakopolous. For full methodology, see p29 of the Appendix.

About New Financial: 

New Financial is a think tank and forum that makes the positive case for bigger and better capital markets in Europe. We think there is a huge opportunity for the industry and its customers to embrace change and reform, and to rethink how capital markets work. Diversity is one of our core areas of coverage. 

Acknowledgements:

New Financial would like to thank all our institutional members for their support and particularly Aviva, Virgin Money, London Stock Exchange Group and City of London Corporation for funding our work on the HM Treasury Women in Finance Charter. 

Report: Paper 1: Diversity toolkit for investors

June 2022 • Topic: Driving diversity • by Birgit Neu and Yasmine Chinwala

Paper 1: Why do investors need a diversity toolkit?

This paper, the first in our research series to build a Diversity toolkit for investors, is the introduction to why more corporate diversity reporting is not yet leading to informed decisions or better outcomes for investee companies, and what needs to change.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the report, please click here.

There is a huge variation in diversity reporting from listed companies – from the barest of the bare minimum through to companies producing reams of extensive detail on multiple aspects of diversity. All stakeholders in the DEI discussion, and particularly investors, want to see more consistent qualitative and quantitative information about diversity progress.

A succinct and practical toolkit of questions on diversity topics could improve engagement between asset managers and the companies in which they invest and drive sustainable change in diversity, equity and inclusion.

1. To improve transparency and consistency in corporate DEI reporting

There is a huge variation in diversity reporting from listed companies – from the barest of the bare minimum through to companies producing reams of extensive detail on multiple aspects of diversity. All stakeholders in the DEI discussion, and particularly investors, want to see more consistent qualitative and quantitative information about diversity progress.

2. To join the dots between companies and their investors

Corporate diversity reporting should seek to satisfy the strategic needs of both the investee company and its various audiences, yet there is limited understanding between these groups. Investment decision-making is not the forte of DEI specialists, nor are investors experts on the latest developments in diversity – both can benefit from learning more about each other’s patch in order to improve reporting and how it can be used more effectively.

3. To drive a focus on materiality

Investors’ understanding of the material impacts of DEI (beyond board and leadership composition) are as yet nascent, but as reporting and data analysis improves and streamlines, that understanding will develop and become more focused. Meanwhile, corporate diversity reporting teams are spending more time managing inconsistent demands for data and DEI information, rather than focusing transparency on why, what and how DEI relates to their business strategy and its execution.

4. To build a fuller picture

Diversity is moving from being an operational silo in HR to being strategically driven from the heart of the business through employee, customer, supplier, community and other partner activity. This shift towards enterprise-wide diversity execution and impacts, as well as how diversity-related risks and rewards are identified and managed and by whom, needs to be coherently reflected in reporting and understood by investors. DEI practitioners are the custodians of this story, and they are best positioned to bring it together and communicate it saliently to wider audiences.

5. To rise to the challenge of data

Within the evolution of corporate reporting, DEI data (particularly anything beyond numbers on female representation) is a long-term challenge that requires consistent effort. Investors lament the lack of consistent standards and comparability across DEI strands, company sectors and geographies, yet they extrapolate from incomplete datasets in other areas of investment decision making. But we shouldn’t wait until we have the perfect data set to take action.

Acknowledgements:

Thank you to our members and contacts for their contributions, and particularly the speakers and attendees of our virtual Toolkit event series; to Columbia Threadneedle Investments, London Stock Exchange Group and S&P Global for sponsoring this research; and to our collaborators at the 30% Club Investor Group, particularly Clare Payn with whom we conceived the idea of the Toolkit.

Report: The Future of UK Banking and Finance

April 2022 • Topic: Rebooting UK capital markets post Brexit • by Panagiotis Asimakopoulos, Christopher Breen and William Wright

This report outlines an ambitious blueprint for the future of UK banking and finance in three broad areas: rebooting domestic capital markets to enable the industry to better support the UK economy; improving the international competitiveness of the UK as an international financial centre; and mapping the potential role the UK could play in developing global cooperation and partnerships.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the report, please click here.

New Financial would like to thank Atlantic Council for partnering on this project at a critical time for the UK financial sector and enabling the reform required for the UK to continue to play a key role, in the international financial system.

