How cleantech investments in the UK are spurring future growth

With Peter Arnold , UK&I Partner, Economic Advisory

Back in June, we launched our 2021 UK Attractiveness Survey – this captured how resilient foreign direct investment (FDI) had been into both Europe and the UK, despite the very turbulent 18 months the global economy had faced as a consequence of the pandemic. One of the many areas where the pandemic seemed to magnify public focus was on sustainability, and the need to accelerate innovation and delivery against environmental targets and aspirations. Indeed, as we shared findings with businesses and governments, a key question that kept arising was how much investment activity was focused on ‘cleantech’ – that is, investments targeted at environmental sustainability and delivering on the global goals around achieving net zero.?

We knew then that cleantech was important as an investment theme – with 19% of investors seeing it as being a key driver of the UK’s future growth, and with 60% of investors stating that clear government policies on sustainability were ‘important’, ‘very important’ or ‘critical’ factors in their decisions to invest.

However, what we didn’t know at that time was what proportion of current investment into the UK – and indeed across Europe – was related to cleantech. Investor sentiment did seem to imply that the UK was lagging a little behind its European competitors.

In this context, and ahead of COP26 in Glasgow and the Government’s Global Investor Summit today (19 October), we have revisited our database of projects . Using innovative text recognition software, combined with some old-fashioned detective work, we have estimated the number of projects into Europe and UK last year that could be counted as ‘cleantech’.

The headline figures are encouraging: the UK was Europe’s second most popular location for FDI-backed clean technology projects in 2020, attracting 59 projects – 17.1% of all such European projects, and behind only Germany’s 67 projects (19.4% of the European cleantech market). In total, cleantech accounted for 6.1% of all UK FDI-supported projects in 2020, very much in line with the European average of 6.2% (346 cleantech projects out of a total of 5,578). These figures reflect the increasing importance and role of cleantech in our economies, but also that the gap with our European neighbours isn’t as significant as the initial responses suggested.

Cleantech investment is far more evenly distributed across the country than other investment: a model for levelling up?

In the UK, again encouragingly, cleantech investment is also far more evenly distributed across the country than other investment. London still attracted the most projects (11) – giving it a 19% share of all UK projects and making it the leading city for cleantech investments in Europe – but Scotland was able to match this performance and also attracted 11 projects. Meanwhile, the gap from the leaders to the rest of the country was far smaller than usual: Yorkshire and the Humber was not far behind London and Scotland on cleantech, with nine projects in 2020 and a 15% market share. The South East (six projects and 10% of the market) and the West Midlands (five projects and 8% of the market) round out the top five UK regions and countries for clean tech. London (=7th), Scotland (=7th) and Yorkshire and the Humber (9th) all feature in the top-10 European regions for 2020 clean tech project numbers (with London leading the table of individual cities).

This gives strong grounds for the hypothesis – expressed in Peter’s blog earlier on in the year – that, if done right, the huge investments required in cleantech could be supportive of the other key UK government objective of ‘levelling up the UK’, as a combination of geography and history give a number of UK regions and nations a comparative advantage in this area.

With the highest share of cleantech investments in manufacturing, the UK is positioned to design and build clean technology, not just deploy it.

These opportunities are further supported by the nature of cleantech investment – the highest share of investments were in manufacturing, both at the European level (36%) and in the UK (27%). This partly explains why Germany performs so well, but the pattern of investment, as with the regional pattern, is very different to the UK average overall where manufacturing accounts for just 11.4% of all FDI into the UK. Business services (12 projects, 21% of the market), logistics (nine projects, 15% of the market) and research and development (nine projects, 15% of the market) were the other key UK clean tech activities in 2020. Interestingly, the UK figure for sales and marketing was 12%, compared with 17% of all cleantech projects in Europe. This is encouraging, as the key challenge for the UK will be to ensure it is a location for designing and building clean technology, not just deploying it.

By publishing this data now, the intention is to raise the focus on this important area. There is plenty in this analysis for us to all to chew on and consider, and rest assured we will revisit the numbers for the UK Attractiveness Survey in June 2022. Hopefully, we are at the start of a rapidly accelerating momentum for cleantech investments in the UK and across Europe.

For the full findings, visit ey.com/uk/ukasgreen