Written evidence submitted by UKSIF
SUMMARY
1. UKSIF welcomes the Government's plans to create
a Green Investment Bank. We note that this measure has secured
cross-party support.
2. We believe that there is strong and credible
evidence from a range of sources as to the low carbon investment
gap that needs to be bridged. In the current fiscal climate, it
is clear that this will require mechanisms to encourage, support
and accelerate private sector investment in the low carbon transition.
Again, this view is widely supported.
3. Like other low carbon finance, the success
of the Green Investment Bank depends crucially on a trustworthy
and predictable (and hence investable) public policy framework
that enables robust long-term business cases for low carbon investment.
High political risk - including just the fear or perception of
this - is likely to result in both insufficient and unnecessarily
expensive capital.
4. Assuming such a stable and effective public
policy framework, UKSIF believes that the Green Investment Bank
can and should raise finance from both institutional and retail
investors in the private sector via "green bonds" and
"green ISAs". This does not preclude use of infrastructure
funds. However, while investor exposure to infrastructure as an
asset class may increase over time, there is a wide consensus
that infrastructure funds alone are unlikely to secure sufficient
investment within the required timescale.
5. These investments need to meet conventional
investment requirements. To achieve the scale of investment required,
they should not assume that a "green premium" is available
until the market more effectively recognises and prices in the
cost of carbon.
6. Such investment instruments could not only
secure low carbon financing needs but also play a valuable role
in encouraging saving, supporting financial security in retirement
and securing public support for the low carbon transition.
INTRODUCTION
7. UKSIF, the sustainable investment and finance
association, supports the UK finance sector to be a global leader
in advancing sustainable development through financial services.
We promote and support responsible investment and other forms
of finance that advance sustainable economic development, enhance
quality of life and safeguard the environment. We also seek to
ensure that individual and institutional investors can reflect
their values in their investments.
8. UKSIF was created in 1991 to bring together
the different strands of sustainable and responsible finance nationally
and to act as a focus and a voice for the industry. UKSIF's 200+
members and affiliates include pension funds, institutional and
retail fund managers, investment banks, financial advisers, research
providers, consultants, trade unions, banks, building societies
and non-governmental organisations. For more information about
UKSIF, please visit www.uksif.org.
9. In support of low carbon investment, UKSIF
has contributed to a 2009 report on Green ISAs produced at the
request of the current Chancellor of the Exchequer and convened
our members to understand and influence the emergence of green
bonds. For example, we have:
(a) Held seminars on World Bank green bonds and
other sustainable investment bonds.
(b) Provided networking and signposting support
to interested investment professionals.
(c) Convened UKSIF members active in the bond
markets to inform and educate other stakeholders.
SIZE OF
THE CHALLENGE
10. According to a recent Ernst & Young report
"Capitalising the Green Investment Bank"[25],
the UK needs a total of £450 billion in low carbon investment
over the next 15 years, with £225 billion in energy
"supply side" investment and £225 billion
in energy efficiency "demand side" investment. The report
calculates that traditional sources of capital are likely to provide
only £50 billion-£80 billion, leaving an energy
investment gap of between £370 billion and £400 billion.
11. If this is contrasted with total investment
funds under management within the UK, the scale of the challenge
is clear. According to TheCityUK[26],
total funds under management in the UK at end 2009 totalled £4.1
trillion (£4,110 billion). The UK's energy investment
gap to 2025 therefore amounts to some 10% of total UK assets under
management with half of this (ie 5% of total AUM) representing
supply side investment. Of course, this does not mean that the
UK's low carbon investment needs will be met only by UK investment
managers but it gives an indication of scale. According to TheCityUK,
total funds under management globally amounted to $71.3 trillion
at end 2009 but, of course, UK low carbon investment requirements
form only a part of the global total needed.
12. In the light of this challenge, UKSIF welcomes
the Government's plans to create a Green Investment Bank. We note
that this measure has secured cross-party support.
13. Assets managed responsibly in the UK at end
2009 amounted to nearly £950 billion, according to UKSIF
data in Eurosif's European SRI Study 2010[27].
