Policymakers need to shift focus from filling investment gaps to creating new trajectories for ambitious low-carbon innovation, says Mariana Mazzucato. A missions-led approach should be at the heart of efforts align the economy with climate and sustainability goals, she tells Environmental Finance.
What is needed from the public sector to scale up innovative sustainable finance?
The toolkit civil servants are currently carrying around will at best see the state de-risk a sector or fix market failures. That's very important and I don't want to throw the baby out with the bathwater, but the problem is you don't get transformation of the economy by just fixing a market failure. A mission-led approach presents a different type of toolkit, one that is about co-creating and co-shaping markets.
Innovation is about structural change and the public sector when properly organised can be a part of that change on the supply-side, as well as the demand-side in terms of using the full power of procurement and also bold policy decisions. A much more dynamic approach is needed and it has to be outside of silos – green shouldn't only be key to the department of energy but across the board in all government departments And the way that finance ministries evaluate public investments needs to go outside of the box of simply looking at cost benefits and net present value calculations--which frankly would stop any mission from day one.
What's the importance of mission-led innovation?
It's very important because the way we currently think about the green economy, space economy and health economy tends to be limited to sectoral policies—rather than through problems that require cross-sectoral solutions. .Policies in these domains always begin by identifying a market failure and then expect governments coming in to fill the gap.
Mission innovation is about identifying opportunities and new ways to define a market which, through an inspirational vision setting, can crowd in various actors such as businesses, other public actors and philanthropic actors. What I argue is we shouldn't be thinking of finance as filling a gap but creating a new trajectory—and in so doing increase the expectations about where the future opportunities lie. This will help to unlock hoarded investment.
At the organisational level, civil servants need to think of themselves as active co-creators of value and be allowed to have a vision and to think big. Historically, every sector I've looked at where you've had a mission-oriented finance approach - for example in the information technology revolution – has also required mission-oriented agencies. Just think about John F. Kennedy's moon shot speech - it was all about governments in terms of really being able to dream big and doing what's not been done before. But it would not have happened without NASA. Similarly, some of the boldest finance today is occurring inside strategic public banks (development financing institutions) which take on the highest level of risk and capital intensity, before the private sector is willing to enter.
How can this thinking be applied specifically to green and sustainable finance?
In the case of energy, there are lots of things happening around the world in terms of investment but it remains very patchy. It's not systemic and it's not bold enough. So there's a real opportunity to use the Climate Innovation Summit in Dublin in November to consider: what are the new types of relationships between the public and the private sector? And what are the new organisational forms within those that can help drive a more ambitious strategy?
The big thing is: we need direct investment from the public sector not just indirect investment through subsidies. We have to stop thinking it's just about incentives and focus on direct investments that help tackle problems across sectors in a very clear way. Subsidies are not a problem, but they are a problem if they're on their own because they don't lead to additionality: making investments happen that would not have happened otherwise.
The energy problem isn't just about promoting renewables but also about how we think about cities, housing and well-being, and the transformation of old industries like cement and steel. So there are many problems and missions we need to formulate within each of these areas, which could drive investment in innovation across sectors and disciplines.
What needs to happen for mission-led finance to take off at scale? How can policymakers drive this kind of relationship with the private sector on sustainable finance?
I think the vision and mission has to come from political forces in a democratic fashion. It should less of a Kennedy movement where he said "let's go to the moon and back" and more of a German Energiewende moment where we had decades of a green movement that led to a legitimacy in society of this big transition to occur. Then, Angela Merkel with her political leadership captured this movement and transformed it into a very concrete top-down mission. She then used all the powers of government instruments like loans from the development bank KfW Bank to help drive the bottom-up solutions
Demand-side policy is really critical. Green isn't just about renewables and crowding in private sector, but green should become the direction for how information technology is used and deployed, and how old industries transform themselves. . Even the steel industry lowered its material content though the Energiewende. These changes don't happen alone. It's how we use city-level policy for sustainable cities and smart cities. Demand-side policy should then end up being a real pull factor for the supply side. There's no lack of finance but a lack of patient long term finance, and also a lack of understanding how to really push and pull with a common direction. We need a creative, cohesive and dynamic framework for all the instruments that governments have at their disposal such as prizes, grants, loans and procurement. Instead of handouts and very narrow sector policy, we can use procurement, grants, equity and city-level policy to really drive through what hopefully should become a green revolution. And we should stop calling public finance a lender of last resort, and admit that it has been the investor of first resort in all the big transformational changes of the last century.
Mariana Mazzucato is Professor in the Economics of Innovation and Public Value at UCL where she is Founder and Director of the Institute for Innovation and Public Purpose.
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