Publication - Strategy/plan

Investing with Purpose: global capital investment plan

Plan articulating the important role private capital investment can play in driving an investment-led recovery. The plan focuses on sectors where Scotland can demonstrate a real international comparative advantage, and marks a pivot in our approach towards targeting ESG investment.

Investing with Purpose: global capital investment plan
5. Bridging the Gap: Taking Action to Meet Scotland's Investment Needs

5. Bridging the Gap: Taking Action to Meet Scotland's Investment Needs

5.1 Introduction

We set out at the start of this plan that we want to create and expand markets; focus on our recovery and transition by building on our strengths; and do this in a manner which is compatible with our values. We have identified the three levers for doing so: increasing opportunity (demand) for investment; increasing the viability of investment opportunities; and through those, increasing the supply of investment. We have begun the work of identifying our target markets, and here we set out our strategy towards opportunity-led investment.

To bring this together, we now present an ambitious agenda over the short to medium term, under five broad areas outlined in Figure 5.1. These areas address the factors highlighted throughout this plan around: leading with our values and pivoting towards ESG investment; building an investment-ready pipeline; market maturity and diversity of funding sources; the importance of underlying market conditions and regulations; the role of the public sector as a convening and coordinating force working in partnership with markets; and of course letting the world know what Scotland has to offer through our global networks.

Figure 5.1: Actions to help us deliver on our ambition
Figure description below

Figure description:

Figure sets out the five priority areas for delivery that the plan’s actions are grouped under.

5.2 Leading with Values: Net Zero and ESG

Scotland has a clear focus on building an economy that values people, place and planet. The Climate Change Plan, the mission focus of the Scottish National Investment Bank, our Vision for Trade, and the Infrastructure Investment Plan are key building blocks for this approach. Building on Scotland's existing strengths as a responsible investing hub will increase access to finance for Scottish businesses, creating a deeper pool of expertise and talent to help firms bring sustainable projects to market, as well as securing high quality jobs in Scotland's financial centres.

Scotland is not alone in looking to expand access to ESG investment. In November 2020, the UK Government made several significant announcements designed to demonstrate regulatory and policy leadership on green finance, and these should complement our focus on sustainable investment. The Treasury, Bank of England, and other major regulators have published a roadmap for making climate-related financial disclosures (referred to as 'the TCFD recommendations' for shorthand) mandatory across the UK economy by 2025 at the latest.[43] Requiring comprehensive climate-related disclosures will allow investors to better price these risks, which should drive investment towards more sustainable projects.

This will be complemented by a new UK 'green taxonomy' which will classify investments according to their compliance with the Net Zero objective. The taxonomy is expected to be largely based on its EU equivalent, and the objective again is to tilt the investment landscape away from 'brown' investments and towards 'green' ones by increasing transparency. To build and enhance our ESG capability:

  • We will make Scotland's values a core part of our National Prospectus and our engagement with investors, making it clear that valuing our people, communities, and environment are core to our economic ambitions
  • Investment opportunities that we promote to market will be benchmarked against ESG investment criteria. We will enable the companies and projects we support to report climate-related disclosures in a standardised and transparent way with flows of ESG monitored via a new metric which will cover environmental and social impacts
  • We will use COP26 as a platform to showcase our investment opportunities such as our Green investment Portfolio
  • We will build on existing ESG investment activity and work with Scotland's investment management industry, using events such as the Ethical Finance Summit to make Scotland a leading globally established hub for ESG investment
  • We will proactively engage with ESG investors and with sources of capital new to Scotland, such as green bonds, to help us achieve our Net Zero and Wellbeing ambitions

5.3 Demand stimulation: building the pipeline

Scotland has a lot to offer investors, but to increase the supply of investment, we need to provide investors with a pipeline of market-ready propositions to invest in, linked to strong economic performance, viability and attractiveness to private capital flows.

Companies: Increasing growth and scaling

To have sustained and consistent flows of finance into companies which anchor and develop Scotland's economy, we need to build-up our capability to host developing businesses from pre-commercial stage through to commercial. This means that we need a rich flow of companies that will provide investment opportunities at each stage of company growth. This requires the system we already have for economic development to ensure a broad pool of possible options, and within it a tight focus on those companies and projects which have the best chance of benefiting from market engagement.

