The Green Investment Bank - Environmental Audit Committee Contents

Written evidence submitted by the City of London Corporation


This letter responds to the recent invitation to submit written evidence to the above inquiry. The City of London Corporation welcomes the Government's investment into clean technology (cleantech) and fully supports the benefits which cleantech will bring to the country now and for future generations. The City Corporation has previously reported on the role financial services play in delivering green investment, which may be of interest to the Committee. In 2007 the City Corporation published research examining the financing of cleantech in the UK, in 2008 it established the London Accord a collaborative research project which provides open access to financial research by some of the worlds leading financial service providers into the low carbon economy. These reports will form the basis of the information for this submission.

It is important to note that the UK will face strong global competition from established European firms, the USA and from the emerging cleantech players in China and India. Currently none of the top ten global cleantech firms are based in the UK and most activity is retained within business units of major energy corporations. The City Corporation in collaboration with the think tank, Forum for the Future examined the UK financing landscape for cleantech firms, basing its findings on a series of consultations with financial services. It found that the Government has played a crucial role in the UK's cleantech industry and in order to sustain the development of the industry, in the face of such competition, it must maintain a joined-up approach to policy and provide consistency for the private sector to develop and invest in new technologies. The report recommended that in order to sustain private sector investment in the cleantech sector there is a need for the Government to:

Set concrete mid- to long-term sustainability targets to provide financiers and developers with a stable platform for innovation.

Target mechanisms to increase commercialisation and address early stage financing gaps and improve scaleable funding models.

Leverage public procurement to drive innovation and create additional demand.

Address wider barriers to investment including testing and certification procedures and fine-tune fiscal incentives.

The report also found that UK cleantech finance has grown significantly in recent years. The growth can be attributed to increased venture capital investment and stock exchange listings for cleantech firms, as well as a consequence of growing social, political and corporate concerns over the environment. In Europe the UK is a lead investor in the share and spread of cleantech venture capital. According to figures from the cleantech Venture Network, the UK accounted for almost a third (€603 million) of the total €1.9 billion invested across Europe between 2003 and 2006. Prior to 2008 the Alternative Investment Market (AIM) was becoming home to smaller cleantech firms from around the globe. However, the AIM as a whole suffered in the financial crisis, and although the AIM's cleantech sector recovered well in 2009, it did not outperform the AIM as a whole, which rose more than twice as much. Therefore, current indications imply the Government should be aware of the Green Investment Bank pushing out the more sensitive private sector, especially at a time when a broader range of investors, as highlighted in the report, are looking at cleantech opportunities. Recent interest has emerged from small to mid cap listed equity funds from mainstream asset managers, dedicated investment vehicles and hedge funds.

In 2009 the City Corporation and London Accord[79] commissioned the Consilience Energy Advisory Group to analyse the role of financial services in supporting action on climate change. The report proposed the use of "Carbon bonds" as an "innovative finance structure which could be harnessed in order to assist in the fight against climate change".[80] The London Accord's model for index-linked carbon bonds would underwrite the risk associated with investment in a new policy area. Unlike other bonds, the index-linked carbon bond is a Government issued bond where the base rate is fixed, but actual interest payments vary depending on whether or not the issuer keeps an environmental promise. This in effect relinquishes the regulatory risk from other project risks, including base rate risk, and is managed separately. This will mean that those who invest in an index-linked carbon bond would receive a better return if the targets are not met. Such a model of investment would gives the investor a high degree of certainty over the regulatory environment and therefore gives greater confidence and motivation to invest. In turn the Government is incentivised to meet its targets for carbon reductions in order to pay out a lower interest rate on the bond. If they fail to meet the green targets, they have to pay out the higher interest rate.

However, as the report into cleantech financing suggested, funding from the private sector should not be overlooked. The involvement of a broad range of financial institutions from banks and venture capitalists through to insurers and a range of investors, as mentioned earlier, would also be required to ensure the success of the Government's investment. The reports also indicate that a strong commercial skills base should be accompanied by the Green Investment Bank having a sound knowledge base of the cleantech market. Green Investment Bank analysts will, therefore, need to boost "sell side coverage of cleantech stocks to provide the necessary information for investor decision making".[81]

20 October 2010

79   The London Accord is an open source collaborative research project, which allows free access to reports written by a range of financial services firms, providing insight into environmental, social and governance issues ranging from renewable energy to the price of carbon to microfinance to governance

80   "Delivering Copenhagen: The Role of the City's Financial Services Sector in Supporting Action on Climate Change", City of London Corporation, December 2009. Back

81   "Clean Capital: financing technology firms in the UK", Forum for the Future, February 2007. Back

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