Green Investment Bank: Driving transition to a low-carbon economy

Supporting the UK Government’s green policy objectives, the Green Investment Bank (GIB) is a new and enduring institution being established to finance environmental and clean energy projects for which the mainstream banks are currently reluctant to take the early risks.  The United Kingdom will be the first country to create a bank dedicated to the low-carbon revolution.  Ambitious to leverage billions of pounds of extra private sector capital, the bank will work to a ‘double bottom line’ of both achieving significant green impact and making financial returns.  It will gain market credibility by operating at arm’s length from Whitehall. While credits are given to this commitment made by the coalition government in their first 12 months, however, as at today, the progresses of setting up the Bank and creating associated green financial products are far from what the society expected, which is a due to a lack of cross-government support.

Financial market failure

          In fact, many energy efficiency projects and ventures face a plethora of barriers to financing as they are too small and/or risky to attract the attention of large financial institutions. (World Bank, 2008)  Today, not to mention various business projects of high profitability competing for capitals, the banking sector, in financing green energy projects, usually perceives the transaction costs and risks around new technologies, creditworthiness and revenue security, etc. to be unbearable.  A number of scholars and energy professionals agree that these market failures necessitates a government-backed bank acting in the public interest, if the UK is to go ahead with the scale of the low-carbon infrastructure required to meet the national carbon reduction targets.  Thus in 2009-10, the UK Government accepted a proposal by the Sustainable Development Commission for a green investment bank that will unlock private finance to accelerate a wide range of green infrastructure projects.

          The Green Investment Bank Commission estimates that £550 billion could be required for investment in supply chains and infrastructure in order to meet the national climate change and renewable energy target between now and 2020. (GIB Commission, 2010) Meanwhile, evidence given to the Environmental Audit Committee suggests that the UK will need to raise £200 billion and £1 trillion over the next two decades, but traditional sources of private fundraising are likely to deliver between £50 and £80 billion only.  (BBC News, 2011)

         

The ‘commercial’ bank for green economy

          The GIB is now being capitalised with £3 billion taxpayers’ money, of which £2 billion will be injected on top of the initial £1 billion capital according to the Budget 2011.  The bank is expected to have catalysed an additional £15 billion into the green economy within four years, making money for clean energy projects more cheaply.  According to the Deputy Prime Minister, Nick Clegg, some of the bank’s priorities will be offshore wind, non-domestic energy efficiency and waste. (Kinver, 2011) Work is being done to explore other sectors that would be eligible for intervention. A further boost to green campaigners is the possibility that GIB helps finance the green deal scheme, where householders will have access to loans for energy efficiency refurbishment to be repaid in instalments through their energy bills.

          The GIB Commission has proposed that the primary focus of the bank should be on lowering risk for investors, rather than simply providing capital. It could help catalyse low-carbon investment by:

(a)  Unlocking project finance through equity co-investment, first loss debt and insurance products;

(b)  Creating green bonds to access to very large pools of capital held by such institutional investors as pension funds and life insurance companies and which would provide the scale of capital needed; and

(c)  Selling green ISAs that enable retail investors to contribute to the funding of green infrastructure. (GIB Commission, 2010)

An independent institution

          To ensure the green bank is an enduring and independent institution, it will be free from governmental and political interference as well as able to reinvest the proceeds from its investments.  The GIB will be set up as a Companies Act company and follow best practice corporate governance. Its public roles, interim governance structure and independence will be enshrined in legislation as soon as the state aid approval is achieved. (BIS, 2011)  Actually, the independence of the bank from ministers has been a major concern for investors, who are worried about the Treasury’s plan to avoid legislation and retain control over the bank would result in years of damaging political interference.  The Deputy Prime Minister has reassured the public that it will be part of the institutional architecture of the country and translated from an idea to a flow of investment to Britain’s clean energy industries in under two years.  The GIB will have powers to borrow from the private money markets from April 2015.

