INVESTING EXPLAINED: What you need to know about Khaki Finance, where polluting industries are encouraged to become greener
In this series, we bust the jargon and explain a popular investing term or theme. Here it’s Khaki Finance.
Defence funding?
No connection with funding of army uniforms. There is also no link with the chino trousers favoured by tech bosses.
The term, which you are likely to hear a lot in 2023, covers schemes to encourage ‘grey’ or polluting industries, such as steel makers and cement and chemical manufacturers, to become more environmentally friendly.
Hundreds of billions are needed to finance the decarbonisation technologies. To take just one example, cement, the world’s second most consumed product after water, is used in almost everything we build and is a major contributor to CO2 emissions.
Sustainability: Hundreds of billions are needed to finance the decarbonisation technologies
Why is it topical?
The war in Ukraine with its impact on energy supply has focused the minds of governments on energy security as never before. The urgent need to reduce reliance on Russian oil and gas means that there has to be a speedier transition to renewable energies such as solar and wind.
This revolution also requires that businesses reliant on fossil fuels, like steel makers, make a more rapid move towards more planet-friendly sources. Such decarbonisation initiatives can have a large impact.
Firms should be greener, surely?
Yes, given the drive for net-zero emissions to combat global warming, but finance for decarbonisation can be hard to get, apparently, with some banks preferring to invest in developing pure green technologies.
Others are more sympathetic. Although HSBC says it will phase down investments in oil and gas, it should be providing funding for decarbonisation projects. Barclays also pledged to finance such schemes. But billions upon billions will be required.
Does it have a cheerleader?
Mark Carney, former Bank of England governor, is a strong candidate. He heads the Brookfield Global Transition Fund, set up this year to back solar and other technologies that aim to cut emissions.
He said it would back clean energy generation, transform traditional utilities and provide sustainable solutions for industries like steel and cement. Sadly for those who would like to back this fund, it attracted $15bn and is closed to external investors.
I’d like my savings to back this kind of project
There is a whole array of ESG (environment, social and governance) funds.
None specifically state that they have a bias towards khaki finance, but the SDCL Energy Efficiency Income investment trust backs firms that help businesses to cut their energy bills. Its managers say that as much as 40 per cent of the world’s energy is used in buildings but half of that is lost or wasted.
Couldn’t I just put money into a range of funds?
It’s an option, but shop around carefully, as funds are at the centre of a greenwashing controversy. There are claims that some have been investing in companies that only loosely match the ESG criteria, while in reality not being very ethical or sustainable.
City watchdog the FCA is trying to restrict how the descriptions ‘ESG’, ‘green’ and ‘sustainable’ can be used.
But there are concerns that these rules may still be too lax, although the Chancellor, Jeremy Hunt, says that ‘the Government is acting to secure the UK as the best place in the world for sustainable investment’.
