Session 2009-10
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Memorandum submitted by the Green New Deal Group (UKFI 09) Summary:
Summary of recommendations to the UK Financial Investments Ltd (UKFI) to help transition to a low carbon economy. The Green New Deal Group recommends:
· That UKFI could play a significant role in directing finance into low carbon infrastructure in the UK through an active investment policy that prioritises lending to low-carbon projects through; a. The authorisation of lending at very low rates of interest to projects that advance the implementation of a step-change in investment in renewable energy projects in the UK, and projects that increase energy efficiency; b. The ability to take lower returns on certain investments in certain classes, in the short-term, because these are in the long-term interests of the taxpayer given the price rises inherent in the imminent peak, and decline of fossil fuels and the need to keep concentrations of greenhouse gases in the atmosphere below the point where it becomes much more likely that we trigger irreversible climate change; · That UKFI play a significant role in managing the Governments portfolio of investments to provide long-term stability and security of energy supply for the UK; · That UKFI should commission an independent review to investigate a set of clear criteria for sustainable investments, with recommendations that could be applied to its holdings; · That UKFI, in consultation with Treasury and other relevant Government departments should lead a review about how the proposals outlined above, would relate to and complement proposals already being discussed for a Green Investment Bank. Response: 1. In July 2008, nef (the new economics foundation) published the world’s first Green New Deal on behalf of the Green New Deal Group. The report, A Green New Deal, described how the global economy faced a ‘triple crunch’: a combination of a credit-fuelled financial crisis, accelerating climate change and the looming peak and decline in oil production. These three overlapping events threaten to develop into a perfect storm, the like of which has not been seen since the Great Depression. The Green New Deal Group - comprised of experts on climate change, energy and finance - came together to prevent this from happening, and to lay the foundations for the economic systems of the future. Drawing inspiration from Franklin D. Roosevelt's wide-reaching programme launched in the wake of the Great Crash of 1929, the Green New Deal offers positive action to bring the world back from the point of economic and environmental meltdown. It contains two central strands of reform: · Major structural changes to national and international financial systems, including taxation. · Sustained investment in energy conservation and renewable energy generation. 2. This response outlines the potential for UKFI to support both strands of reform. In particular, we focus on the potential for UKFI to play a part in channelling funding into a sustained programme to invest in and deploy energy conservation and renewable energies, coupled with effective demand management. This huge transformational programme must be designed to substantially reduce the use of fossil fuels while in the process tackling the unemployment and decline in demand caused by the credit crunch. The Green New Deal Group is convinced these objectives are in the immediate and long-term interest of UK taxpayers. 3. We welcome the Environmental Audit Committee’s examination of the role that UKFI can play in the transition to a low carbon economy in the UK. The UKFI is a majority shareholder of a number of the UK’s largest banks. It is our contention, that given the interlinked challenges of the imminent peak and decline of oil , of climate change and global financial instability, that long-term stakeholder interest (and the stability and security of the UK more broadly) requires investment decisions that significantly increase the UK’s renewable energy capacity and increase energy efficiency. 4. The investment context. The government needs to set out a national plan for a low-energy future and its provision on the ground. There is no such plan at present: no risk analysis of the peak-oil threat and no contingency plan for what would happen if oil or gas supplies collapsed rapidly. The lack of such a plan leaves the nation very vulnerable. Such a plan would include oversight and co-ordination for generating funding from the government, the energy industry, and a range of private savings vehicles for investment to rapidly wean the economy off fossil fuels. 5. The scale of the challenge: To reduce carbon dramatically will require expertise ranging from energy analysis, design and production of hi-tech renewable alternatives, large-scale engineering projects such as combined heat and power, and offshore wind at the high skilled end. It will need medium and unskilled work to make every building energy tight, and to fit more efficient energy systems in homes, offices, and factories. A carbon finance sector will be needed to publicise, advise, and put into practice the range of funding packages inherent in the Green New Deal. The scale of investment needed, and the mechanisms needed to ensure its implementation are set out in the Green New Deal Group’s first report, ‘ The Green New Deal. ’ UKFI could play an important role in this carbon finance sector, guiding investment to serve the best long-term interests of the UK. 6. The benefits of investment in a low carbon economy for the UK: The advantage of the massive scale of this energy transition will be the scale of job creation. Thousands of new and existing businesses and services will benefit, and a large increase in tax revenue will be generated for the government from this new economic activity. The potential benefits of this investment are quantified in the Green New Deal Group’s second report, ‘ The cuts won’t work: Why spending on a Green New Deal will reduce the public debt, cut carbon emissions, increase energy security and reduce fuel poverty.’ 