This is a critical theme in Mark Logan's Scottish Technology Ecosystem Review. By creating a higher volume of quality early stage companies we create a virtuous circle through which we can attract new capital, and this capital in turns boosts the growth and maturity of the talent pipeline. As recommended in Financing the Recovery, this should be a joint effort by the public sector and partners. The development offer we make to companies should be open to those recommended by others in partnership, whether by centres of expertise, industry groupings, business advisors or banks.

Infrastructure and place: Systematic origination and quality control of investable projects

Scotland's public sector has been working together for a number of years on improving the quality of major projects we take to market. For example we have developed the Scottish Green Investment Portfolio. This approach needs to be both focused and augmented. It needs to focus in on the themes selected in this plan, and on the places and infrastructure to support them; and augmented through better coordination and use of the expertise that sits in the public sector to source and structure major projects to market projects to market readiness.

Again, this must build on the capabilities we already have, including the expertise in our Enterprise Agencies, Scottish Futures Trust and in local authorities. The advent of the Scottish National Investment Bank is intended to grow and develop into a centre of expertise on investment within the Scottish institutional landscape. It has arrived at the time we need it most, to help think through the implications and possibilities around coordinated, multi-sector and multi-project government supported efforts at tackling climate change.

In Chapter 1 we set out that not all capital investment is equal, or equally beneficial for the broader economy it acts in. This is a critical distinction when it comes to delivering Scotland's objectives for a Just Transition to Net Zero greenhouse gas emissions by 2045. The transition to Net Zero will transform our economy and society. It will bring huge opportunities and benefits but there are also risks that these will not be shared equally or fairly. The Climate Change Committee's latest analysis finds that the costs of transition are affordable, but the distribution of those costs may not be. This emphasises the need for governments to prioritise that impacts on people, communities and sectors are taken into account in decisions and investments we make. This will be important as we structure major investments in heat, transport, energy efficiency, hydrogen, energy and land use.

Whilst we will make many investments directly, as set out in the Infrastructure Investment Plan, it will also be important that we work with investors investing in Net Zero projects so that they understand the benefits of a Just Transition to their investments and to ensure we are able to consider the distributional impacts of the transition. To build a strong pipeline of strategic investable opportunities to take to global investors:

  • We will identify and prioritise place-based opportunities or clusters e.g. low-carbon heating or hydrogen, and accelerate their investment-readiness for both company and infrastructure investment
  • We will work with the private sector to identify and secure the private capital investment needed to develop internationally recognised clusters of excellence in our identified sectoral themes (Low Carbon, Digital, Health and Life Sciences, High Value Manufacturing) and build investment solutions for their business ecosystems
  • We will build demand for private capital investment for the growth companies working in our key sectoral themes, for whom engagement with private capital markets is a viable and useful route to growth
  • We will build capacity to structure major projects and programmes for financing focused on the Just Transition to Net Zero, building digital capacity to support data movement, and housing needs
  • We will co-ordinate the wider public and private sector landscapes to aggregate opportunities of scale that will be of interest to institutional investors
  • We will act as cornerstone investors in emerging sectors and technologies where Scotland has genuine potential to lead on the international stage
  • We will establish a 'route-map' from project inception to promotion to ensure investment opportunities are investment ready and attractive to markets, and that the route to support is clear to candidates. The route-map will denote criteria for when a project is ready for development and will be considered 'market ready'
  • We will take a Team Scotland approach to disseminate learning and best practice from across the public sector and private sector ecosystems. This will involve coordinating government and agencies with the private sector to accelerate the development of investment opportunities, using co-investment models for example
  • We will benchmark how our investment propositions that we present to market compare with international standards to ensure our propositions are best-in-class

5.4 Right Regulation, Right Incentives

Improving regulatory frameworks

Scotland already has a very strong investment environment, underpinned by sound and predictable legal and planning systems, and benefiting from the availability of financing and development partners available within Scotland and the UK. Now, though, that system needs to evolve in line with emerging priorities, in particular in relation to Net Zero.

We have already seen how the introduction of Contract for Difference in effect created an investment market for wind power. The scale and pace of the transition to Net Zero means we need to see the development of long-term market frameworks to create the demand certainty that is necessary to drive investment appetite in heat decarbonisation, hydrogen and more. There are recent positive signals from the UK Government on hydrogen in particular, and we need to engage fully to ensure these frameworks emerge as fit for purpose for investments in Scotland.