The banking and finance industry is one of the most successful industries in the UK. As a sector, it makes a huge direct contribution to the UK economy, plays a vital role in supporting the wider economy, and sits at the heart of the global economy as a dominant European and global financial centre. Brexit provides the UK with a rare opportunity – but also an imperative – to rethink its approach to the banking and finance industry. The current position is a good place to start, but faster coordinated action on taxation, regulation, and access to world-class talent is needed to ensure the UK remains well ahead of competitors.

Key Findings:

1. A good place to start: The banking and finance industry in the UK has a strong platform on which to build as it charts a new path.

• A direct contribution: The sector employs 1.1 million people across the UK, accounts for 7% of UK gross value added, and generates more than 10% of all tax receipts.

• Supporting the economy: More than 95% of large UK companies use capital markets to finance investment and manage their risks. UK capital markets are twice as deep relative to GDP as in the rest of Europe.

• A global financial centre: The UK’s role as a European hub is underlined by the fact that in sectors where firms can choose where to locate their businesses, the UK accounts for between 40% of asset management activity in Europe and over 80% of derivatives and foreign-exchange trading.

2. Warning signs: In a number of sectors, the UK has been losing ground over the past few decades. The number of listed companies has fallen by more than 40% in the past twenty years, while the UK’s share of global initial public offerings has dropped from 13% to less than 4% over the same period. The amount of long-term capital invested is far below the levels of comparable developed economies. Brexit has directly caused the relocation of some operations in foreign equity trading and derivatives.

3. Out of line: The UK has been a strong advocate of global standards, but in some areas has become an unfortunate outlier in applying additional rules and constraints. These include the taxation of banking and finance (where the UK has the highest total tax rate), rules on pay and bonuses (where the UK retains EU rules on top of its own rules on clawback), and issues such as ring-fencing (where the UK is the only major market to require a formal separation of retail and investment banking).

4. Growth potential: Our analysis suggests that the UK has the potential to achieve as much as 40% growth in its capital markets. If the UK industry can close half the gap between UK and US capital markets, nearly two thousand additional companies a year could raise an additional $75 billion per year in the capital markets, an increase of around 40% The same analysis suggests a potential increase in pools of long-term capital of around $2.5 trillion. This growth would significantly boost economic growth, innovation, productivity, and investment across the UK.

5. The scope for reform: There are two main types of potential reform. First, addressing the low-hanging fruit left behind by EU rules which are not appropriate for the unique UK market. Many of these have already
been identified in the various reviews and the UK should accelerate implementing agreed changes. Second, regarding UK-specific rules, the UK should be wary of going above and beyond the standards implemented in other markets.

This process of reform is not a race to the bottom but a sensible reappraisal of which parts of the current framework make sense, which don’t, and how the overall framework can be improved while balancing financial stability, customer outcomes, investor protection, and international competitiveness.

6. Priorities for reform: Five broad principles for reform cut across domestic markets and international activity.

• The UK should develop a clear strategy for the future, backed up with metrics and milestones and supported by closer cooperation between
government departments.

• The new rules framework should be dynamic, agile, outcomes based, and data driven.

• Prudential and market policy should not block the industry from supporting the wider UK economy, nor put UK firms at an obvious international competitive disadvantage.

• The taxation of financial services should incentivize wider participation and investment and also serve competitiveness.

• The recalibration of the UK framework should take a “digital first” approach with the aim to take a global lead in areas such as data sharing, open banking and digital IDs.

7. Rebooting domestic capital markets: Domestic markets in the UK are deep, efficient, and liquid. There is, however, scope to reform the framework for banking and finance to help make them more dynamic, and enable the UK industry to better support the government’s levelling up agenda to reduce inequalities among regions, and the transition to net zero carbon emissions.

8. Ensuring the competitiveness of the UK: While the UK is a dominant international financial centre, international finance has become more competitive in recent years. It is even more imperative that the UK framework does not put firms at a clear competitive disadvantage.

9. International alignment and cooperation: In a post-Brexit world, the UK is a significant “free agent,” and can play a significant role in helping to shape global standards on a par with the three economic superpowers: the United States, the EU, and China. In key areas such as sustainable finance, fintech, capital requirements, and trading rules and the principles of international regulation, the UK’s scale, expertise, and experience can play an important role. The UK also can build on its long history as an international crossroads for trade in financial services and develop
closer bilateral relations with developed markets such as the United States, Switzerland, Japan, and Australia based on openness and collaboration.

10. The transatlantic relationship: The US and UK financial systems are already highly interconnected, but there is scope for a deeper transatlantic relationship. The UK banking and finance industry is already mid-Atlantic. It is closer to the US in its approach to open markets and its outcomes focused approach to supervision and regulation. In markets such as derivatives, trading, clearing, asset management, and international capital raising—where the United States and the UK represent a de facto global market between them—there is an obvious case for closer cooperation.

