Written evidence submitted by the World
Development Movement
The World Development Movement (WDM) campaigns to
tackle the root causes of poverty. With our partners around the
world, we win positive change for the world's poorest people.
We believe that charity is not enough. We lobby governments and
companies to change policies that keep people poor. WDM is a democratic
membership organisation of 15,000 individuals and 60 local volunteer
groups, with offices in London and Edinburgh.
SUMMARY OF
KEY POINTS
IN RESPONSE
The financial crisis cost the UK £129 billion
in annual GDP and increased the structural deficit by £93
billon.
The UK can't afford another meltdown, yet short term,
high risk, carbon intensive investments are still business as
usual for the banks.
The coalition government has an opportunity to redefine
the role of banks in society, rather than allow the sector to
return to the short-termist approach which contributed to the
financial crisis - and a Green Investment Bank (GIB) should form
a key part of this.
If adequately resourced and managed, the new GIB
can provide a number of crucial functions to kick-start low-carbon
growth, including enabling risk-sharing, providing a benchmark
standard for green investments, supporting research and development,
attracting global expertise, leveraging additional capital and
offering a focal point for UK government policy coherency on green
financing.
The bailed-out banks should be brought within the
policy framework of the GIB. The largest public recapitalisation
of a UK bank occurred at the Royal Bank of Scotland, with the
UK government currently having an 83% stake in the bank. With
the government shareholding in RBS, there is an opportunity to
use this bank to set an example to its peers. In order to protect
its shareholding and demonstrate its commitment to a low carbon
future, the new Government should utilise RBS as a way of delivering
the GIB.
The GIB needs to drive the development of zero-carbon
energy in order for the UK to achieve its goal of cutting greenhouse
gas emissions by 80% by 2050. The GIB should support innovators
and small businesses that are developing the low carbon and energy
efficient technologies of the future.
GIB must have clear accountability and strong active
management to deliver the investment required, and a single government
department should have responsibility for its success.
The GIB will need to apply a longer investment horizon
than the short-termism that drives much of the behaviour within
the City and be in a position to provide enough certainty for
investors and share enough risk to leverage funding from the private
sector.
The GIB has an opportunity to use the credit rating
of the government to securitize debt and guarantee loans, without
increasing the national debt.
The establishment of a GIB provides significant opportunities
to develop a market framework that could help the financial sector
play a more active role the urgently needed transition to a low
carbon economy and, in so doing, rediscover a socially useful
purpose.
By creating a GIB with sufficient scale and momentum,
the UK will benefit from improved energy security, stabilised
energy costs, the creation of green jobs, greater efficiency and
improved international competitiveness.
ANSWERS TO
QUESTIONS OUTLINED
BY THE
ENVIRONMENTAL AUDIT
COMMITTEE
1. Barriers or market failures requiring the
establishment of a GIB; and risks of not getting this done quickly
There has been extensive analysis of the causes of
the financial crisis, with a complex range of factors cited including
US sub-prime mortgages, regulatory failure, excessive consumer
debt levels, short-term funding markets, and international trade
imbalances. There has also been a major spotlight on the banking
sector after what were thought to be "invincible" banks
failed.
The financial crisis cost the UK £129 billion
in annual GDP and increased the structural deficit by £93
billon (see appendix for details of calculations). The initial
budget cuts announced by the coalition government demonstrate
the pain this is causing to public services. The UK can't afford
another meltdown, yet short term, high risk, carbon intensive
investments are still business as usual for the banks. Allowing
this to continue presents an unacceptable financial and environmental
risk, for example banks such as RBS continue to finance companies
opening up new sources of fossil fuels, despite the warnings of
the Stern Review on the economics of climate change and the predictions
of the IPCC about the impacts of further rises in global average
temperatures.
The cost of the financial crisis to the UK
There are three main ways in which the financial
crisis has impacted the UK economy:
the cost of bailing out insolvent UK banks;
the loss of productive capacity in the UK economy
arising from the economic crisis; and
the impact on the public finances through lower productivity
capacity leading to lower tax receipts and higher public expenditure.
Unless the financial sector changes the way it does
business, the UK risks being exposed to further meltdowns in the
future, with a weakened economy even less able to deal with the
subsequent stress.
The problems at Northern Rock, Bear Sterns, Lehman
Brothers, RBS and HBOS indicate the need for a change from the
focus on profit at the expense of vulnerable customers and small
businesses. At present there is a risk that the big investment
banks are just returning to business as usual, ie short-termism.
The largest public recapitalisation of a UK bank
occurred at the Royal Bank of Scotland, with the UK government
currently having an 83% stake in the bank. With the government
shareholding in RBS, there is an opportunity to use this bank
to set an example to its peers. The £45 billion RBS shareholding
sits with UKFI.[51]
At the time of investment it was indicated that UKFI would seek
to divest from the banks at an appropriate time in the future.