We also need to investigate the expansion and use of existing models that work. The Scottish Government will establish a Green Heat Finance Taskforce in early 2021 to forge a new collaboration between the Scottish public sector, heat decarbonisation experts and the financial sector to explore how existing models could work alongside innovative financing mechanisms to fund both at-scale heat infrastructure and individual level investment.

The needs of Net Zero will require significant sustained investment in our electricity and gas networks across the coming decades to enable the rapid growth in renewable and low carbon energy that will be needed to decarbonise our heat and transport systems, and meet industrial demand. Although energy regulation is reserved, the Scottish Government is closely engaged with the regulator, Ofgem, on these matters, as well as Scotland's energy network owners. The UK Government Energy White Paper, Powering our Net Zero Future, published in December 2020 commits to consulting on how to align Ofgem's remit and strategy to support delivery of our Net Zero commitments.

Incentives that target and drive behaviour

The incentives package Scotland offers investors has previously largely been targeted at commercial property and housing. This includes a competitive non-domestic rates (NDR) system, with the lowest poundage in the UK, delivering a lower rate of tax in Scotland for over 95% of properties than anywhere else in the UK; and a package of NDR reliefs to encourage investment including the unique Business Growth Accelerator relief for new builds and building improvements, which from 1 April 2021 is available even where there has been a change of use of property alongside an improvement; the unique Fresh Start relief for long-term empty properties when they are reoccupied; and the most generous relief thresholds for small businesses as well as reliefs for renewables anywhere in the UK. Recognising the timescales involved in investing, the Scottish Government has committed to making the Telecommunications New Fibre Infrastructure relief available until 2029, and the existing Hydro and District Heating reliefs available until 2032.

There is an opportunity to align incentives to the broader set of priorities we want to create markets for. The Green Growth Accelerator Model has already started this, with enabling infrastructure grant support predicated on creating Net Zero outcomes from a new development. The Scottish Government holds many of the levers which would allow us to adjust incentives such as rates relief towards repurposing and redevelopment of assets. To ensure we have the right set of regulations and incentives:

  • We will establish relationships with UK financial services and pension regulators to influence and support the coordination of future regulations around reporting standards and our Net Zero aims
  • We will align our suite of available incentives to help stimulate investment in our sectoral themes, places and Net Zero, whilst always seeking to understand and mitigate market distortions
  • We will engage with the UK and international bodies to influence the design of market-creating financial and pricing solutions (e.g. Contract for Difference and carbon pricing), working constructively to remove barriers to investment

5.5 Working in Partnership with Markets

Increasing the size and diversity of equity and growth finance markets

The best investment ecosystems turn on the availability of talent, capital and infrastructure. Having more diverse sources of capital will attract the attention of other investors, entrepreneurs, corporates looking to acquire innovative companies, and the wider community of advisors who can direct clients towards emerging ecosystems. Combining this with the world-class support for companies proposed in the Logan Review would make Scotland an attractive hub for entrepreneurship and investment which goes well beyond the digital sector. With both Scottish Enterprise and the Scottish National Investment Bank engaged, we can target both on a deal-by-deal and early-stage basis, and on a multi-deal and fund structure basis.

Given that diversity of funding sources is our objective, we need to help and encourage Scottish companies to go out and access the best and most appropriate investors regardless of location. Experience suggests that once an out of territory investor makes their first investment in a new location the probability of making further investments increases significantly. We should therefore first take action to have a large and diverse range of new investors make their first investment in Scotland. Over time, a subset of investors will emerge from this group who are particularly well aligned with what Scotland has to offer. Some of this group of very regular investors in Scottish companies will go on to set up a presence in Scotland based on need and fit.

Testing the approach

Scotland has a significant opportunity in health and life sciences, but we also have a number of companies leaving Scotland in order to find growth capital. With a renewed strategic focus on retaining strengths and supply chains in health related sectors, we need to reverse this. This will be the first of our roadmaps to investment for each of our four sectoral themes, and will serve as a model.

Meeting the market at their level

In our response to the report from the Advisory Group on Economic Recovery, the Scottish Government committed to working closely with business to support and grow the economy. In this plan, we set out clearly the kinds of investments we want to see made in Scotland, and how these will benefit people, businesses and supply chains, as well as investors. We recognise that in setting out this approach, there will be investors who want to be a part of it, with whom we will seek to build strategic relationships. There will also be investors who prefer a more transactional approach to making their investments. Scotland is still open to those investors. However, we also recognise that there is a set of investors for whom a deeply coordinated and supported system of project structuring, pre-commercial support and development, as well as a match with their own values and future direction, will make investing in Scotland a natural fit.

