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Analysis

Financing a sustainable world

Policy bank promoting low-carbon economy

by Shaun Kingsbury in London

Wed 12 Jul 2017

Global, regional and national development banks have helped to channel public and private finance towards infrastructure and key business and industrial sectors since the end of the second world war. The creation of the Asian Infrastructure Investment Bank and India’s National Infrastructure
Investment Fund suggests the model remains in favour with policy-makers and governments.

Newer development banks have an explicit focus on low carbon investment. Some, known as green banks, have this as their exclusive remit. There is a growing network of such institutions across the world with the UK Green Investment Bank at the forefront.

Discussions about establishing a government-backed policy bank to support low-carbon investment in the UK began in late 2008. Within four years – a year earlier than anticipated – the GIB was launched.

During the planning period for the bank, doubts were expressed about its ability to meet its aim of accelerating the UK’s transition to a greener economy, not least because of the restrictions that were placed on its mandate. All of the GIB’s investments – in energy efficiency, energy from waste, onshore renewables and offshore wind – had to be demonstrably green, profitable and add value to the market. Private capital had to be crowded in, not crowded out.

Yet, in a little under five years, the bank has committed almost £3.5bn to 100 UK green infrastructure projects, mobilising a further £12bn into the low-carbon economy. What's more, the UK government announced in April 2017 that it had agreed to sell GIB to Macquarie Group, the world’s largest
infrastructure investor, for £2.3bn.

Its success has relied on a number of ingredients: the ability to specialise in green infrastructure; the hiring of industrial and financial experts; having the flexibility to invest where market needs lie; working with operational independence from its shareholder (the UK government); and building systems and processes to bring discipline to the business while investing in an entrepreneurial culture.

By pioneering a flexible and competitive debt product the bank helped a number of UK local authorities invest in energy-efficient LED streetlights that deliver immediate revenue savings. It is a model that can be replicated in other parts of the public sector and for different technologies. There is scope for more in the commercial and industrial sector.

The energy-from-waste market has changed markedly in the bank’s lifetime. GIB began by investing in UK public-private partnership projects secured against local authority waste contracts. More recently its focus has been on commercial and industrial waste streams, emerging gasification technology and projects that are seeking additional revenue from heat sales. It expects energy-from-waste to be the first of the renewables to adopt a subsidy-free business model and is optimistic that onshore wind and solar will follow this path.

In offshore wind the bank has adapted to respond to a rapidly maturing market. It started off by lending to operating wind farms and moved progressively up the capital structure until it became involved at the
point of the investment decision.

In parallel, the bank raised and invested more than £1bn in UK offshore wind via a fund managed by its Financial Conduct Authority-regulated subsidiary. The fund now has a range of different private investors
and owns stakes in six projects, including those at Lynn and Inner Dowsing, where it became the first nonutility investor to assume 100% control of a UK operating offshore wind farm.

Investing in green infrastructure assets is one thing, but proving those projects really are green is something else. When the GIB was launched there was no way of measuring the green impact of its projects in any
meaningful way.

So, it charted its own course, moulding and refining the green policies, practices and legally binding covenants that enable it to assess, monitor and report on the environmental impact of its investments. This methodology has been condensed into a Green Investment Handbook that has been published in English, Spanish and Mandarin, and underpins the green impact reports the bank has produced for third-party organisations including Morocco’s Banque Centrale Populaire. The widespread adoption of more robust and consistent green impact reporting, like that pioneered by GIB, is vital in protecting the integrity of the fast growing green bond market.

So, almost five years on, the GIB has proven itself to be adaptable to change, using it as an opportunity for growth and the development of the organisation. The next phase of that change will be in the ownership of the bank as it moves from public to private ownership. This will provide the organisation with the capital it needs to continue playing a leadership role in the green infrastructure market.

Moving into the mainstream of the private sector will provide a powerful vindication of the idea that lay behind the UK government’s initial intention for GIB – that the market can be put to work in tackling climate change. And that it is possible to build an organisation that is green and profitable, and which adds real market value.

Shaun Kingsbury is Chief Executive of the UK Green Investment Bank.

This article appears in OMFIF's fourth annual Global Public Investor publication. Order your copy of GPI 2017 to receive on-demand access to the world's largest ranking of Global Public Investors.

 

 

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