Green banks are playing a growing role in the low-carbon transition. As a pioneer in the space, the now-privatised Green Investment Group, based in the UK, offers one of several models under development

UK CREATION
The UK’s Green Investment Bank was set up by the Conservative-Liberal Democrat coalition government in 2012 as a public institution. It was privatised in 2016 when acquired by Australia’s Macquarie Bank and renamed the Green Investment Group_

WHAT
A green bank is a public, quasi-public or non-profit entity established to facilitate private investment into low-carbon, climate-resilient infrastructure_

CONTROVERSIAL
The privatisation of Britain’s publicly owned green bank sparked controversy. The Green Investment Group say privatisation has allowed the organisation to become a global business, help expand its technological reach, deepen its impact in terms of capital deployed, help it innovate around green pact reporting and stimulate other jurisdictions to establish their own green banks_

KEY QUOTE
The question is, how do you get the right mix of public and private capital and risk management to be able to move quickly to address climate change

Targeted green investment banking is reaching scale. In September 2019, the nine members of the Green Bank Network announced they had committed almost $15 billion of predominantly public capital to mobilise a total of $50 billion towards the low-carbon transition. With a range of different business models and funding structures, green banks are playing an increasingly prominent role in financing the low-carbon transition and numerous jurisdictions around the world are mulling launching their own green finance institutions. “There is lots of interest from emerging economies wanting to replicate the green bank model,” says Dileimy Orzoco, a policy advisor in think-tank E3G’s international climate finance programme. She highlights that, at a green bank design summit in France in March 2019, around 20 developing countries were represented. “New catalytic climate finance initiatives on the green bank model are moving forward.” The network names countries such as New Zealand, Norway, the Netherlands and the US. As a membership organisation it encourages existing green banks to collaborate, share knowledge and support jurisdictions looking to establish new green banks. The pioneer in the space is the UK’s Green Investment Bank (GIB). Set up by the Conservative-Liberal Democrat coalition government in 2012 as a public institution, it was privatised in 2016, when acquired by Australia’s Macquarie Bank and renamed the Green Investment Group (GIG). Ahead of privatisation, GIB executives saw opportunities to break free of some of the restrictions they were operating under as a public institution, such as a requirement to limit investments to the UK and to seek state aid approvals for any expansion of their mandate into new sectors or technologies. “We are now a global business,” says Ed Northam, GIG’s head of UK and Europe, with existing or planned investments across 25 countries. Two years later, the group has also expanded its technological reach, deepened its impact in terms of capital deployed and is continuing to innovate around green impact reporting. Further, it is helping other jurisdictions establish their own green banks. “But it has also been an exercise in really deepening the Macquarie Group’s commitment to the sector and turbocharging the group’s activities across the green infrastructure space,” Northam adds. He says the bank has some 400 dedicated staff within the GIG, making it one of the largest environmental investment teams in the world. “The breadth of [green] investment Macquarie is pursuing globally now that it owns the GIG has changed quite markedly,” says Peter Young, chair of the Green Purposes Company (GPC), an institution created when the GIB was privatised to ensure it continues to pursue green objectives. In terms of capital deployed, the figures tell a positive story. In the GIG’s latest annual progress report, Dan Wong, Macquarie Capital co-head and GIG chair, says the group has, since privatisation, invested or arranged almost £4 billion in the UK and Europe alone. This is roughly double the £1 billion a year the GIB was investing before privatisation and exceeds the commitment Macquarie made to invest £3 billion over the three years following its acquisition of the GIB. As well as a broader geographical reach, the GIG now also invests earlier in the investment cycle. The main challenge in the renewable energy market is not a lack of capital, but rather a lack of investible projects, says Northam. “We have a role in ensuring there is a steady pipeline of projects coming to market.” The GIG has developed a “partnership platform model”, where it works with local developers to build project pipelines. Alongside its in-house activity, this work has resulted in a global renewable energy development pipeline that exceeds 20 gigawatts.

