Enterprise and Regulatory Reform Bill

Memorandum submitted by Aldersgate Group (ERR 07)

Background

The UK is facing a time of considerable economic stress. Restoring growth and re-balancing the economy are urgent priorities. Focusing our recovery effort on low carbon growth can re-power the economy, increase our energy security and help tackle climate change.

Rapidly accelerating investment in low carbon and environmental technologies will also increase the competitiveness of Britain’s businesses in the global market, protect consumers from fossil fuel price shocks and stimulate growth, especially in the regions. But fulfilling this low carbon vision for Britain will require financial as well as technological innovation.

For this reason, the Aldersgate Group fully support the Government’s commitment to set up a Green Investment Bank (GIB). This crucial institution can help tackle the significant investment barriers standing in the way of delivering vital investment in our future. By directly reducing the risks to investors the cost of the energy transition will be significantly lowered for taxpayers and consumers.

Aldersgate Group

The Aldersgate Group is an alliance of leaders from business, politics and society that drives action for a sustainable economy. In partnership with Transform UK (an alliance that campaigns to accelerate investment into the low carbon economy), it has been one of the leading advocates for the creation of the GIB through engagement with investors, businesses, Government Ministers, MPs and others senior stakeholders.

The Aldersgate Group’s Financing the Transition report (October 2009) found that the achievement of low carbon targets for 2020 and beyond presents a major financing challenge for the UK economy. It recommended the creation of a GIB that would seek to reduce political and regulatory risks for low carbon investments and mobilise capital from institutional investors at scale.

GIB Legislation

It is welcome that the Government will enshrine the GIB in the Enterprise and Regulatory Reform Bill 2012. The Aldersgate Group has argued previously that legislation is vital to establish a fully independent, accountable and enduring institution that will provide confidence to investors.

There are a number of positive elements in the Enterprise and Regulatory Reform Bill 2012. However, in conjunction with Transform UK and Client Earth (a leading European environmental law organisation), we have identified three areas that require amendments to ensure that the GIB maximises its potential to be both credible and effective. These are:

1. Mandate

2. Enabling a real bank

3. Transparency and accountability

1. Mandate

The GIB must have a clear mandate to leverage investment in low carbon and resource efficient technologies. Client Earth have recommended that the legislation provides a list of exclusions and legal prohibitions to ensure the Bank’s activities are truly green, while retaining a necessary degree of flexibility to allow the Bank to respond to emerging technologies and environmental problems. Client Earth also calls for legislative enshrinement of a non-exhaustive list of priority sectors to minimise policy risk for investors.

Clause 1) of the legislation currently defines the "green purposes" of the GIB as follows:

(a) the reduction of greenhouse gas emissions;

(b) the advancement of efficiency in the use of natural resources;

(c) the protection or enhancement of the natural environment;

(d) the protection or enhancement of biodiversity;

(e) the promotion of environmental sustainability.

This definition is overly broad. As only one of the "purposes" needs to be met, it is feasible that investments which might be considered as unsustainable or "not green" could meet this criteria (such as a highly efficient gas power station without carbon capture and storage). This would be inconsistent with the objective of the bank to promote green growth and that "the UK makes a successful transition to a low carbon economy".

As Climate Earth states "a list of priority sectors has not been included in the legislation, but does appear in the company constitution. While this focus for the Bank is positive, the decision to place it in the constitution alone means that in practice, it fails to provide investors with any certainty beyond electoral cycles. The next government can amend the constitution to introduce an entirely new set of priority sectors, (provided they fit within the extremely broad purposes in clause 1 of the legislation) and the Bank would be bound to adhere to such a change."

Recommendation:

Clause 1) of the legislation requires amendment. It must be tightened and/or coupled with legal exclusions ruling out the possibility of the Bank supporting high carbon projects or other environmentally harmful activities, while preserving enough flexibility to respond to emerging technologies and challenges.

2. Enabling a real bank

It is vital that the GIB is a bank and not a fund. According to a report by Ernst & Young, Capitalising the Green Investment Bank (2010), the UK needs £450 billion in energy investment by 2025 and the traditional sources of capital such as utility companies, project finance and infrastructure funds are only likely to provide £50 to 80 billion. That means the UK is facing a huge low carbon energy finance gap of £370 to 400 billion. Ernst & Young conclude that this gap can only be bridged with the support of a Green Investment Bank with full borrowing powers.

According to Government proposals, the GIB will be given powers to borrow from April 2015 and subject to public sector net debt falling as a percentage of GDP. However, for the GIB to drive the economic recovery, it should have the power to raise funds from capital markets right away. Otherwise, it will not make a significant impact on the low carbon financing challenge. This view is shared by the CBI who state that "If investors are to have confidence in this important institution, it must have the powers to raise funds on the capital markets as soon as possible".

The draft bill does contain enabling powers for state guarantee and this is welcome. The bank is also enabled to borrow as it is a Companies Act company. However, if the GIB is prevented from borrowing until 2016 or 2017, it severely undermines its ability to leverage in private capital to support the creation of green infrastructure. The borrowing conditions have cast strong doubt in the market place that the GIB will ever be allowed to borrow which would mean, in effect, that it is not a public bank but a fund. It is therefore vital that the legislation makes absolutely clear that the GIB is a proper public bank and that it will be allowed to borrow from the capital markets.

Recommendation:

A legislative amendment is needed to cement the commitment to borrowing as soon as possible, to provide a signal for investors and stimulate economic growth.

3. Transparency and accountability

Client Earth finds that the most significant weakness regarding accountability is that neither the legislation nor the GIB company constitution require any kind of formal or public facing review into the practices of the bank, or its progress in attaining its mission. Of course, this does not prevent the Department from running consultations or publishing review documents from time to time, but it is unacceptable that this has not been included.

It is vital that the review process is informed by public consultation requirements, as is appropriate for a publicly funded institution fulfilling a new and vital public purpose. In the current model, not only is there no independent review of the Bank, but even the monitoring that the Department (BIS) proposes to undertake will take place behind closed doors.

Recommendation:

The legislation requires amendment in the form of a new clause requiring periodic statutory review, informed by stakeholder and public consultation.

June 2012

Prepared 22nd June 2012