GIB going, going, gone! The future of the Green Investment Bank and sustainable investment in the UK

offshore wind turbines

The Green Investment Bank is a leading investor in the UK's offshore wind industry

The sale of the government-backed Green Investment Bank (GIB) for £2.3bn to a consortium led by Macquarie Group Limited has been completed this week.

The sale has been met with criticism, including an application for a judicial review of whether it meets criteria laid out by the government, and suspicions over the timing of the sale, which was announced in April two days after the Prime Minister called a snap election in the UK.

Concerns stem from whether the mission of GIB will be safeguarded after its privatisation.  The GIB has played a key role in providing funding in the UK for low-carbon projects and – perhaps more importantly – in encouraging private investment into such projects.

Without the GIB’s support, some low-carbon ventures may find it more difficult to access finance, which could negatively impact on low-carbon innovation and the UK’s performance on cutting emissions in line with the Climate Change Act.

The GIB plugs a gap in private sector investment

The government created the GIB in 2012 to bridge the gap between the current levels of investment and the amount of investment needed to transition to a low-carbon economy ―an estimated £12 billion per annum up to 2030 for the electricity sector alone.

Investments in sustainable infrastructure have long time frames and the future returns can be uncertain because technological change and changes in climate policy can affect them. While this might be off-putting for private investors, the government-backed GIB, with its mission to mobilise investment in the UK’s green economy, had more leeway to fund low-carbon projects.

So far the bank has provided £3.4 billion in direct funding for projects in energy efficiency, waste and bioenergy, offshore wind, and onshore renewables. Its Offshore Wind Fund is the largest renewable energy fund in the UK and has assets under management of £1.12bn.

As well as direct investment, the GIB has encouraged the private sector to follow suit: involvement of the government-backed bank reassures investors that projects have been vetted. For every £1 the GIB has invested, it has mobilised another £3 in private sector investment.

There are questions about whether the GIB’s mission will be preserved now it is privatised–and implications for post-Brexit Britain if it is not

The government say that the success of the GIB means it can support itself, and that selling the bank–and reducing the government deficit by taking it off the public balance sheet– will remove budget considerations that have constrained its growth.

The decision to sell at all has been questioned.  Interest rates are at historic lows, making it a good time for the government to invest to boost economic growth rather reduce the deficit.  However, with the sale due to complete imminently there are still concerns over whether, post-privatisation, the bank will continue to support long-term low-carbon projects that have difficulty attracting private sector capital.

Responding to these concerns, the government created a ‘special share’ arrangement in attempts to protect the green mission of the bank. Five GIB trustees will have special voting powers to ensure that “the GIB remains permanently under a legally enforceable obligation to invest exclusively in accordance with its green purposes.” There is dispute over whether this will be practically enforceable.

Post-Brexit the UK may lose EIB funding―leaving large scale government-backed investment in low-carbon in doubt

There is also uncertainty around the future of EIB funding from the European Investment Bank post-Brexit.

The EIB (the EU’s green bank and the world’s biggest renewable lender) contributes significantly to the UK: the EIB committed £5.5 bn to UK projects in 2016 including more than £1.2 bn in renewable energy investment alone, compared to £700 million from the GIB.

Macquarie has promised to put £3 bn into green energy projects over the next three years―an increase over current GIB funding. However, without the EIB the UK would still experience a net loss in low-carbon investment: widening the gap in investment needed.

Mature technologies, like solar and onshore wind, find it easier to raise capital as they become cost-competitive with incumbent fossil fuel energy. Earlier stage projects, and larger or riskier ones, may still need government support. Without the GIB to mobilise the high levels of investment needed the government will need to consider other means of backing new technologies.

Macquarie could fund new low-carbon investments by selling some mature projects funded by the GIB

The potential for Macquarie to ‘asset-strip’ the bank, selling profitable investments the GIB has made, garnered criticism during the bidding process. Vince Cable MP, former Secretary of State for Business, Innovation and Skills, said the bank risks being “broken up and destroyed” by asset sales.

If assets are sold, critics will be keeping an eye on how the proceeds are invested. Macquarie is one of the largest investors globally in renewables. Selling some of the more mature projects to re-invest in earlier-stage technologies would be more effective than, for example, distributing the profits as dividends to shareholders.

Without certainty of long-term green investment from the privatised GIB how can the UK mobilise additional low-carbon investment?

As outlined in a recent Grantham Research Institute policy brief, green finance will need to be significantly scaled up to support low-carbon innovation and meet the UK’s emissions reductions targets. The potential loss of GIB funding is only part of the problem.

To spur private investment in low-carbon technologies, the UK needs consistent and forward-looking policies for energy efficiency, transport beyond 2020, carbon capture and storage, and mature low-carbon energy generation. Unanticipated policy reversals have in the past created uncertainty and caused a drop in investment: there is a dearth of planned renewable energy projects in the National Infrastructure and Construction Pipeline, equivalent to a 95% drop in investment in 2020/2021 compared with 2017/2018. Consistent climate policy could go some way towards renewing investor confidence.

The government should also develop a strategy for green finance overseen by BEIS or the Treasury. This should include wider financial disclosure of climate-related risks (as recommended by the Task Force on Climate-related Financial Disclosures). A forward look at risks and opportunities encourages investors to make longer-term, climate-resilient investment decisions. The strategy should also include the mainstreaming of green finance in financial markets which can help scale up corporate financing and bank lending for proven technologies like onshore wind and solar, and smaller scale projects such as loans to increase energy efficiency.

Over the next three years Macquarie have committed to the GIB’s remit. After that three years is up, and if the UK no longer receives EIB funding post-Brexit, it will be up to the government to ratchet up much needed public and private investment in low carbon for the future―consistent climate policy and a strong green finance strategy will be essential tools in that task.