Green finance: mobilising investment in clean energy and sustainable development Contents

3Development finance

54.Concerns were raised during the inquiry about funding for sustainable infrastructure and renewable energy given the uncertainty around the future role of the European Investment Bank (EIB) and the Green Investment Bank (now known as the Green Investment Group).81

The Green Investment Bank

55.The Green Investment Bank (GIB) was established by the Coalition Government in 2012 to address market failures limiting low carbon investment and to accelerate the clean energy transition to meet the UK’s Climate Change Act commitments.82 After only three years of operation the Government announced plans to sell the GIB and this process was completed in August 2017 with a sale to Australian firm Macquarie. A number of commitments were made by Macquarie to preserve the green purposes of the Bank including a promise to target £3 billion of new investment in green infrastructure projects over the next three years. Following the sale Macquarie announced that the GIB would operate under the name Green Investment Group (GIG) to overcome legal and regulatory barriers when investing in international markets.83

56.Our predecessor Committee published a report at the outset of the sale process in 2015. It concluded that the Government took the decision to sell the Bank ‘without due transparency, publication of relevant evidence, consultation, or proper consideration of alternatives.’84 It raised concerns that the Bank’s green purposes would not be adequately protected and recommended that the Government retain a Special Share to protect them. In response to these concerns, the Government established the Green Purposes Company to hold a Special Share to safeguard GIB’s green principles after the GIB left public ownership.

57.At our roundtable there was a degree of disagreement between participants who believed privatisation might lead to a gap in higher risk investments and those who thought the market for lower carbon technology was sufficiently mature to be able to meet those needs. There was general agreement that it was too early to tell how the Green Investment Group’s new international model would affect levels of green investment in the UK. Nevertheless, E3G argued in its written submission that the case remains for a Green Investment Bank in the UK because environmental market failures still exist. It suggested the Government should create a ‘National Infrastructure Bank to provide funding to support the ambitious Clean Growth and Industrial strategies’.85

Negative impacts of the sale

58.This inquiry has revealed three negative impacts that the sale of the Green Investment Bank either has had, or could have, for the UK’s ambitions to increase flows of green finance domestically:

The disruption of the sale process itself has reduced the number of investments made by the Bank during 2016/17;
The new international focus of the Green Investment Group (GIG) may lead to the Bank making fewer investments in the UK;
As a private institution the GIG is unlikely to fulfil the original purpose of the Bank, which was to invest in riskier projects.

Disruption of the sale process

59.As previously noted in Chapter 1, the disruption of the sales process had an impact on the number of investments that the Green Investment Bank made in 2016/17. The National Audit Office’s report in December 2017 examining the sale of the Green Investment Bank shows that the number of projects being invested in by the Bank, and the total transaction value of those projects, fell in 2016/17 (see graph below). The GIB told the NAO that the delay and uncertainty throughout the sale process led to the loss of key GIB staff, and affected GIB’s ability to continue investing in projects.86 When asked about the rate of investments made by the bank, Lord Teverson told us:
“Yes, it looks slow.”87

60.The Green Purposes Company (GPC) pointed out that the GIB sale process took 18 months, more than twice as long as expected. It said:

This was a difficult period and GPC welcomes the strong management during this time which has resulted in relatively modest staff losses and some continued investment activity. However, Macquarie have had little time since August to build a new pipeline of opportunities and bring new talent into the GIG. We note that UK deal flows in the first few months have been modest and hope that reflects the distraction of the recent sale process rather than a market response (to recent government policy) or focus abroad by the GIG.88

International focus of the GIG

61.The GIG outlined its new international focus in a letter to us on 15 December:

The early intention … was that GIG would become the main platform for Macquarie’s principal investments in green infrastructure in Europe. That has now broadened to include Asia and the Middle East–key markets for the global growth of green infrastructure. All geographic expansion of the GIG business will be conducted under the same green purposes and principles which governed the business under public ownership.89

62.The Green Investment Group has announced four investments since its privatisation in August. Only one of these is in the UK:

€136M investment for 50% equity stake in the operational waste-to-energy (WtE) plant in Dublin;
€300M joint equity investment with GE Energy Financial Services, for 650MW of onshore wind in northern Sweden;
Up to £30M of UK Climate Investments funds in partnership with Lightsource, for up to 300MW of solar PV in India;
£38M of debt financing for Wheelabrator Technologies for a new Energy-from-Waste facility in West Yorkshire.90

63.Concerns were raised during the inquiry that this new international focus of the Green Investment Group could leave an investment gap in the UK. We asked the Head of the GIG Edward Northam about its balance of international to UK investments to date and whether this would reflect future GIG investments. He told us that we were looking at a ‘very short timeframe’ since privatisation and that in those five months the GIG had invested ‘in excess of £1billion’.91 He said it was too early to say what the GIG’s portfolio will look like in 12 months, but suggested that the balance of UK to international projects could be different in the future:

I can’t predict the future, so I can’t categorically say about the one-to-four ratio but there is a couple of factors. Within the four projects that we have committed to to date, one of the larger ones involves investment in a partnership alongside the world’s leading waste-to-energy company and that partnership contemplates the delivery of a range of assets, the majority of which and the pipeline of which is UK-based. The second thing is that I can look forward a little in my current investment pipeline, which moves around and changes shape, and when I look at what that looks like today, the percentage of UK-based projects that make up that pipeline is quite substantial. It is in excess of 50%, so that gives me confidence to suggest that the one-to-four ratio that you are quoting is not necessarily indicative of the way this will play out.92

64.On 14 March 2018, the Public Accounts Committee published a report on the sale of the Green Investment Bank, criticising the Government for failing to secure assurances guaranteeing future investment in the UK. The PAC concluded that:

It is unclear whether Green Investment Group (GIG; the rebranded GIB under Macquarie ownership) will continue to support the government’s energy policy, or continue to have an impact on the UK’s climate change goals. We believe that it was a misjudgement that the Department has so little assurance over GIG’s future investment in the UK and in emerging technologies, which will be crucial to ensuring that the UK’s green commitments are met.93

65.We are pleased to have secured protections for the Bank’s green purposes with the Special Share we recommended. However, we are concerned that the Green Investment Group’s new international focus may mean less direct green investment in the UK. It is too early to say whether the sale of the Green Investment Bank has left an investment gap in the UK, but only one of the GIG’s first four investments has been located here.

Addressing market failures

66.Our predecessor committee identified a risk that even if the GIB’s green purposes were protected, it would ‘move its focus away from novel and complex projects which struggle to find funding in favour of easier and less complex projects’.94 Several submissions to this inquiry also highlighted a move away from higher risk or less attractive sectors as a risk now that the GIG has been privatised.95 It was felt that as a private entity the GIG would inevitably take a different approach. Sini Matikainen from the Grantham Institute said:

One of the things that we highlighted … is the concern that with the Green Investment Bank now being privatised it will fulfil a different role than it did before. The special share arrangement should be helping to guarantee that the focus is the same as it was before, but in a sense it is going to be a private sector actor competing with other private sector actors for similar types of projects, as opposed to a Government entity that is perhaps taking on higher risk projects or projects that private sector actors would be unwilling to fund, so it might be changing its focus. We did highlight that concern but I think at this stage it is difficult to say definitively, given the privatisation is still quite new, so we have only a few months’ information to draw from.96

67.We put these concerns to the GIG. It insisted that although it now has a broader mandate and an international remit, this did not amount to a ‘fundamental shift in focus’:

Edward Northam: Addressing market failures remains our core focus for the Green Investment Group under private ownership. There are a number of reasons for that. I think it starts with the fact that that is in our DNA. The team that came together as part of the Green Investment Bank now under Macquarie ownership still has the same focus, the same desire, I guess, to identify those areas where the market is short of capital and to look to ways to fill—97

68.The GIG also argued that its initial investments had all had ‘significant risks’:

