Memorandum submitted by Green Alliance,
People & Planet, PLATFORM and the Royal Society for the Protection
UKFI & RBSTHE GOVERNMENT'S
(a) This evidence outlines the extent to
which RBS are continuing to provide finance for significant projects
responsible for climate changing emissions, what UKFI is doing
about this, what they would need to do to match the best responsible
investment practices, to which the Government frequently calls
on private institutional investors to apply.
(b) This evidence will focus on the investments
UKFI has in the Royal Bank of Scotland, although lessons from
it apply to all of the financial institutions in which UKFI has
shares. This focus is for two reasons:
(i) RBS has historically been and remains the
UK's biggest financier of fossil fuel extraction.
(ii) RBS is the bank in which the UK Government
has the largest financial stake.
2) RBS and fossil fuel extraction: The Oil
and Gas Bank.
(a) RBS is the UK's biggest fossil fuel
financier. The 2007 report "The Oil and Gas Bank" (Minio-Paluello)
found that "The Royal Bank of Scotland is the primary UK
bank financing new extraction of the fossil fuels." The report
argues that, in 2006, the emissions resulting from its investments
were greater than the domestic emissions for the whole of Scotland.
(b) The 2008 report "Cashing in on
Coal" (Smith) examines the role played by RBS, HSBC, and
Barclays in providing finance for coal projects. It finds that,
of these banks, "the data available shows RBS as having been
involved in the greatest number of loans as well as having been
responsible for loaning the largest estimated sum of money."
(c) A more recent report by actuary Nick
Silver (2009) argues: "A recent report from PLATFORM found
that embedded emissions from project finance attributable to RBS
was 44 M tonnes of CO2 in 2006|. However, most of these projects
were in collaboration with other lenders and the total annual
emissions from these projects was 825 M tonnes of CO2, significantly
more than the UK's total direct emissions and 3% of global emissions.
So, through its ownership of RBS, the government potentially has
a larger influence on global carbon emissions than it does through
all domestic activities."
(d) The February 2010 report "Cashing
in on Tar Sands" finds: "between 2007-09, the Royal
Bank of Scotland (RBS) has led underwriting for the largest amount
in loans (of UK high street banks) to companies operating in tar
sands in Canada, to a total of more than $7.5 billion." (Evans
et al, 2010). The report also outlines the extent to which this
project is harming First Nation Canadians, and destroying crucial
(e) RBS sometimes argue that they are also
significant financiers of renewable energy. Whilst this is, of
course, welcome, the necessary transition to a low carbon economy
is not possible unless fossil fuel extraction and burning is rapidly
displaced with low carbon technologies. A forward looking investor
needs to be finding ways of getting out of the fossil fuel economy
and into the growing alternatives.
(f) As well as financing projects responsible
for the greatest volume of greenhouse gas emission, RBS have financed
numerous projects which have caused substantial controversy. The
banks's energy investment strategy appears not to have been affected
by UKFI becoming the majority shareholder. For example, in January
2010, Reuters reported that RBS had acted as a joint global co-ordinator
on a share deal for Tullow Oil worth 925 million. RBS was also
involved in financing Tullow in March 2009 (Crookes, 2009), when
RBS provided around $100 million. Tullow Chief Executive Aidan
Heavey told Reuters that the funds raised by RBS would allow Tullow
to bring their Ugandan fields to production. The Platform report
"Cursed contracts, Uganda's oil agreements place profit before
people" (Lay, 2010) and Guardian article "Uganda oil
contracts give little cause for optimism" (Lay, 2010) outline
how this deal risks increasing violence and corruption with little
benefit for the people of Uganda.
3) What actions can UK Financial Investments
take within its current remit?
(a) According to UKFI's website: "Our
overarching objective is to protect and create value for the taxpayer
as shareholder with due regard to the maintenance of financial
stability and to act in a way that promotes competition."
As this statement makes clear, UKFI do not currently see taxpayer
value as extending beyond the role taxpayers have as shareholders
(other than with regard to competition in the marketplace). Even
within this mandate, UKFI could still go much further to ensure
its investments help, rather than hinder, the transition to a
low carbon economy.
4) What is UKFI doing now?
(a) UKFI has no Responsible Investment Strategy,
no Climate Change Policy and, until recently, it had no Sustainability
(b) After legal challenges and pressure
from green groups, UKFI published a Sustainability Policy in February
2010 (available at http://www.ukfi.gov.uk/about-us/what-we-do/).
5) How could this be improved?