The new government may be taking a more long-term view however,
which Vince Cable MP, expressed just prior to the May 2010 election
that: "These banks should remain effectively under public
control for something in the order of a decade."[52]
This approach provides the new government with the
opportunity to direct RBS as a force for good, rather than use
the excuse of potential divestment to avoid responsibility as
the previous government did.
The Office for Budget Responsibility has recalculated
the deficit for 2010-11 at £114 billion.[53]
The government spent a total of £117 billion recapitalising
the banks.[54]
With the coalition government under severe pressure to reduce
the deficit and cut expenditure, it is even more imperative that
they demonstrate some value from this investment.
If the regulatory framework is not set up to deliver
more responsible financial products, then the GIB will not flourish,
which will send the wrong signal to other banks. Those banks,
such as RBS, which the government has an interest in need to be
aligned with a low carbon banking agenda, otherwise taxpayers'
interest in them will be at risk. If the government is serious
about meeting its greenhouse gas targets then it needs to entrain
financial institutions to deliver the required infrastructure.
The new government is promoting mutuals, setting
lending targets for banks, and establishing a committee to review
separating the retail and investment banking divisions of large
banks.[55]
This agenda, combined with the establishment
of a GIB, provides significant opportunities to develop a market
framework that could help the financial sector play a far more
active role in supporting viable entities to contribute to a low
carbon economy, and in so doing, rediscover a socially useful
purpose.
2. Objectives and roles the GIB should assume;
areas it should and should not operate in; how its lending and
investment decisions should balance green benefits against financial
risks. The GIB's investment priorities; whether and how the bank
should support and foster areas where the UK has emerging green
technology strengths
The Stern Review on the Economics of Climate Change
in 2006 for HM Treasury outlined the case for early action on
climate change:[56]
Stern observed that; "climate change is a result of the greatest
market failure that the world has seen."[57]
The financial crisis also serves as a warning that relying on
unfettered markets to solve climate change is a very high risk
strategy, and the framework established by governments needs to
significantly improve.
History shows us that without a clear mandate to
initiate a transition to a low carbon economy, financial institutions
have limited interest or incentive to address this issue.
The longest standing example of this is perhaps the
UK Export Credit Guarantee Department (ECGD), which for years
has chosen to interpret its mandate to merely respond to the demands
of existing fossil-fuel based energy companies, rather than drive
development of a new clean-tech UK industrial base.[58]
The coalition government has accepted the need to change this
situation which could complement the work of a GIB by supporting
exports of UK-based renewables manufacturers.
It is estimated that at least £200 billion needs
to be invested in UK energy infrastructure over the next 10-15
years. The proposed GIB must be clearly aimed at financing renewables
and energy efficiency, in order to deliver the rapid emissions
cuts the UK has committed to. If adequately resourced and managed,
the new GIB can provide a number of crucial functions to kick-start
low-carbon growth. These include enabling risk-sharing, providing
a benchmark standard for green investments, supporting research
and development, attracting global expertise, leveraging additional
capital and offering a focal point for UK government policy coherency
on green financing.
The "green" standards need to be at the
core of all investments promoted by the GIB. This should be defined
so that it drives investment to the leading edge of low carbon
energy. The GIB needs to ensure it is only financing projects
or technologies that will reduce the carbon intensity of energy
production. The GIB needs to be driving the development of zero-carbon
energy in order for the UK to achieve its goal of cutting greenhouse
gas emissions by 80% by 2050.
A significant level of investment in research and
development and new infrastructure is needed in order to advance
the renewable industry even further and make it the global norm,
rather than a novelty. Whatever the industry, it has always been
necessary to invest in development to deliver fundamental change.
The limited sums invested by the oil majors in renewables compared
to the amounts ploughed back into deepwater technology (eg Gulf
of Mexico), and unconventional oil exploitation (eg Canadian tar
sands) have restricted the growth of renewables. The negative
externalities of this focus for local communities and the global
environment are now clear for all to see. The GIB needs to support
innovators and small businesses that are developing the energy
technologies of the future.
The GIB will need renewables expertise, in order
to understand the markets it is trying to promote, and how to
overcome the barriers currently faced by the sector. Other regulatory
environments have historically been more favourable than the UK,
although following the offshore wind regime developments, the
UK became joint 6th most attractive regulatory climate for renewable
according to Ernst & Young's analysis in February 2010.[59]
3. Funding and governance structures required
to create an effective and accountable body, including the role
of green bonds
We believe it will be important for the GIB to have
clear accountability and strong active management to deliver the
investment required. It would therefore be preferable for a single
government department to have responsibility for the success of
the GIB, and to report against both investment targets and carbon
emissions reductions and renewable targets. These climate change
related targets should also be a major part of any incentive package
for those employed by, contracted to or partnering with the GIB.