          Downing Street’s decision to delay the bank’s power to borrow from the capital market until the public sector net debt has fallen as a targeted percentage of GDP attracted criticisms.   Some urged the Government to needs to say legislation will happen next year at the latest, and make clear the bank can borrow from the capital markets from the outset. (Kinver, 2011)  Earlier, the heads of 15 green campaign groups have written to the Prime Minister and pointed to delays in giving borrowing powers to the new green investment bank. (BBC News, 2011) “Setting up a Green Investment Bank without the power to borrow would be a bit like trying to buy a house without first getting a mortgage offer. George Osborne has got the deposit, but if he doesn’t allow the bank to raise extra capital, the sums are going to fall far short of what is needed,” said Joan Walley, chair of the Environmental Audit Committee. (BBC News, 2011) Many believe the most effective form to stimulate and promote green growth is to let the bank raise money in a similar fashion to regular banks that can leverage huge funding from the private sector.

Timing

          The Green Investment Bank will begin operating in April 2012, according to the latest statement of the Government in the House of Commons in May 2011.  The legislation for the bank may take longer than a year, but funds would be released within 11 months so that companies can start planning their applications for funding for green projects, including offshore wind farms, waste and industrial energy efficiency.  Now, Edinburgh and Bristol are bidding to be the home of the bank’s headquarter and a decision will be made later this year.

Limited progress in Whitehall

Downing Street in March this year launched the Carbon Plan, according to which, the Department for Business, Innovation & Skills (BIS) will get the GIB operational by September 2012 with the first annual data released on the funds in and size of investments made by the Bank by May 2013. In fact, attributable to the absence of cross-government support, the overall progress of setting up the green bank has been delayed by the Treasury which was instrumental in preventing the GIB from having any borrowing powers until 2015, subject to public sector net debt falling as a percentage of GDP. Thus, the capacity of the GIB to leverage private investment will be weakened. It is always this kind of caveat that is the barrier.

Figures from Ernst & Young show that £450 billion is needed in energy investment in the UK over the next 15 years, but only £50-80 billion is expected from traditional capital sources. (Ernst & Young, October 2010) The society had high expectation that a fully operational GIB can bridge this gap. It is more desirable for a bank which can support the transition to a low-carbon economy at the scale and speed required to deliver the targets in the Climate Change Act to be up and running much earlier.

As part of the GIB project, Downing Street also committed the government to creating green financial products such as Green ISAs, proposed by George Osborne when he was still a shadow chancellor, in order to provide consumers with opportunities to invest in the infrastructure which supports the green economy. However, hitherto, almost no progress is seen on this commitment as the Treasury considers green financial products as a matter for the GIB and thus will not offer any savings products until 2015. The different perceptions on low-carbon economy shown between departments cast doubts on how high the green agenda is on the Treasury’s priority list.

The way forward

            Vital to driving a transition to a truly low-carbon economy is the development of well-designed, long-term and stable policies that provide incentives for businesses to invest in new, green infrastructure.  Theoretically, the Green Investment Bank will unlock the major new streams of investment and give greater certainty of meeting the climate change targets.  It will work over the long term in the national interest with its focus on innovative risk aversion, sending a strong signal to investors that the UK is serious about its low-carbon transformation.  This is a tremendous opportunity to realise sustainable growth by rapidly scaling up the green investment, creating green jobs and industries of our future.  If the green bank model is a success, this will be another great contribution from Britain to the world’s economy. At the moment, what really matters is cross-government leadership that is desperately needed not to shiver the great commitment but to deliver the truly “greenest ever” government.

References

BBC News. (2011, May 14). Coalition 'losing way' on green policies - campaigners. BBC News .

BBC News. (2011, March 11). Green Investment Bank must not be compromised, say MPs. BBC News .

BIS. (2011). Update on the design of the Green Investment Bank. London: Department for Business Innovations & Skills.
Ernst & Young. (October 2010). Capitalising the green investment bank: key issues and next steps. London: Ernst & Young.

GIB Commission. (2010). Unlocking investment to deliver Britain's low-carbon future. London: Green Investment Bank Commission.

Kinver, M. (2011, May 23). Clegg: UK green bank 'to begin investing in April 2012'. BBC News .

World Bank. (2008). Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond. Washington DC: World Bank.

  

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