Report – An introduction to financial health checks

February 2022 • Topic: The Purpose of Finance • by William Wright

This ‘concept paper’ outlines an ambitious initiative to help engage and empower individuals with their money, improve their financial resilience and financial literacy – and ultimately drive wider retail participation in capital markets.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the report, please click here.

The core concept of this paper is that every few years – or at each of your big life moments – you would receive a gentle nudge from a trusted source. These nudges would point you in the right direction of a simple financial health check tailored to your age, life stage or circumstances. They would provide some simple, free and impartial information, and point you towards additional resources. They wouldn’t tell you what to do. They wouldn’t be selling you anything, and they wouldn’t share or record any of your personal financial information.

Instead, they would nudge you to think about how to ask the right questions about your money and to consider your options – and provide you with just enough information at just the right time to help you think them through.  

We think this could be a powerful tool to empower and engage millions of citizens in the UK and the EU, to help improve their financial well-being, financial resilience, and financial literacy – and to provide a long-term boost to the economy.

Summary: an introduction to financial health checks:

1. Regular financial check-ups: this paper outlines the concept of regular financial health checks for all EU citizens to improve their financial engagement, resilience and well-being. This would involve a series of age-based or life stage based ‘nudges’ from government or another trusted source for citizens to take a short online (or potentially in person) financial health check tailored to their circumstances, to help them form good financial habits and engage more with their money.

2. The problem: the combination of low levels of financial literacy, financial participation, and trust in the financial industry in Europe (along with a cultural reluctance to talk about money) translates into low levels of financial well-being and resilience, and a low level of engagement by European citizens with their money and financial matters. Financial health checks would help connect citizens with their money and drive traction with existing financial literacy programmes.

3. The value proposition: financial health checks would lead to higher levels of financial well-being and resilience, better financial literacy, more trust in the financial services industry, and higher levels of participation in financial services. More citizens would feel more in control of their money.

4. Parallels with health checks: many countries have a system of physical health checks, which offers plenty of parallels for financial health checks, including: the value of collective solutions; universal coverage; the concepts of cohorts: early detection and prevention is better than a cure; simple nudges, maxims and rules of thumb; the link between physical, mental and financial health.

5. Style & content: these health checks would be high level and more focused on concepts such as budgeting, savings, long-term financial planning, and understanding risk, rather than granular financial calculators. They would aim to encourage good habits to support financial hygiene, well-being and resilience.

6. Frequency: at a basic level, citizens could receive annual or age-based ‘nudges’ to take a basic financial health check. A more advanced system would involve ‘life stage’ nudges (such as leaving school, starting work, buying a house, having children). The key is to provide regular and relevant nudges to engage people in thinking more about money and financial matters at the right time.

7. Source and delivery: the sources of the regular ‘nudges’ would be a trusted source from a combination of government, employers, or healthcare providers. The content or ‘curriculum’ would be developed in partnership between governments, regulators and civil society groups (based on existing frameworks). Face-to-face health checks could even be conducted by civil society groups.

8. What they are NOT: financial health checks are not a replacement for existing financial literacy programmes (they would instead drive traction to them); not about going back to school; not compulsory; not low-level financial advice; not just online; not a product comparison site; and not a retirement calculator.

9. The policy angle: an EU wide system of financial health checks would build on existing EU initiatives such as financial literacy and digital IDs; support ‘an EU that works for its citizens’; help put ‘citizens at the heart of CMU’. The EU’s convening power and technical expertise would create a cost-effective common platform.

10. The likely pushback: an EU-wide project would face many challenges (complexity, cost, priorities, government intrusion, privacy concerns). However, the cost, time and effort involved would be far less than is currently expended on thousands of pages of detailed financial regulation – and the benefits of higher levels of financial literacy, higher financial participation and better financial well-being and resilience for millions of EU citizens would more than offset the costs involved.

Report: A new vision for EU capital markets

February 2022 • Topic: The future of EU capital markets • by Panagiotis Asimakopoulos, Eivind Friis Hamre & William Wright

This report presents a new vision for EU capital markets and identifies the potential for game-changing growth to support investment, jobs, and sustainable growth.  We estimate that an additional 4,800 companies in the EU27 could raise an extra €535bn per year in the capital markets and that an additional €14tn in long-term capital could be put to work in the EU economy to help support a recovery.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the report, please click here.

