Environmental Audit CommitteeWritten evidence submitted by Carillion

Carillion welcomes this opportunity to respond to the Committee’s inquiry into Green Finance. In order to put our comments into context, it may be helpful to outline briefly our role in the provision of energy services across the UK and Ireland.

Carillion is one of the UK’s leading support services companies with a substantial portfolio of Public Private Partnership projects and extensive construction capabilities. The Group has annual revenue of £4.4 billion, employs around 40,000 people and operates across the UK, in the Middle East, Canada and the Caribbean.

Carillion’s Services division is a leading independent energy services provider and one of the largest installers of renewable technologies and domestic heating services in the UK. We currently operate within the private domestic, social and commercial market sectors offering a wide range of energy efficient renewable technologies and domestic heating services to our customers. We have the ability to source responsive funding solutions, design and implement a customer centric offering and deliver the installation of required measures with the support of an established supply chain network.

Carillion is a registered Green Deal Provider is delivering the Green Deal and Energy Company Obligation across Great Britain, working in partnership with local authorities, housing providers and utility suppliers. We are proud to be delivering the flagship Birmingham Energy Savers (BES) programme working with Birmingham City Council as its exclusive delivery partner to improve the energy and carbon efficiency of up to 60,000 households across the city, together with schools and other non-domestic council properties.

Response to Questions Posed by the Committee

(i) What are the main drivers behind institutional investors’ decisions on the type of investments they include in their portfolios? Where they contemplate supporting energy or environmental projects, what relative weights do they give to questions of possible financial return, environmental/carbon impact, energy security, or other factors?

Carillion believes that institutional investors have a range of drivers and strategies in respect of green investment and that these vary between investors. It is difficult to establish commonality, in part because there is no universal definition of what actually constitutes a “green investment.” Some investors may look to ensure that their entire portfolio may meet certain environmental or resource efficient benchmarks, whereas another approach may be to ensure that a certain percentage of the total portfolio is considered to be “green.”

The key is certainty and openness. Investors see that rising energy prices and climate change suggest that this is an area worthy of investment. There are also increasing improvements in technology, the ways in which investment can be packaged and structured and improvements in client engagement however there is a great deal of change and uncertainty in energy policies which create a negative reaction. Financial return and security of investments are key.

It also important that the structures allow the investor to benefit so the legal and policy framework needs to allow for this if we wish to attract institutional investors.

We would argue that ultimately, green investment is competing with traditional forms of investment and therefore the same drivers will apply, such as an attractive rate of return, investor certainty and growth potential. We appreciate that investors may also increasingly prioritise objectives such as energy security and emissions reductions, particularly as global economic growth boosts demand for energy, hence accelerating the need for investment in low-carbon, energy efficient technology and the increased risk to other assets of the impact of climate change.

(ii) How effective are the financial markets in matching available finance to the required investment in renewable energy and other green projects? To what extent is a potential “carbon bubble” a real risk?

As has been highlighted by Shaun Kingsbury, Chief Executive of the UK Green Investment Bank, the UK needs to invest close to around £200 billion over the next decade in order to meet its climate change targets; however at the current rate, only around 40—50% of the required investment is being met.1 This clearly indicates that there is currently a “green finance gap” as investors are reluctant to invest in green infrastructure at the scale required.

In terms of the potential for a carbon bubble to develop, we concur with Carbon Tracker’s assessment that this is a genuine risk and the apparent failure to address the risk that a high percentage of carbon reserves may be unburnable is perhaps a reflection that the markets are unconvinced that global carbon budgets and emissions targets will be enforced. Instead of high carbon companies reinvesting funds into identifying new reserves, higher dividends could be offered to institutional investors, which could then be redirected towards greener forms of investment, helping to diversify portfolios and reduce exposure to risks associated with unburnable carbon.

(iii) What should the Government be doing to help redirect finance to help fill the £-multi-billion green finance gap? This includes

How can “political risk” to investors from changes to the Government’s energy and environmental policies be reduced? Can the Government ever remove political risk or are more innovative financial instruments that offset those risks the solution?

Carillion strongly believes that political risk to investors can never be fully eliminated; however, it can be mitigated by policy certainty and stability from Government both on specific policies and more broadly across government. Furthermore, the interplay between policy design, regulatory oversight, and policy implementation is key for investors to have confidence that the market is operating well.