(a) This policy is some way behind best
practice amongst the institutional investment community. We will
take the Universities Superannuation Scheme (USSthe pension
fund for university employees) as a comparator. They have a number
of documents detailing the processes by which they ensure investments
are socially responsible. They have also signed up to the principles
of the Institutional Investor Group on Climate Change (http://www.iigcc.org/),
and the United Nations Principles of Responsible Investment (http://www.unpri.org/principles/).
UKFI has not signed up to either of these.
(b) The United Nations Principles of Responsible
Investment have 700 signatories from investors responsible for
billions of pounds. The Institutional Investor Group on Climate
Change have more than 50 members. Many UK public sector investors
have signed these principles. UKFI ought to do the same, or, at
the very least, incorporate them into their own policies.
(c) The policy fails to recognise that UKFI
is a universal investor. The Universities Superannuation Scheme
Responsible Investment Strategy 2006, for example, explains: "Universal
Investors have holdings that are so diversified that their investment
returns are impacted by the returns from the economy as a whole
as much as any specific industries or companies. This gives UIs
a breadth of concern that aligns with whole market performance.
For example, pension funds can be concerned with externalisation
of costs such as pollution and training of staff, whereas an owner
with a perspective limited to a particular company or industry
may consider these to be unacceptable expenses because of competitiveness
(d) Similarly, as Nick Silver points out,
(Silver, 2009) this is an argument the government has made to
investors: City Minister Paul Myners said recently: "Any
change that will lead to fund managers behaving more like "owners"
and less like "investors" will have to come from the
end client| Short-termism, as practised by pension funds, is self-defeating
for those charged with delivering pensions over many decades into
the future, and yet it remains a predominant form of behaviour|
"A focus on `shareholder value', as measured
by relative share price performance over quite short time periods
lies at the heart of a number of behaviours which have delivered
less than ideal outcomes, such as| A failure to take account of
the longer-term consequences of investment activity, including
impact on the broader economy and society."
(e) The UKFI policy says: "If it were
proved to be the case that any of our investee companies' sustainability
policies, including environmental, social and governance issues,
were significantly out of line with existing regulatory standards
and guidelines such that they would have a negative effect on
the value of the company and its shares|". Other investors
recognize that such a provision is not sufficient. UKFI has a
stake in four separate financial institutions which, between them,
have a large stake in the UK and global economies as a whole.
If RBS externalize a cost or a risk onto a company in whom Lloyds
have invested, then UKFI stands to lose out, even though RBS don't.
(f) The USS strategy says it seeks to "Ensure
USS Ltd plays its role as a Universal Investor| the Fund has an
interest in ensuring that externalities and market failures (for
example, in the form of pollution or systemic / weak corporate
governance controls) do not affect market wide economic performance."
By limiting its concerns to each bank's own separate share value,
UKFI is failing in its fiduciary duty in that it will only take
action when it's investees have policies which damage themselves,
rather than taking into account the fact that they could damage
each other. It may be that long term future external costs, such
as climate change, do not impact UKFI, who do not aim to exist
in the long term. But the policy does fail to recognise those
externalities which have more immediate riskssuch as risks
from funding projects which may de-stabilise central Africa (see
Lay, 2010, for example).
(g) PriceWaterhouseCooper argue in their
November 2009 report "Back to the futureGovernment,
financial institutions and the global financial crisis" (PWC
2009) that the Government is likely to have shares in the bailed
out banks for years to come. John Hitchins, UK banking leader,
PricewaterhouseCooper, said: "Governments need to accept,
given the limited likelihood of a quick extraction from the sector,
that their main focus needs to be on the positive role they can
play given they are `inside the tent'. With governments retaining
stakes in FIs for some considerable time |they must: be seen
to be `good owners' focusing on wider social and economic objectives
as well as narrow financial goals."
(h) The final paragraph of the UKFI policy
says "If it were proved to be the case that|" However
it gives no account of how this will happen. It is possible that
UKFI have, alongside this policy, put in place appropriate mechanisms
to monitor RBS investments but there is, as yet, no evidence to
(i) The report "Towards a Royal Bank
of Sustainability" has recommendations for what UKFI would
have to do to match investment industry best practice:
(i) Becoming a signatory to the Carbon Disclosure
Project (CDP), enabling UKFI to assess the climate risks of its
(ii) Being fully transparent by stating clearly
guidelines on Environmental, Social and Governance (ESG) considerations
and undertaking a periodic independent audit that takes into account
(iii) Seeking expert advice on how best to incorporate
ESG considerations into its investment analysis and decision making
(iv) Behaving as an active owner and incorporating
ESG issues into its ownership policies and practices; as well
as seeking appropriate disclosure on ESG issues by the entities
in which it invests.