Edward Northam: Market failure is not as simple as saying no one supports that technology. A market failure in the waste-to-energy industry can be that there is insufficient liquidity in that market to deliver the potential of that opportunity. When I look at the role we played in financing the Ferrybridge waste-to-energy facility, that was the situation we found. While there is capital available to a degree to support those projects, there is sometimes a shortfall, and that is the role that we fill there.98

69.The Green Purposes Company stated the obvious fact that as a private entity the GIG is no longer obliged to support Government policy:

Peter Young: … we have to be clear there is a slight game change here because it has been privatised and the GIG is no longer connected to Government policy. […] It is for Government to think about whether there are gaps that are going to appear. In any organisation, however constructed and whatever purposes are set to it, its investment committees… will have to take a decision on the basis of an investable project. If no investable projects can be brought forward, that is something that needs to be done in collaboration with policies that help address those market failures.99

70.However, Energy and Infrastructure Project Finance consultant Martin Blaiklock, was sceptical as to whether the Green Investment Bank had ever addressed market failures, even before privatisation:

Primarily, GIB was a re-financing, rather than a development finance, institution. Most of its business was re-financing existing investment projects, particularly offshore wind projects which had reached completion, rather than investing in ‘green’ projects at the outset of construction (where the risks are higher). Hence, its impact on the UK’s industrial strategy was, in my view, minimal.100

71.We asked the Minister whether the sale of the Green Investment Bank would have an impact on the availability of finance to stimulate investment in innovation in green technology. She told us that there were no longer market failures in this area:

Claire Perry: …do we think there is a funding shortfall that is somehow hindered by this change of ownership? I do not think there is. I look at the fact that originally the GIB was set up to address market failure and it does not appear that there is market failure now. There are questions around the cost of risk structuring, particularly around carbon capture, but that is not the point of the additional finance.101

72.While significant progress has been made in decarbonising power, we heard from Lord Turner that considerable policy and investment challenges remain to be overcome in decarbonising transport, heating and heavy industry.102 Market failures also remain when it comes to pricing and protecting biodiversity and habitats. The RSPB noted in its evidence that ‘prior to privatisation, natural capital was one of the GIB’s green purposes against which it failed to invest anything, despite trying.’103 According to the RSPB, this shows that the challenge with natural capital investments is the lack of reliable revenue streams. Because many of the benefits associated with environment protection—such as improved well- being or flood protection—are public goods ‘they are not amenable to market allocation, do not automatically generate revenue streams and are therefore uninvestible to a large extent.’104

73.The Green Purposes Company agreed that there were still market failures when it comes to protecting natural capital. It pointed out that the 25 Year Environment Plan will require new investment flows into natural capital, but there are currently no markets at scale for investing in biodiversity or the natural environment: two of the five ‘green purposes’ of the GIB. It suggests that ‘until such markets are created through policy and incentives it is unlikely that the market, including the GIB, will be able to invest in these areas in a meaningful way.’105

74.We do not accept the Government’s assertion that the market failures the Green Investment Bank was set up to address have been resolved. The previous Committee was unconvinced by the case for privatisation of the Green Investment Bank at the time. Now that the GIG is operating as a private company it is no longer bound to support Government objectives and is likely to invest in lower risk projects.

European Investment Bank funding

75.Compounding the concerns about the future provision of green finance in the UK by the Green Investment Bank is the uncertainty over our continued access to European Investment Bank finance. The European Investment Bank (EIB) is an EU development bank owned by Member States that provides finance and expertise for sustainable investment projects that contribute to EU policy objectives. The EIB has an AAA credit rating and can raise money at a cheaper rate than private debt and equity providers. As the EIB does not make commercial returns, it is a cheaper source of finance than private equivalents.106 The EIB supports projects by investing directly helping to ‘de-risk’ projects for private investors.107

76.The UK is a 16% shareholder in the EIB.108 Since 2012, the EIB has invested over €31.3 billion in the British economy, including more than GBP 13.4 billion in ‘climate projects’.109 This includes onshore and offshore windfarms, sustainable transport and energy efficient public buildings. In 2016, Britain was the fifth largest recipient of EIB loans with most funding going to upgrading infrastructure like water, transport projects, or energy.110 The Grantham Institute says that the EIB contributed more to renewable projects in the UK than the GIB. In the fiscal year ending in 2016, the GIB committed £700 million in financing, whereas the EIB committed £1.2 billion in renewable energy investment in the UK.111 At our private roundtable event on green finance, one participant told us that the UK could lose 90% of EIB funding after Brexit.