A new vision for EU capital markets

This report paints a bold and ambitious vision for capital markets across the EU and highlights the potential benefits of deeper capital markets to the EU citizens, companies, and the wider economy in concrete and practical terms.

Building deeper and more integrated capital markets in Europe cannot be magically achieved overnight: capital markets union is a long-term project that will take decades to achieve.

But as Europe lays the foundations for a single capital market it is vital to keep half an eye on the longer-term prize of the sort of capital markets the EU needs to fully support the sort of companies and growth that it wants.

We looked at four specific areas of EU capital markets:

• The state of EU capital markets today: EU capital markets are relatively small, underdeveloped, fragmented, and shrinking in a global context. They are not equipped to address the challenges they are being asked to help solve, such as supporting the transition to net zero.

• A bolder vision: we paint a high-level vision of what bigger and more integrated EU capital markets could look like in the next few decades based around five structural forces (such as technology and climate change) and at a sector-by-sector level.

• The growth potential: we measure the growth potential of capital markets across the EU and in individual countries in different sectors. We estimate that an additional 4,800 companies in the EU27 could raise an extra €535bn per year in the capital markets, and that an additional €14tn in long-term capital could be put to work in the EU economy to help support a recovery.

• How to get there: we outline a roadmap of how to accelerate growth based on a combination of ‘top down’ / EU-wide measures, and ‘bottom up’ / national measures to increase capacity.

We hope the report helps stimulate debate and inject a greater sense of urgency and ambition across the EU to develop bigger and better capital markets.

Here is a short summary of this report:

1.A bigger role: Brexit, the Covid crisis and the climate crisis require capital markets to play a much bigger role in the coming years.. This report analyses the current state of capital markets across the EU, outlines an ambitious new vision for EU capital markets, and highlights the huge potential for growth in capital markets in each country.

2. Game-changing growth: there is huge potential for growth in capital markets across the EU27. On our ambitious but achievable analysis, an additional 4,800 companies in the EU27 could raise an extra €535bn per year in the capital markets – not far short of double the current levels of activity. This growth (or significant progress towards it) would significantly reduce the reliance of the EU economy on bank lending, drive innovation, and boost investment in jobs and growth.

3. A more sustainable future: our analysis shows the potential to transform pools of long-term capital in the form of pensions and insurance assets that the EU needs to provide for a more sustainable future. An additional €14tn in long-term capital could be put to work in the EU27 economy – roughly double today’s levels – with the average value of long-term capital per household rising from around €63,000 today to €136,000

4. A smaller global footprint: Brexit has significantly reduced the EU’s global footprint in capital markets and could undermine its longer-term influence on the global stage. The EU’s share of global activity has fallen from 22% before Brexit (the second largest block and around half the size of the US) to just 14%. In the longer term, without urgent reform, the EU’s share will shrink to around 10%.

5. Mind the gap: post-Brexit capital markets in the EU27 are smaller and relatively underdeveloped. This limits the sources of funding for companies and the opportunities for investors. On average, capital markets across the EU27 are half as large relative to GDP as in the UK, which in turn is roughly half as developed as the US. In their current form, EU capital markets will struggle to fuel a post-Covid economic recovery and the green transition.

6. A wide range in depth: there is a wide range in the depth of capital markets across the EU. The good news is that there are a number of countries in the EU27, such as the Netherlands, Sweden, Denmark and France with well-developed capital markets that can lead the way in terms of the future growth across the EU27. On the other hand, capital markets in large economies such as Germany, Italy and Spain are significantly underdeveloped and could play a much bigger role in funding a green and sustainable recovery

7. The reliance on banks: companies in the EU are still heavily reliant on bank lending for their funding despite some progress over the past decade. In the US, companies use corporate bonds for three quarters of their borrowing, three times more than level in the EU27. Banks will be unable to provide the necessary funding for European companies on their own post-Covid and in future crisis.

8. Deeper pools of capital: deep pools of long-term capital such as pensions and insurance assets – as well as direct retail investment – are the starting point for deep and effective capital markets. But pensions assets in the EU27 are a third as big relative to GDP as in the UK. Shifting more savings from bank deposits to investments would deploy more patient capital to help drive a more sustainable recovery in the longer term.

9. Fuelling the growth economy: the EU doesn’t have a start-up problem but it does have a problem channelling investment into high growth and scale-up companies that drive job creation. On our analysis, nearly 3,260 additional companies a year could benefit from an extra €6bn a year in venture capital funding – double current levels – and the number of companies listed on growth stock markets could quadruple.