PUBLIC VERSUS PRIVATE Some argue, however, that privatisation of the group has left the UK without a dedicated public vehicle to support decarbonisation. “The institution has lost its mandate to focus on the transition in the UK,” says Orzoco at E3G. “Especially after Brexit, when the UK is getting no funding from the European Investment Bank, the UK no longer has an institution focusing on infrastructure.” The group retains elements of its original public mission through the Green Purposes Company (GPC). Staffed by five unpaid trustees, it is a “quasi regulator”, says its chair Young, checking the GIG continues to focus on reducing greenhouse gas emissions, increasing natural resource efficiency, protecting the natural environment, protecting biodiversity and promoting environmental sustainability. The GPC holds a “special share” in the group which, should it depart from its green purposes, could be used to wind up the company, says Young. Short of this nuclear option, the GPC acts as “a critical friend”, he says. Each year it publishes a letter assessing how the group has performed against the five green purposes regarding its investments in the UK and mainland Europe. Its latest letter, while broadly positive, raises a handful of flags. The European portfolio: “Remained disappointingly narrow, consisting of onshore wind and waste to energy,” it says. Northam responds that the GIG’s reporting is restricted to investments made. “Peter [Young]’s comments reflect what we have reported,” he says. They do not reflect the range of activity we have in our pipeline … It is great he is pushing us on this and as a business we are fully aligned with that. Watch this space.” When pressed, Northam cites energy storage, the technologies required to enable decentralised renewables, the electrification of transport, energy-as-a-service (where a company’s energy provider is incentivised to improve the client’s energy efficiency) and renewable heat as sectors where the group is looking to make investments. The GPC letter also raises concerns around disclosure of the GIG’s green assessments. It includes a call for the group to increase the rigour of its green impact reporting, to improve its use of forecasts of life-time environmental impact and to make greater use of third-party assurance. “We are ultra-sensitive that the [GIG’s environmental impact] methodologies are robust and there are not any shocks,” says Young. “Other environmental markets have suffered from reporting that has found to be, retrospectively, less than transparent … That is by far the biggest risk to the green markets.” The GIG and GPC are on the same page regarding the rigour of its impact reporting, he adds. “It is fantastic to have someone like the GPC trustees challenging us and pushing us,” says Northam. “That is really valuable to us.”

DIFFERENT MODELS Environmental credibility is important to any financial institution active in green investments, but is of particular importance to the GIG given it is developing an advisory service helping other jurisdictions to set up green banks. Among further ongoing commissions not yet disclosed, the group has announced it is working with the Mongolian government and the UN Green Climate Fund to establish a Mongolian Green Finance Corporation. “One of the questions I get asked the most is, how do you do this? How do you set up a green financial institution in a way that’s commercially successful?” says Northam. There are a number of different models that jurisdictions could follow, says Doug Sims, director of the Green Finance Center at US environmental group the National Resources Defense Council. Green Banks have been established in several US states. Some, like the Connecticut Green Bank, have an explicit social mission, reducing risk in transactions in underserved markets, like energy efficiency in low-income housing. Such institutions are likely to work best in the public sector given the limited commercial appeal of such transactions. The GIB, even in its initial public guise, had a different approach, suggests Sims, aiming to encourage private sector investment in the green economy by leading by example. By developing specialist in-house expertise, it was able to get transactions over the line, in partnership with private investors, that the private sector alone baulked at. “Even when the GIB was public, it was trying to be as close to the private sector as possible,” says Sims. This made its move into the private sector relatively straightforward.

DIFFERENT MARKETS While there may have been observers who argued against the GIB’s privatisation, it was always envisaged as an institution that would show the private sector investment in green infrastructure could be commercially attractive, rather than one that would permanently tie-up taxpayers’ money in non-market investments, says Northam. “The logic of that model is pretty compelling to me,” adds Northam. “And that is not limited to the UK market, similar logic could be applied to many if not all markets globally.” Sims believes the GIB/GIG approach may be replicated in the developed, Anglo-Saxon world, where historically the state has played a very limited role in the financial sector, but that emerging market jurisdictions are likely to favour public sector institutions with a greater appetite to address underserved markets. There are also questions around how green banks in the private sector can catalyse new markets, says Andrea Colnes from the Coalition for Green Capital, a US-based non-profit organisation. “The primary value-add of green banks in the climate finance architecture is to address gaps in the market and create financial strategies to crowd in and expand private investment by absorbing risk,” she says. “While private green banks can lead the market and demonstrate the viability of green investments, their need for commercial returns would likely limit their ability to fulfil this type of catalytic role,” she adds. Fundamentally, the green bank sector is in a period of experimentation, with numerous models under development. “The question is, how do you get the right mix of public and private capital and risk management to be able to move quickly [to address climate change],” says Sims. “What we are seeing around the world are different attempts to get that right.”

TEXT Mark Nicholls