The UK’s future relationship with the EIB

77.On 8 December 2017, a joint report concluding Phase 1 of the Brexit negotiations, published by the European Commission and UK Government stated that:

The UK considers that there could be mutual benefit from a continuing arrangement between the UK and the EIB. The UK wishes to explore these possible arrangements in the second phase of the negotiations. After the date of withdrawal, UK projects will not be eligible for new operations from the EIB reserved for Member States, including those under Union mandates.112

78.There are potential options for a continued relationship between the UK and EIB post-Brexit. The European Free Trade Association (EFTA) states (Norway, Iceland, Switzerland and Lichtenstein), for example, have been funded since 1994 under the EIB EFTA Loan Facility.113 Reuters has also reported that in phase 2 of Britain’s EU-exit, the EIB will be investigating whether it can set up a subsidiary which would also be open to non EU-Members.114

Replacing GIB & EIB funding

79.In written evidence, E3G called for Government to develop and publish contingency plans, and guarantee funding for climate change finance that would otherwise be provided by the EIB. It says that:

The EIB and GIB have played an important role in financing infrastructure by undertaking due diligence on complex and ‘first of a kind’ projects. With the sale of the Green Investment Bank, and uncertain arrangements with the EIB, this financing is uncertain.115

80.In oral evidence Treasury Minister, John Glen MP, suggested that the British Business Bank could play a role in replacing funding from the Green Investment Bank and European Investment Bank.116 We pressed him on this:

Chair: EIB’s investments in the UK collapsed by about 60% to 70% last year, post the referendum results. In 2016 it was €5.5 billion invested, last year €1.9 billion. […] that is about a 60% drop. The British Business Bank isn’t going to make up that shortfall, is it?

John Glen: You are right, and if I could take that perspective back further. If you look from 2006 to 2016, you see €15.69 billion invested [by the EIB]. I acknowledge that there is work to be done in terms of overcoming the challenge of working out how we transition to the new environment. The Chancellor has been very clear about the possibility of seeing it mutually beneficial to continue to have that relationship with the EIB, but it is not something I can categorically tell you the outcome of because it is part of the wider negotiations. We are aware of the actual sums of money involved and the need to have an appropriate alternative mechanism to invest should that be necessary at the end of the negotiation process.117

81.The British Business Bank (BBB) was created by the Government in 2014 ‘to make finance markets work better for small businesses in the UK at all stages of their development’.118 Its focus as a development bank, owned by the Department for Business, Energy and Industrial Strategy, is on increasing ‘the supply of finance available to smaller businesses where markets don’t work well’ to support entrepreneurs starting—or scaling up—businesses.119 In the November 2017 budget, the Chancellor announced £2.5bn of new resources for the BBB in response to the Patient Capital Review.120 The BBB currently has no remit to invest according to green objectives or support infrastructure development. Its role in delivering the Government’s Industrial Strategy is currently limited to correcting regional imbalances in small business funding and supporting companies to innovate and grow.121

82.The decision to privatise the Green Investment Bank after only three years of operation carries additional risks, given the potential loss of EIB funding and the Government’s desire to build investment markets in natural capital. There is likely to be a continued case for development finance tied to the Government’s green policy objectives—especially as we move in the coming years to decarbonise heat, transport and heavy industry. If the Government wants to use the British Business Bank to replace EIB investment in green infrastructure and clean energy projects it would require a refocusing of the Bank’s remit and objectives.

83.The Government should set out how it intends to stimulate development finance for the decarbonisation of local heat, transport and heavy industry. The UK Government should negotiate to maintain our relationship with the European Investment Bank, which would allow riskier early stage green infrastructure projects in the UK continued access to development bank finance.