Of this, over £50 billion was subject to sustainable
investment strategies like thematic investing using sustainability
themes or values-based exclusions, while nearly £900 billion
was subject to the integration of environmental, social and governance
issues into conventional financial analysis and/or engagement
with companies to improve their sustainability performance. The
increase from under £550 billion at end 2005 indicates
both the opportunity to secure low carbon investment but also
the need to address conventional investment requirements to achieve
this at the scale and with the speed required.
RECOMMENDATIONS:
INSTITUTIONAL INVESTORS
14. Our recommendations are based on discussions
with UKSIF members active in the institutional bond market.
15. In our view, well-designed green bonds offer
an effective means for the Green Investment Bank to raise funds
rapidly and at scale from institutional investors.
16. Initially, few or no institutional investors
such as pension funds will have an asset allocation specifically
to low carbon investments. As a result, the investment instruments
used must fit within existing asset allocations. For most such
investors, this is likely to mean that bonds are more appropriate
than infrastructure funds as they will tap into a deeper pool
of capital.
17. There will be no initial premium for "green
bonds". Indeed, green bonds may need to be more financially
attractive to offset any perceptions of higher political or technology
risk or greater due diligence requirements due to their unfamiliarity.
For this reason, the green bonds should resemble other bonds to
the greatest degree possible.
18. It is important that regular Green Investment
Bank bond issues of significant size take place to create a liquid
market. Sufficient equity will be required to leverage debt finance
and a government guarantee is likely to be needed to attract debt
capital at scale particularly before a credit rating and track
record is available.
19. In the future, green bonds may become accepted
as a distinct class of asset-backed securities or a familiar part
of the bond market. The risk profile of green bonds will be understood
removing any uncertainty premium. Their attractiveness as investments
will benefit from a trusted policy framework within which there
is wide acceptance of low carbon business cases. Carbon risk may
be priced more highly into other investments. At this point, green
bonds may well be more attractive than equivalent high carbon
investments, resulting in a "green premium".
20. The development of a market in green bonds
does not and should not preclude the parallel development of green
infrastructure as an asset class. However, because institutional
investors today tend to have higher exposure to bonds than to
infrastructure, it is difficult to see that infrastructure funds
alone would be likely to secure sufficient investment within the
required timescales.
21. Both green bonds and green infrastructure
are likely to increase in attractiveness as institutional investors
seek predictable and preferably inflation-linked income from investments
to meet the needs of an aging beneficiary population
RECOMMENDATIONS:
RETAIL INVESTORS
22. In our view, it would be a missed opportunity
if the Green Investment Bank raised capital only from institutional
investors. We support proposals that capital should be sought
from retail investors as part of the introduction of Green ISAs.
It has been proposed that this extension to ISAs should offer
access to a range of green investment opportunities including
equities. Capital raised by the Green Investment Bank would form
only part of this total.
23. The Wigley report estimates that the Green
Investment Bank might, in time, raise £2 billion per
annum from retail investments placed in Green ISAs. This would
make a valuable if relatively limited contribution to the total
needed.
24. More significantly, this opportunity could
increase public support for and understanding of the low carbon
transition and provide a needed boost to consumer savings. As
the current Chancellor said in February 2008 "Green ISAs
will engage the public in a new way in the issues around climate
change and show them very clearly the economic benefits of green
investment."
25. UKSIF research for the annual National Ethical
Investment Week[28]
has found that about half of investors would like to make money
and make a difference in the world with their savings and investments,
as long as they can achieve both at the same time. Retail investments
in the Green Investment Bank could tap into that demand, offering
additional diversification for all investors together with valuable
lower risk opportunities for those investors for whom significant
exposure to cleantech equities is not appropriate.
26. The Green Investment Bank might participate
in National Ethical Investment Week as one way to raise public
awareness about these opportunities. National Ethical Investment
Week (NEIW) is a campaign to ensure that everyone knows that they
have green and ethical options when it comes to their finance
and investment decisions. As "Fairtrade Fortnight for money",
it seeks to enable green and ethical investment and financial
services to become as familiar and popular as Fairtrade.
18 October 2010
25 Capitalising the Green Investment Bank: Key issues
and next steps, Ernst & Young LLP (October 2010). Back
26
Fund Management 2010, TheCityUK (October 2010). Back
27
European SRI Study 2010, Eurosif (October 2010) at www.eurosif.org/research/eurosif-sri-study/european-sri-study-2010. Back
28
Further details at www.neiw.org Back
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