The offer we will make to work with business and investors will operate at different levels, with appropriate levels of partnership and cooperation for each type of investor to find common goals and values.

  • Tactical introductions to Scotland, developing our understanding of specific investor 'asks' and how best to encourage companies to engage with them. The aim here is to increase the number and scale of new 'out of territory' repeat investors active in Scotland
  • Increasing opportunities in Scotland for those investors and intermediaries who are already active here and seeking further opportunities
  • Strategic relationships, forming long-term partnerships with a set of investors who share interests and aims around long-term transitions, and aiming to create a sense of shared ownership of those changes

For our first goal, we will build on the success of the Scottish Growth Scheme equity funds in attracting new repeat investors to Scotland. Both the Scottish National Investment Bank and Scottish Enterprise are building strong teams around investor relations and understanding both markets and the propositions we have which might match them. We need to ensure that there is good communication between agencies at national and local level, and a seamless, timely and professional service for investors.

For the deeper strategic relationships envisaged here, we want to target investors who share a commitment to ESG investment and to long-term transitions. We want Scotland to feel like home to these investors: a place where they will find a ready pipeline of projects and companies that are a natural fit for their objectives, where projects have been scoped and checked for compliance with reporting requirements, and where the convening power of government and its agencies can help structure them to create a long-term fit with their funding options. In turn, we will ask for patience and a genuine desire to create shared value for Scotland through their investments. We want to see these projects, central to the places and infrastructure Scotland needs for the future, use Scottish suppliers and technology, and crowd in more positive economic and jobs impacts through attracting suppliers to Scotland.

Building our capacity in market intelligence

Chapter 3 of this plan has begun the work of better understanding and therefore being able to offer different market players what they are seeking. As we noted, this will continue to be a shifting picture, and one at which no one part of the Scottish public sector system currently has extensive and in-depth knowledge. Without this, it is not meaningful to establish target markets or investors beyond a very general level. We therefore need to commit to building this knowledge base, focusing first on acknowledged market gaps in Scotland:

Venture capital funds – identifying and targeting these by sector and geography, and understanding the funds which are likely to take more patient positions which favour growth and expansion over rapid exits. As above, we should then seek initial deals and partnerships with a view to long-term location in Scotland

Institutional investors – institutional investors have multiple funds and structures, so here the challenge is to understand the sub-components, and which aspects and stages of projects are most relevant to which fund. In parallel, these funds often seek scale in projects, and we will need to map what that means to different fund managers. We should start local – in Scotland and in London

Sovereign Wealth Funds – like institutional investors these look for scale, but frequently also benefit from government-to-government relationships. We should seek specialist advice on these fund structures and their requirements in deciding where we may have something to offer, and what other arrangements are acceptable alongside investment

ESG investors – this category spans the risk and investor categories, with for example most institutional investors now beginning to operate some ESG funds within their overall structures. Understanding ESG funds will therefore act as an overlay, and we should additionally investigate opportunities in the green bond market

  • For each category of investor we will develop an investor relationship strategy to increase our level of understanding, engagement and partnership with the market
  • To support business growth investment, and in line with the Logan Review recommendations, we will seek to fill the gaps in the Scottish equity market by:
    • Developing a new Series A fund with a focus on the Scottish ecosystem
    • Investing outside of Scotland to build a reciprocal relationship with funds that will in return, invest in Scotland
    • Recapitalising and reorienting existing funds where this will support greater investment
    • Ensuring that investment is fairly distributed through investment vehicles focused on female and minority founders
    • Intensifying appropriate support for these companies, such as development, networking, contact building opportunities, leadership, peer to peer support and pitching masterclasses
  • We will increase connections with institutional investors who may not be familiar with what Scotland has to offer, starting with ESG investors and thematic funds
  • We will build relationships with the most active developers and intermediaries in similar regions in the UK, linked to the sectors and opportunities we want more investment in
  • We will work closely with local government pension funds to identify appropriate means of increasing investment in Scottish propositions
  • We will develop a service standard on investor experience, aligned with the Inward Investment Plan, to ensure we are providing investors with a rapid professional and comprehensive service to encourage them to commit to further investment in Scotland
  • We will establish an investment panel to form a partnership with government, drawing on their expertise to provide industry insight on the structuring and financing of the large scale investments required for the transition to Net Zero
  • We will put in place a process to track private capital investment into Scotland and to measure performance going forward

5.6 Mobilising our Global Networks

Scotland is the proposition: promoting quality, coordination and values

We have already built a stronger Scottish brand and presence in investment markets, including through our global footprint, and are increasingly targeting events at investors with a known interest in either Scotland, the UK, or the specific project, company and investment opportunities which are available in Scotland.