The GIB will need to apply a longer investment horizon
than the short-termism that drives much of the behaviour within
the City. There are already approaches emerging which exemplify
this.
Venture capitalists typically own companies for at
least five years, giving them a strong interest in the viability
of a company over several years. It is also vital for them to
demonstrate a healthy future for their companies in order to realise
an exit strategy. For example Vantage Venture Capital focuses
on groups of clean-tech companies that complement each other.[60]
It has holdings in electric vehicle manufacturers, battery manufacturers,
infrastructure providers and zero carbon power generators that
together form a value chain for the roll-out of electric cars.
In a departure from its fossil fuel activities, the
World Bank has issued a series of green bonds (totalling $1.5
billion), in partnership with commercial banks such as SEB (Sweden)
and Daiwa Securities (Japan), which have attracted investment
from a range of US and Scandinavian Pension Funds.[61]
All projects meet low carbon criteria developed by the World Bank
and consist of a range of climate change mitigation and adaptation
activities from around the world.
The Labour government's proposal was that half of
the initial £2 billion in equity is to be provided by the
sale of state assets, such as the channel tunnel rail link, with
the other half coming from the private sector. There are a range
of other revenue streams which could be earmarked to provide ready
capital for lending. These include:
The Committee on Climate Change has indicated that
it expects revenues from the auctioning of EU Emissions Trading
Scheme permits to raise £40 billion by 2020, (estimate only).
The government's platform for banking reform also indicates new
a banking levy and social responsibility levy for the sector which
could be used to ensure a ready flow of capital into the GIB.
The UK government has averaged £9 billion per
annum in oil and gas revenues over the last five years[62]
(Norway used its petroleum revenues to establish an investment
fund in 1990 which now stands at US$ 838 billion).[63]
The government could also learn from its Scandinavian counterparts
and establish a sovereign fund that seeks to finance a sustainable
future for the country, rather than continuing the policy of exploiting
finite resources such as coal and oil, with no investment plan
for a viable low carbon economy beyond this.
The GIB could also go to the markets to raise capital,
using mechanisms such as green bonds or venture capital funds.
This would be a way of bringing in private capital to augment
the funds provided by the government purse.
The GIB should not be reliant on a significant state
funding stream, especially in the context of the huge budget deficit
facing the UK. However it must be accepted that some investment
is needed in order to deliver the green growth that is needed
to drive the UK out of recession. It is more important however
that the GIB is in a position to provide enough certainty for
investors and shares enough risk to leverage funding from the
private sector.
The different funding needs of initially capital-intensive
renewable projects which have low operating costs need to be met
by the products offered by a GIB. Risks faced by the renewable
sector need to be addressed so that it is more attractive to investors.
For example, guarantees covering regulatory risk or insurance
for offshore wind construction risk could remove current barriers
for investors. The bank will therefore need to be managed by people
with expertise in these target sectors, as well as in finance.
International experience of raising finance and structuring
deals will be required to get UK projects moving. The GIB could
provide a range of different types of financial services to the
green sector over time. These could include:
Risk guarantees and insurance pools.
Securitization funds.
Bond issuance.
Venture capital.
Research loans.
It is also interesting to note that the new government
is keen to promote green retail products such as green Individual
Savings Accounts (ISAs), which will provide greater tax benefits.
These retail products will also need a green economy to invest
in, which links to the role of the GIB. There is also scope for
working with institutional investors, including the government
pension funds, and fund managers, who apply responsible investment
criteria to produce a range of investment products.
If the GIB is set up with an initial £2 billion
in equity it is clear it will need to leverage private capital
many times that amount each year in order to deliver the clean
energy infrastructure required by the UK. Since the credit crunch,
the primary challenge to the banking sector has been to start
lending again, in order to facilitate the flow of capital. The
GIB has an opportunity to use the credit rating of the government
to securitize debt and guarantee loans. Critically, these forms
of support will not increase the national debt, as the GIB would
not be providing the actual finance. The GIB can also play a crucial
brokering role between the renewable energy industry and private
financial institutions, to help overcome any existing barriers
to finance. As well as working with private finance, the GIB will
also be expected to identify international sources of funding,
from the European Union for example.
The GIB needs to part of an overall policy framework
of tax incentives, market mechanisms and regulations which drive
green investment. The UK has been hedging its bets for too long,
not providing certainty over the direction our energy future should
take. This has resulted in a perpetuation of the status quo -
a dependence on fossil fuels. A GIB will only be successful is
there are no more mixed messages, and a clear path is agreed,
with all government departments and interests aligned.
