Green Investment Bank

Written evidence submitted by UKSIF – the sustainable investment and finance association (GIB 29)

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" [1] , the UK needs a total of £450 billion in low carbon investment over the next 15 years, with £225bn in energy "supply side" investment and £225bn in energy efficiency "demand side" investment. The report calculates that traditional sources of capital are likely to provide only £50bn - £80bn, leaving an energy investment gap of between £370bn and £400bn.

11. If this is contrasted with total investment funds under management within the UK, the scale of the challenge is clear. According to TheCityUK [2] , total funds under management in the UK at end 2009 totalled £4.1 trillion (£4,110bn). 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 £950bn, according to UKSIF data in Eurosif’s European SRI Study 2010 [3] . Of this, over £50bn was subject to sustainable investment strategies like thematic investing using sustainability themes or values-based exclusions, while nearly £900bn 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 £550bn 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 £2bn 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 [4] 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


[1] Capitalising the Green Investment Bank: Key issues and next steps, Ernst & Young LLP (October 2010)

[2] Fund Management 2010, TheCityUK (October 2010)

[3] European SRI Study 2010, Eurosif (October 2010) at www.eurosif.org/research/eurosif-sri-study/european-sri-study-2010

[4] Further d etails at www.neiw.org.