The Scottish Government and public sector partners have also established a well-regarded quality control system over the past three years, aimed at increasing the market readiness of any propositions we take to market. This is open to all local authorities and areas of Scotland. We already have a presence in over 30 markets via Scottish Development International's overseas field offices and the eight Scottish Government international offices (Figure 5.2).

Figure 5.2: Making the most use of our international networks
Figure description below

Figure description:

Figure shows the Scottish Government and agencies’ international presence.

GlobalScots is a volunteer network administered by Scottish Enterprise that comprises senior business people around the world who have a connection to Scotland and are keen to support Scottish businesses to further their international growth ambitions. GlobalScots provide, on a volunteer basis, informal advice and introductions to Scottish companies and also act as advisors and advocates in promoting Scotland as a place to live, work, invest and study. We are scaling up the GlobalScot network, expanding from 600 to 2000 business people in key markets, with clearer "asks" and "offers" of support from a revamped SDI support platform.

The Scottish Government Trade Envoy network comprises six individuals covering Indonesia, Poland, Spain, UAE, Singapore and a higher education sectoral envoy. We can make more and better use of this network and we will also keep our marketing materials updated, relevant and credible, making sure that investors are seeing new opportunities when we speak to them. Increasingly, we are experiencing that our values are part of our pitch. Our values protect our strongest assets (our people and natural capital), and that makes Scotland attractive for the long-term. We should not be shy about this, and so we will both start and end with values: We have previously committed to developing a National Prospectus for Scotland, and this Plan will build capital investment into that. Here we set out how we will make improvements in this key area:

  • Through our combined networks and relationships, we will continue to promote Scotland's broad and diverse capital investment offer to investors globally
  • We will develop and deliver a programme of domestic and international events and activities to support the development and promotion of the pipeline of private capital investment opportunities, providing a platform to access new investor relationships
  • We will increase our global capital investment resource in target international markets and make best use of use our international networks to provide insights, intelligence, introductions and advocacy focused on building investor relations and promoting investment opportunities in Scotland. Such networks include:
    • SDI's network of overseas field offices
    • Scottish Government's eight international offices based in private capital investment global capitals including London, Berlin and Paris
    • Scottish Government Trade Envoys
    • The GlobalScots Network
    • The international footprint of our universities and colleges
    • Private sector business networks that promote Scotland
  • We will further invest to develop the capital investment strand of 'Scotland Is Now' and utilise this as a key channel to communicate our messaging and propositions

5.7 Shifting our Approach to Delivery

To be even more effective in attracting internationally mobile private capital we must make a shift and change our delivery. The ecosystem that we have in place performs well with the enterprise agencies including Scottish Development International, Scottish Futures Trust and local authorities all playing a strong role currently in leveraging in investment. Until now though, we have not had a national strategy that will help us to mobilise the public and private sector ecosystems and use our resources and levers where we can have the biggest impact. Figure 5.3 summarises what we will do differently.

Figure 5.3: How we will change our approach to our target markets
Current delivery What will feel different
We build companies: We pitch companies to individual funds for investment. We build markets: We pitch Scotland to funds for repeat investing and create diversity and ecosystems.
We give equal attention to all potential investors. We target our efforts at our best opportunities and at investors who want the same long-term outcomes as us.
Investors find the Scottish system difficult to navigate. We work across the Scottish public sector ecosystem to have a seamless and joined up system which is based on a one-point of entry concept. This is more relevant for infrastructure investment than venture capital.
There are no sectoral priorities for investment. We target our efforts on the sectoral themes identified where Scotland's strengths match international demand.
There are no geographic priorities for investment attraction. We work in partnership with Scottish-based investors recognising the necessity for local investors to leverage in foreign capital investment, and focus our foreign engagement in the global financial centres such as London, Boston, New York, Silicon Valley, Berlin, Frankfurt and Singapore.

Contact

Email: investmentfinance@gov.scot