Written evidence submitted by the City
of London Corporation
HOUSE OF COMMONS ENVIRONMENTAL AUDIT COMMITTEE:
INQUIRY INTO A GREEN INVESTMENT BANK
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
(see www.London-accord.co.uk). Back
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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