Development finance at a local level

84.We heard that local authorities often struggle to access development capital for their small scale low-carbon projects,122 and that central government could do more to help them make a low carbon transition.123 Polly Billington, Director of UK100, told us that local authorities struggle to access public finance because they do not have the capacity or expertise to access the various ‘pots of money’ available within different Government offices, such as the Office for Low Emission Vehicles (OLEV) or the Heat Networks Delivery Unit. She told us:

There is clearly a finance gap on clean energy. It is primarily an issue of development capital. As you point out, with the prospect of the UK leaving the European Union, the access to the kind of funding that has currently been available to local authorities is under threat. However, the development capital is important because, although Government has invested in individual technologies previously—and we have seen how that has prospered—what we actually need to do to transform the energy system overall to make it more resilient in the future, is local transformation. You need integrated projects at local level and the people who are going to be best placed to do that, because they have levers across a wide range of energy vectors, is the local authority.124

85.The scarcity of funding for local projects may be exacerbated following the sale of the GIB and the UK’s withdrawal from the EU. We heard that the GIB had played an important role in financing local projects, such as converting street lighting from sodium lamps to LED bulbs.125 Local authorities have also been able to access European Regional Development Funds for low-carbon infrastructure projects, but will lose access to that European funding after the UK leaves the EU.126

86.Local authorities and metro mayors could play a key role in financing small-scale low-carbon projects, reducing emissions and maximising the benefits of the transition to a low-carbon economy to their areas. At present, they lack the technical capacity to develop projects and to attract public and private finance. With the UK’s withdrawal from the EU and the sale of the GIB, local authorities may find it even harder to attract finance for projects.

87.The Government should explore how to create partnerships with local authorities to provide technical and development expertise to enable more towns and cities to access finance for green projects. The Government should set out in its response to this report the concrete steps it will be taking to work with local government to increase access to green finance at a local level.

Utilising Dormant Assets

88.During our inquiry, we heard evidence that the Government could utilise dormant financial assets to boost investment. It was suggested to us that this could follow the model of Big Society Capital Ltd (BSC), which was founded in 2012 to enact the recommendations of the 2005 Commission on Unclaimed Assets, using the Dormant Bank and Building Society Accounts Act 2008. BSC received money from dormant UK bank accounts, which are bank accounts where the account holder cannot be found. Steve Waygood from Aviva suggested it may be possible to mobilise other dormant UK financial assets:

You will recall that Big Society Capital was created from the dormant assets in the banks, about £3.5 billion. You may be familiar with the fact—and we mentioned it briefly in our written evidence—that there is roughly £2 billion of dormant assets sitting in the UK fund management sector and the insurance sector—£2 billion. That is people who have either not understood what they did when they invested or perhaps have emigrated and died and we cannot find their estate, their estate cannot find us. […] at the moment £2 billion is sitting there being managed for no one.127

89.He noted that fund managers will be charging a fee for managing dormant assets, and went on to say: ‘We could set up a fund, which co-invested with various development banks, pension funds, and insurance companies and so on, in direct solutions to sustainability challenges.’128

90.There may be significant untapped resources in dormant UK financial assets in the UK fund management and the insurance sectors. While the first priority must always be to locate the owners of these assets, this is sometimes not possible. In these cases, dormant assets could be used to create an environment fund to support investment in low-carbon and sustainable development projects, and to create markets for natural capital, fund climate change adaptation and ecosystem preservation.

81 Grantham Institute (GFI0001), E3G (GFI0016)

82 Green Investment Bank Commission, Unlocking investment to deliver Britain’s low carbon future (June 2010)

83 HM Treasury and the Department for Business Energy and Industrial Strategy (GFI0027)

84 Environmental Audit Committee, Second Report of Session 2015–16, The Future of the Green Investment Bank, HC 536, p. 3

85 E3G (GFI0016)

86 National Audit Office, The Green Investment Bank (December 2017)

87 Q107

88 Green Purposes Company (GFI0006)

89 Letter from GIG to the EAC (15 December 2017)

90 http://greeninvestmentgroup.com/news-and-insights/?news-type=all-news

91 Q142

92 Q142