The Royal Bank of Scotland is ideally placed to deliver
GIB's required functions, with its existing experience in financing
renewables. In particular, RBS has been active in the offshore
wind sector, which Infrastructure UK indicates as a likely first
priority for finance. The government must establish a policy framework
to support the objectives of the GIB, and then ensure that RBS
is aligned to this strategy to ensure it makes the most of investment
opportunities in the green energy sector. In order to protect
its shareholding and demonstrate its commitment to a low carbon
future, the new Government should therefore utilise RBS as a way
of delivering the GIB.
THE BENEFITS
OF FINANCIAL
SECTOR REFORM
TO THE
UK
An effective GIB at the heart of a more sustainable
financial system should bring the following benefits:
Improving energy security,
by easing initial costs of paying for the new infrastructure to
deliver long-term energy security for the UK, so it can become
an energy exporter.
Stabilising energy costs,
by ensuring the scaling up of renewables and so reducing the financial
costs of the energy supplied in the long term.
Creating green jobs, by
delivering growth in the low carbon economy. The environmental
goods and services sector is predicted to create around 50,000
jobs per year, if the GIB delivers the necessary growth.
Supporting international competitiveness
by increasing the UK's market share in environmental industries.
Increasing government efficiency
by providing a focus for its green finance interests which are
currently dispersed and lacking overall coherence.
This submission is based on the report "A Bank
for the future; maximising public investment in a low carbon economy",
June 2010. It was commissioned by the World Development Movement
and Platform, and written by James Leaton.
APPENDIX
The Treasury's total net cash outlay for purchases
of shares in banks and lending to the banking sector, including
Northern Rock, amounted to around £117 billion by 2010. The
Treasury's additional potential exposure to banking losses (through
insurance of bank assets and Bank of England lending) totals over
£1 trillion. The Treasury estimated in April 2009 that there
may be a one-off loss to the taxpayer of between £20 and
£50 billion.
The March 2010 Budget assumed that by 2015, the reduction
in output was 6.5% of GDP.
The June 2010 Pre-Budget forecast from the Office
of Budget Responsibility produced revised estimates which suggest
a greater reduction in output - 8.75%. This means that, on the
most recent government estimates, the financial crisis permanently
reduced UK output by almost 9% per year. The latest ONS projections
suggest that in the current tax year, GDP will be valued at £1.476
trillion. 8.75% of this figure equals around £129 billion
in lost GDP.
In the 2007-08 tax year HM Treasury calculated the
structural deficit to be 2.5% of GDP. The recent forecasts from
the OBR estimate that the structural deficit increased to 8.8%
of GDP in the year 2009-10.[64]
The correct measure of the effect that the financial crisis has
had on the structural deficit can be arrived at by subtracting
the 2007-08 deficit (pre-crisis) from the 2009-10 deficit (post-crisis).
This gives a figure of (8.8-2.5) = 6.3% of GDP. This suggests
that the financial crisis had an overall impact on the public
finances equal to around £93 billion.
The estimates presented here, although substantial,
should be viewed very much as lower bounds on the cost of carrying
on with "business as usual". It has become clear that
complex risk transfer products only provide short-term profits
for the few, at huge cost to the overall economy. Similarly the
externalities of fossil fuels, in terms of both local pollution
and global climate change, bring negative consequences for our
societies which are not acceptable.
18 October 2010
51 http://www.ukfi.co.uk/releases/115_2%20FW%20Update%20Jan%202010_10_AW_LR.pdf Back
52
http://www.businessweek.com/news/2010-04-27/cable-wants-lloyds-rbs-to-stay-under-u-k-control-for-decade.html Back
53
http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.pdf Back
54
http://www.nao.org.uk/idoc.ashx?docId=e19e64bd-0f13-4f9f-a412-592cbf6ef00f&version=-1 Back
55
http://www.timesonline.co.uk/tol/news/environment/article3666273.ece Back
56
http://www.hm-treasury.gov.uk/sternreview_index.htm Back
57
http://www.guardian.co.uk/environment/2007/nov/29/climatechange.carbonemissionsx
http://news.bbc.co.uk/1/hi/8694327.stm Back
58
http://www.timesonline.co.uk/tol/news/environment/article3666273.ece Back
59
http://www.ukinvest.gov.uk/United-Kingdom/105844/es-ES.html Back
60
http://www.vpvp.com/portfolio_cleantech Back
61
http://treasury.worldbank.org/cmd/htm/WorldBankGreenBonds.html Back
62
http://www.hmrc.gov.uk/stats/corporate_tax/table11_11.pdf Back
63
http://www.regjeringen.no/upload/FIN/Statens%20pensjonsfond/PF-summary-aug08.pdf Back
64
The structural deficit is forecast to fall in future years, reaching
2.8% by 2014-15; because of planned tax rises and spending cuts
which will reduce the deficit, rather than due to any underlying
improvement in the UK's economic outlook. Back
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