Though there has been some improvement for investor certainty through the implementation of mechanisms such as the proposals within electricity market reform, including early publication of strike prices, there remain mixed messages in terms of the Government’s overarching policy direction, for example, rejection of a 2030 decarbonisation target within the Energy Bill.

Where ever possible there should be clear roadmaps, forums to engage and support from key policy makers and regulatory bodies so that interested parties can be informed, test theories and strategies and have a reliable roadmap to forecast against.

Is greater direction to banks needed to encourage them to increase their lending to renewable energy and green projects?

Carillion welcomes the role that the Green Investment Bank can play in encouraging lending to renewable and green projects. We recognise that the support provided by the Green Investment Bank must be additional to avoid “crowding out” other potential sources of capital; however, the bank can play a key role in demonstrating the attractiveness of green investments, given its focus on profit and achieving market rates of return on investment.

We would agree that greater direction to banks and those making investment decisions would be a useful stimulus. Organisation that can development investment opportunities for presentation to banks and other investors is also key and a useful tool.

How can pension funds and other investors be encouraged to re-direct their capital funds towards investments with green objectives

To echo our previous response, Carillion believes that institutional investors will only be encouraged to redirect capital towards green investment if they are given consistent and clear policy signals that Government favours this approach over the long-term. Actions to encourage this could include providing budget as well as price certainty for renewables in the long-term (through the Levy Control Framework for example), and setting explicit emissions and carbon intensity targets for the short, medium and long-term.

Are fiscal incentives for people/institutions to put funds in green investments needed, and if so what?

Carillion would support the use of fiscal incentives to support green investments. This could be offered in the form of tax incentives; however, we would be supportive of other innovative incentives.

How can better information on the environmental impacts of investments and companies be provided to investors? What difference would such information make to investors in practice?

Carillion believes that financial services professionals have a role to play in communicating the environmental impacts of investments to fund trustees and individual investors. Calculation of risk for mainstream investments needs to reflect the long-term impact of failing to act on climate change and its impacts on various types of assets, such as property or agricultural assets.

What are the pros and cons of having a financial transaction tax (Tobin tax) with revenue hypothecated to support green investments?

Provided a financial transaction tax was implemented globally and did not therefore disadvantage the UK’s position as a financial centre, we could support at least partial hypothecation of revenue to drive green investment, if it could be demonstrated that directing the revenue towards this would work. It is perhaps worth noting our support for hypothecation of revenue from the EU ETS and Carbon Floor Price to fund domestic energy efficiency as a signatory to the Energy Bill Revolution campaign.

However, there are a number of issues that could arise from hypothecating revenue to support green investment including: that the revenue raised would be unlikely to match the level of support required, and the amount of revenue generated could be volatile and may decrease during periods of economic difficulty, precisely when green projects may struggle most to access other forms of capital.

Furthermore, existing hypothecated taxes tend to have a clear link between the source revenue is raised from and the entity it then supports, for example television licensing and public broadcasting, or the US gasoline tax revenue being utilised for transportation projects. Without a clear link to green investment, there are surely arguments for revenue from a financial transaction tax to be hypothecated towards other sectors where there is a finance gap, rather than predicating green investment alone.

(iv) What can the Government do to help increase the flow of finance to small and community-based renewable energy and green projects?

Government should encourage the private sector to develop innovative funding mechanisms with community energy projects, utilising existing expertise. Government should also ensure that regulators ensure processes such as grid connections etc… are as smooth as possible to prevent unnecessary delays, which can deter investors. Furthermore, we would support the ability for the Green Investment Bank to be able to focus on smaller projects.

(v) What impact is the Green Investment Bank likely to have on the green finance gap? Does it have the right investment strategy?

Carillion believes that the Green Investment Bank is likely to have a positive impact in reducing the green finance gap and we agree with its focused investment strategy, though this should be dynamic enough to adapt and change if necessary.

(vi) How should progress against that green finance requirement be monitored? While the Committee on Climate Change monitor progress on emissions reduction via the Carbon Budgets, and the Office for Budget Responsibility monitors progress on Government debt reduction, who should monitor progress on delivering the necessary green finance?

Carillion does not take a view on responsibility for monitoring progress provided such monitoring processes are in place.

18 July 2013