UK’s Green Investment Bank’s 1st birthday brings calls to bolden and broaden its investments

RI reports on the GIB’s first year of activity.

From the get-go, the UK’s Green Investment Bank (GIB) has faced pressure to grow faster, think bigger and act more decisively. It’s no surprise that, as the novel government-backed financial institution approaches its first anniversary, those calls are growing louder. “It’s time for the Green Investment Bank to be a bit bolder, take a bit more risk, and be a bit more innovative,” said Nick Mabey, Chief Executive of E3G, a London-based think-tank that agitated for the launch of the GIB, speaking at a seminar in London on 5 September organised by the Westminster Forum. “The GIB is seen as an enduring institution, but it’s also an evolving institution,” he continued. “We’re at the point where we need to ask what it will evolve into.”
While the GIB’s leadership has been cautious and deliberate as it seeks to build a solid investment track record, its critics would like to see it raise more money, loosen the constraints of its state aid approval, and invest in a wider range of activities. The GIB was created by the UK government to accelerate private sector investment in the green economy. It is independent, but accountable to Parliament, with the government as sole shareholder. It has been capitalised with £3bn (€3.5bn) for the first three years of its operations, and, in the latest spending round, it won an additional £800m for 2015-16. Specifically, it is charged with supporting four priority sectors: offshore wind, waste recycling and energy from waste, industrial energy efficiency, and domestic energy efficiency. It can lend up to 20% of its assets to other permitted sectors, including biomass power, marine energy and renewable heat.
It is required to invest at market rates – its state aidapproval from the European Commission explicitly rules out grants or soft loans – and it has a ‘double bottom-line’ with its investments expected both to be profitable and to demonstrate ‘green impact’ by, for example, reducing greenhouse gas emissions or waste to landfill. GIB management can point to a solid first year. The bank is now fully staffed, with some 90 individuals split between its head office in Edinburgh, Scotland, and London. It has committed some £660m in 14 transactions, which leveraged an additional £1.7bn in private sector capital. Those transactions include providing £100m in debt to help get away a £1bn financing to part convert the giant Drax power plant from coal to biomass, and participation in the refinancing of the giant London Array wind farm. It has also seeded five fund managers, who are investing in smaller-scale energy efficiency and waste projects. “We’re off to a really good start,” Rob Cormie, the GIB’s Head of Operations, tells Responsible Investor. “We’ve invested capital in all our priority sectors, and we’ve got a really good pipeline in place. But we need to be very cautious, and make sure that our processes are rigorous and that we’re on firm foundations to ensure we become an enduring institution.” Inevitably, the GIB’s safety-first approach draws fire from some observers. “You’ve done some deals, fine. Now go out and do some more high-impact deals inside your current mandate,” said Mabey at E3G. What he describes as a more “impactful” approach is within the existing remit of the bank, he said. “This is a management decision, a risk committee decision, and should be taken forward.” There are also repeated calls for the GIB to become bigger. “£3bn itself is not very
much, we need much, much more,” Richard Werner, Head of the Centre for Banking, Finance and Sustainable Development at the University of Southampton, told the seminar. “We’ve got a problem that looks about £100bn big,” agreed Oliver Griffiths, the GIB’s Head of Government Affairs and Policy, referring to the figure the UK government estimates needs to be invested in the country’s electricity sector by 2020 to meet climate change and renewable energy targets. The GIB’s access to capital has been a controversial issue in its early life. Because the bank is government-owned, any borrowing that it takes on will be added to the national debt. This has made the Treasury strongly opposed to granting it borrowing powers. In response, its CEO Shaun Kingsbury has stressed the need to invest its initial capital wisely, and worry about going to the markets later. However, its rhetoric is changing. “We will need to raise external capital,” Griffiths said. “We don’t want to continue to be dependent on the government for our financing.” But this need for external financing may play against calls for the bank to take on more risk, he suggested. “If we have a strong portfolio that’s making money, we will be more attractive to the capital markets when we want to raise money,” said Griffiths. “If we’re doing very risky investments…those things aren’t going to happen at the same time.” Werner argued that were the GIB to be allowed to operate as a conventional bank – raising capital from bondholders and, potentially, depositors – it could dramatically increase its leverage. With £3bn in equity capital, it could “conservatively speaking” run a loan book of £50bn-70bn, with capital ratios much higher than its peers, he said.An alternative would be to follow the German model, Werner added. There, KfW, the state development bank, lends to small, local banks, allowing it to spread its money across large numbers of small, community projects, sourced locally by its partner banks. Community renewables is an area where the GIB would like to become active, Griffiths said. Providing finance for small-scale projects was in the GIB’s original state aid application. The European Commission rejected that as part of the GIB’s mandate at the time, taking the view that this was an area that was adequately served by existing private sector funders. Since then, the financing climate for small-scale renewables has deteriorated, with, for example, the troubles at the UK’s Co-operative Bank meaning that it has cut back on lending to the sector. The GIB would have a “good case to make” to provide support to the sector, says Griffiths, who notes that the terms of its state aid approval are up for review: “We will be starting discussions with the Commission before Christmas,” he says.
And the GIB is also looking at taking more risk, says Griffiths: “We do want to expand our remit as we get more sure-footed in our different sectors, and to get more ambitious.” He cites offshore wind, and plans by the GIB to move from its focus on lower-risk, operational farms into construction-stage projects. There is no shortage of calls for the GIB to take more technology risk. David Ainsworth, CEO of Marine Current Turbines, a tidal power developer and turbine-maker bought by Siemens in 2012, expressed disappointment that the GIB has declined to support its first projects, considering “the returns too low and the

risks too high”.
“There should be a much greater focus on funding tidal energy,” said Mabey, arguing for a strong role for the GIB in “innovation demonstration”.
But there is also more the GIB could do with its existing mandate, said Ben Caldecott, Head of Government Affairs at Bloomberg New Energy Finance.
“One of these is the aggregation piece,” he said, bringing together renewable energy deals “to get the issuance to a size and scale that’s attractive to institutional investors.” The GIB, he said, could have a “catalytic” role in securitising such transactions.He said that this is part of the wider issue of mobilising debt capital markets to invest in low-carbon infrastructure. “They will get going eventually…but there’s a strong public policy interest in speeding up that process.”
Inevitably, the GIB will attract brickbats from those who want to see much faster progress in funding low-carbon infrastructure. But the signs from its management are that, while they may understand their critics’ impatience, their priority, for now, is conservatism and caution in their investment choices.