7. The need for structural reform: In our 2008 report, the Green New Deal Group analysed the post-war success in an era of greatly restricted finance and low interest rates, of lower unemployment and greater stability. The Group’s longer-term proposals suggest ways to return to that economic environment, and to reverse financial deregulation. These included a permanent low level of interest rates, and very much tighter control on the generation of credit. The Group suggested de-merging large banking and financial groups and more. 8. The cost of not acting: The Stern Review showed the level of serious disruption to the economy that will be caused by inadequate efforts to abate climate change, which should render any qualms about the cost of the transition to a low carbon economy redundant. On top of this, the looming peak and decline in oil will focus minds on mobilising alternatives to oil and gas as fast as possible. There is a wall of money in pensions and other savings, plus a recognised need by the Government for people to save much more. UKFI could play a significant role in channeling the upfront funding needed for the low-carbon future through its own investment policy, and the control it now exerts over a number of the UK’s largest banks. 9. The inadequacy of change to date: Massive transfers of funds from the taxpayer to the finance sector have supported the financial sector’s assets on a temporary basis only. As the additional transfers to Lloyds and RBS have shown, they do nothing to permanently improve the underlying strength of the economy. By contrast this is exactly what the Green New Deal programme with its emphasis on productive activity can achieve. The transfer of funds from the taxpayer to the finance sector was an emergency measure, structural change is now needed. UKFI should be the agent for change in this next stage. 10. The case for effective investment. The Institutional Investors Group on Climate Change has published groundbreaking research showing that incorporating climate change is now essential for effective investment strategies. This should form the basis for UKFI’s investment strategy. 11. The role of UKFI: Following significant intervention UK taxpayers now own 84 per cent of the Royal Bank of Scotland. This controlling interest makes the UK Government de facto responsible for the investments of the bank. At a minimum the Treasury’s own Green Book guidance which stipulates: "central government to undertake a comprehensive and proportionate assessment of all new policies, programme and projects so as to best promote the public interest when using government resources," should apply to any new investment decisions. 12. UKFI policy is to "follow best institutional shareholder practice" when managing investment. To date, this has been limited to securing short-term returns for the taxpaper through "value-realisation" and "disposal". It is our contention that these short-term returns may disadvantage the UK taxpayer in the long-term, particularly where these are investments are in, for example, new oil and gas projects. The failure to invest now in the transition to a low-carbon economy could seriously disadvantage UK taxpayers in the long-term.
13.
The UKFI sustainability policy
UK FI Sustainability Policy, February 2010
http://www.unpri.org/principles/ 14. Shareholders and pension funds have already raised concerns about the investment policies of a number of the companies UKFI now manages investment for. For example, shareholders have raised significant concerns about British Petroleum’s investment in Canadian oil sands; or arctic oil drilling. 15. UKFI’s management of assets should be widened to consider full-cost accounting, whereby the economic costs of emitting carbon (as a measure of the damage this causes) are factored into investment decisions. 16. In cases where short-term returns are questioned, we believe that, in common with other public financial institutions, UKFI should be able to take lower returns on certain investments in certain classes, in the short-term, because these are in the long-term interests of the taxpayer. 17. A long-term view on investment can provide significant benefit. Triodos and the Co - op B ank, who both actively invest in environmental and social ‘goods’ fared far better during the recession. While they don’t provide project finance in the ways that many UKFI investments do, they prove there is a wider appetite for the type of investment we propose. For example:
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During the first six months of 2009, Triodos Bank’s operating profit rose by 50% compared to the same period in 2008. Net earnings for the first half of 2009 were €5.7 million compared to €3.7 million for the first six months of 2008.
Triodos half-year results 2009
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Co-operative Financial Services (CFS) [incorporating the Co-operative Bank]… has reported pre-tax profit of £81.4 million for the 28 weeks to the 25th July 2009.
Banking Times Online, September 2009 1 March 2010 18. UKFI should adopt a strong policy that would include provisions to implement the intent of the 2006 Companies Act. The revised UK Companies Act (2006) provides significant enablers to be more active in the management of companies. For example, according to clause 172, Company Directors have the Duty to promote the success of the company, and that the Directors of a company must have regard to (amongst other things): a. The likely consequences of any decision in the long term, and b. The impact of the company’s operations on the community and the environment. 19. These recommendations could apply directly to UKFI, and not just to its financial holdings. UKFI should have directors with specific expertise in, and responsibility and for environment and social governance. 20. UKFI can and should play a significant role in mobilising the funds needed to de-carbonise and localise the economy and to help mitigate climate change before we reach a point of no return. They remain essential to both the recovery of the economy and to preventing irreversible climate change. 21. UKFI should commission an independent review to investigate a sustainable bank model, with recommendations that could be applied to its holdings. 22. UKFI, in consultation with Treasury and other relevant parts of Whitehall , should lead a review about how the proposals outlined above would relate to and complement proposals already being discussed for a Green Investment Bank. |
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| ©Parliamentary copyright | Prepared 13:36 on 15th March 2010 |