(v) It is not clear that UKFI has fully met any
of these proposals despite the fact that these are the very principles
of best practice the Government has long been encouraging investors
to follow. Furthermore,these proposals are all clearly strategic
in nature, rather than management decisions for RBS themselves
so it is appropriate for UKFI to intervene.
(vi) UKFI have chosen to interpret their mandate
narrowly. Increasingly, investors have active sustainability policies.
The principles on which these are based are widely understood
and promoted by the Government. Yet UKFI fails to follow them.
6) Why UKFI's mandate should be extended/clarified.
(a) If UKFI currently has a mandate to prioritise
direct shareholder value above the broader interests of the UK
government, this is problematic. With the Universal Investor principle,
institutional investors know they have a broader stake in the
economy as a whole than do the individual companies in which they
invest. As a result, there is a conflict between the interests
of investors, and those of investees. Investors actively oversee
company strategies in order to ensure theirs are the interests
which are secured.
(b) UKFI has a direct fiduciary interest
in much of the UK economy. But UKFI's owners'HM Treasuryhave
a much larger stake in the longer term future. If it is appropriate
for investors to intervene in their investees in order to secure
their broader financial interests, then it is similarly appropriate
for the Government to intervene in UKFI in order to secure their
(c) The Government should, essentially,
apply a "universal investor plus" principle. While UKFI
and RBS may not have a long term stake in the costs resulting
from the burning of fossil fuels, the UK Government does. Lord
Stern suggests climate change risks a 20% reduction in GDP. Nick
Silver suggests RBS alone are involved in projects and companies
responsible for 3% of global emissions. Effectively, the Royal
Bank of Scotland is externalising costs onto its owners.
(d) As well as recommending that UKFI match
best practice of institutional investors, Nick Silver also highlights
the necessary steps for UKFI to provide leadership by:
(i) Providing incentives for long-term, sustainable
behaviour by linking executive pay to the companies' long-term
performance and to the bank's environmental and social performance.
(ii) Ensuring bank lending is screened on environmental
and social criteria. The bank's commercial customers should be
subject to independent audit on environmental and social criteria.
(iii) Appointing a board member with specific
ESG (Environmental, Social and Governance) responsibilities.
(iv) Commissioning an independent review to investigate
a "sustainable" bank model, with recommendations and
lessons learned that could be applied to RBS.
(e) It would be possible for UKFI to introduce
such policies with their current mandate. Active ownership is
entirely in keeping with policies of many large investors. These
are appropriate strategic decisions for owners to take, rather
than management decisions which ought to be left to RBS. However,
as UKFI have failed to enact these, the Treasury ought to make
it clear that they are expected to.
(f) The application of the "Universal
Investor Plus" principle requires setting a strategic direction.
It is not sufficient to simply "negatively screen" projectsto
prevent financing for those which are most destructive. The Government
should also push for strategies which align with their interestsjust
as pension funds do. The Norwegian Government Pension Fund, for
example, not only has comprehensive ethical guidelines (Norwegian
Finance Ministry, 2004). They have also recently decided to actively
use a proportion of their funds ($4 billion) to finance green
energy. The Financial Times (Lamont, 2009) were told by a Norwegian
Government representative that "the new investment strategy
reflected Norway's recognition of the need for a strong partnership |
`in the international arena to find a solution to challenges such
as climate change'".
7) Towards a Green Investment Bank.
(a) In parallel to debates about UKFI's
remit, the Government and opposition parties have been considering
proposals to establish a state backed Green Investment Bank. Green
Alliance, E3G, Policy Exchange, Climate Change Capital and others
have called for the establishment of such a bank to lever in significant
private capital for investment in the infrastructure required
to deliver a low carbon economy. There are a number of ways that
such a bank could be created, but to be successful it will need
a capital base. One route would be to use a proportion of the
public stake in UKFI to provide some of the initial capital for
a Green Investment Bank. The energy funds in RBS could be transformed
over time into a low carbon infrastructure fund, and held back
from sale when shares of RBS are eventually sold.
(a) The Government's failure to properly
scrutinise RBS and the other bailed-out banks from financing fossil
fuel extraction could be their biggest contribution to global
climate change. If they accept the arguments they have previously
made to pension funds about responsible investment, and if they
are to truly help the effort to transition to a low carbon economy,
then they must act now.
(b) The report "Towards a Royal Bank
of Sustainability" has a number of clear actions the Treasury
and UKFI could take, and we recommend that they do.
(c) We further recommend that they look
at the possibility of using part of the stake in RBS as a foundation
for a green investment bank.
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25 February 2010