10. Laying the foundations: EU policymakers and regulators should focus on: a) redefining the framework to improve supervision, monitoring and accountability b) building deeper pools of capital and boosting retail participation c) improving market infrastructure and the functioning of markets d) gaining political support and building capital markets from the bottom up, and e) increasing attractiveness, competitiveness and international cooperation.

Report: Slow progress – the gender pay gap in banking & finance

December 2021 • Topic: Driving diversity • by Eivind Friis Hamre

This report is a unique analysis of the gender pay gap data at more than 400 firms from across the financial services industry highlights the slow progress made in tackling its large pay gap and the lack of women in the highest paid roles.

New Financial is a social enterprise that relies on support from the industry to fund its work. To request a copy of the report, please click here.

What this report is about:

In April 2018, for the first time, all UK companies with more than 250 staff were required to report to the government on their gender pay gap – the difference in average hourly pay for men and women – and on the representation of women in  each quartile of the workforce measured by pay. We analysed that data to produce a detailed report on the pay gap and female representation at a senior level across more than 400 firms at an aggregate and sector level.

This report looks at the latest round of gender pay gap reporting in October 2021 and analyses how much progress the financial services industry (and specific sectors within it) have made in addressing the gender pay gap and increasing the representation of women.

Our analysis does not name and shame individual firms but instead measures the changes in the pay gap and representation of women at different levels of pay in different sectors of banking and finance. While the industry and the majority of individual firms have made progress on both counts over the past few years, our main conclusion is that the pace of change is painfully slow and that a surprising number of firms have stood still or gone backwards.

This report addresses the following questions:

• How big is the gender pay gap and the bonus gap in different sectors of the financial services industry? How does the industry compare to UK business more widely?

• What is the level of representation of women in senior roles across the industry and in different sectors?

• How has the pay gap and representation of women changed between 2017 and 2020 across the industry and in different sectors?

Here is a short summary of ‘Slow progress: the gender pay gap in banking and finance’:

1. Slow progress: The financial services industry is making slow progress in improving its gender pay gap, despite political and social pressure on the industry and its public commitment to diversity. From 2017 to 2020, the mean gender pay gap improved by three percentage points from 31% to 28%.

2. Spot the difference: The reason progress is slow is because of the very small increase in representation of women in more senior (and higher paid) roles. Between 2017 and 2020, the distribution of women at different levels across the industry flatlined, with the only difference being a one percentage point increase in female representation in the top pay quartile from 28% to 29%.

3. Playing catch-up: As a sector, financial services is still far behind the national average. The mean gender pay gap in financial services (28%) is twice the national average (14%). If the financial services industry continues improving the pay gap at its current pace, it will reach the national average in 2034.

4. A wide sector spread: The high gender pay gap within financial services disguises the differences between sectors. While most sectors hover around the average for financial services, investment banks and wealth managers are major outliers with gender pay gaps of more than 35%.

5. Mixed progress: Every sector of the industry improved its pay gap, but the rate of change varies. While the gender pay gap at banks improved by five percentage points, the improvement in wealth management, consumer finance and diversified financials is effectively a rounding error (one percentage point over three years).

6. A steep pyramid: Women remain underrepresented at the top end of the industry compared with the rest of the UK economy. Women represent just 29% of staff in the highest pay quartile (compared with 40% in the wider economy) and 35% in the top half (versus 43%). Women account for less than a quarter (24%) of the highest paid staff in asset management and less than a fifth (17%) at investment banks.

7. Low representation: This problem is exacerbated by over representation of women at the bottom end of the pay scale. Nearly 60% of staff in the financial services industry in the bottom quartile are women.

8. A collective push: In positive news, the gender pay gap and senior female representation (by pay) improved in every sector. Roughly two thirds (65%) of all firms improved their gender pay gap and nearly two thirds (63%) improved representation of women in the top pay quartile.

9. Leaders and laggards: At roughly a third of all financial services firms that reported, the gender pay gap stayed the same or widened, and the representation of women stayed the same or fell. At one fifth of firms, both metrics deteriorated.

10. A clear correlation: The most effective way of tackling the pay gap is to increase representation of women at the top – 75% of the firms that improved their gender pay gap also improved the representation of women in the top pay quartile, and 77% of firms that improved the representation of senior women also improved their gender pay gap.