Resource: Green Investment Handbook
Published by: UK Green Investment Bank
How do you forecast what the impact of a green investment might be? And once you’ve made the investment, how do you check on actual performance and then report it to your stakeholders? We talk to Gavin Templeton, Head of Sustainable Finance at the UK Green Investment Bank (GIB) about how it addresses these needs.
Opening its doors for business in 2012, the GIB has over the succeeding four years invested £3.4 billion in 98 projects across the UK, ranging from offshore wind farms to energy efficient street lighting. This investment has helped to attract around £12 billion of co-investment from the private sector. The Bank has also established the world’s first dedicated offshore wind fund, which recently passed the £1 billion mark, and expects to start making the first investments shortly from a £200 million portfolio it manages for the UK government’s International Climate Fund (ICF).
In response to requests from governments to investors and peers, the Bank has now published a ‘Green Investment Handbook’, which summarises the lessons from its experience as a pathfinding green bank.
Note: Technical terms are marked with a * and explained briefly in the Glossary.
The twin aims have always been for the Bank to be both green and profitable
The genesis of the bank is an intriguing one in the context of the climate commitments now made by governments across the globe in support of the Paris Agreement. Gavin Templeton, who joined the Bank in 2013, explains: “It was actually born out of some concern in the government over how the UK was going to achieve some legally binding and quite ambitious climate change and low carbon energy targets that were enshrined in the Climate Change Act of 2008. Ministers were aware that these would only be met if significant private capital could be mobilised.”
“From the outset,” he says, “the twin aims were for the Bank to be both green and profitable. Without the second aim, we knew we couldn’t bring the private capital on board alongside.” To date, the GIB has had over 100 co-investors in its projects, including investment banks, private equity and institutional investors. “The offshore wind fund was deliberately designed for the institutions, especially pension funds,” he says, with its long ‘tail’ of steady and predictable returns well suited to the pattern of their liabilities.
While the GIB very much had to make the running on creating pipeline in the early years, Templeton has observed that many deals are proceeding without their participation. “That’s a sign that the market now has confidence, both in the viability of the projects and its own capacity to finance them,” he says.
The Handbook: sound principles that can be adapted
Since its publication in late 2015, the Handbook has been adopted by a wide variety of institutions around the world, and is now available in Spanish and Mandarin as well as English. “Ma Jun at the People’s Bank of China has been citing it as best practice, and the Spanish version has been co-branded with the Mexican development bank NAFIN.”
One of the reasons the Handbook may commend itself to users is that it is admirably brief. “We didn’t want to be too prescriptive,” Templeton says. “Everyone is working in different circumstances and has different needs, so we are trying to embody sound principles that people can adapt. And anyway, best practice is continually evolving, it’s not a static thing.”
The guide falls into three sequential segments, on assessing and forecasting green risk and performance prior to an investment; then monitoring performance once the investment has been made; and, finally, reporting that performance to stakeholders, including the general public whose taxes support the Bank.
Green covenants can actually help make a project fundable
The ‘green risk’ in a project is the risk that it may not deliver the promised green impact. To counter help this, the Handbook suggests the interesting concept of ‘green covenants’. Like financial covenants* in investment agreements, these specify steps the investee has to take to ensure green performance, and should, the Handbook says, “have equal legal status and recourse to enforcement measures” as financial covenants. “Covenants can actually help make a project fundable,” Templeton says, “because in the assessment phase you might have found some gaps, but with covenants you can set milestones to deal with those gaps over time, and keep track of performance against them. And the covenants don’t have to be complicated: “A really simple example is a requirement for projects to provide an annual audit of their impacts. Most of the time, that wasn’t happening before these covenants were included.” While no enforcement action has had to be taken by the GIB as yet, Templeton says that the covenants have been useful when possible non-performance issues have surfaced, as these can then be dealt with by constructive discussion.
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The Bank itself reports the green performance of its investments in its Annual Report.
The kind of assessment and reporting the Handbook covers is going to become ever more widespread, Templeton suggests. “Green risk is going to be viewed the same way as credit risk.” The reason for this is the growing requirement for disclosure, a prime example being France’s new Energy Transition Law, the first reports under which are due from companies this year. “Things that start voluntary like the TCFD* also have a habit of becoming requirements,” he notes.
What we bring to the mix is long-term, patient, minority equity investments
On the international front, the GIB is managing £200 million of the UK government’s International Climate Fund – the whole fund, at close to £4 billion, being one of the largest bilateral climate commitments. The initial target countries are India, South Africa and parts of East Africa (Kenya, Rwanda, and Tanzania). With the objective of making £10-30 million direct investments in projects, “the mission statement here is ‘green, profitable and transformational,” Templeton says. The first transaction is expected to be closed soon, “and what we bring to the mix is long-term, patient, minority equity investments.” Building on the UK market development experience, one of the criteria for projects is that they should be replicable by others in due course.
Four reasons for GIB success
– Political support but operational freedom
– Supportive and consistent policy environment
– Clear sectoral focus
– In-house expertise in focus sector
Asked about possible reasons for the success of the GIB, Templeton puts it down to four main factors. “First,” he says, “we have cross-party political buy-in but complete operational independence. Second, the policy environment has been supportive and generally consistent. Third, we have had a clear sectoral focus (offshore wind, waste and biomass energy and energy efficiency). And last but very much not least, we have deep in-house expertise in the focus sectors.” For its international investments, the Bank has added personnel with emerging market experience, but the technical expertise remains the critical factor, he says.
On communications with policy makers, Templeton says that the Bank doesn’t see a role for itself in active advocacy, “but we can and do act as a feedback mechanism for making the government aware of private sector views on the effects of its policies. Having those lines of communication probably does allow policy makers to tweak and design better policy over time, but one thing the market maybe hasn’t been so good at is talking about why there have been successes. And a lot of the time success is due to having policy that’s supportive and reliable and consistent.”
On NDCs, Templeton says that he does sense a growing awareness in the market that these are a potential source of pipeline and the Bank itself has begun to think about how it could start to address the opportunities specifically in the context of the country commitments.
For the financing of NDCs, we think GIB serves as a very relevant model which other countries might consider emulating. In a fairly short period (four years) its investment mandate has moved from a set of country level policy objectives, not dissimilar to NDCs, to active investment in a range of projects to reduce carbon emissions and add value to the UK economy generally. It has also demonstrated success in mobilising private capital alongside government funds. .
For more on green banks see our piece on the Green Bank Network
Gavin leads the UK Green Investment Bank’s Green team. He is responsible for all of the organisation’s external and internal engagement on green issues, and leads the sustainability element of its work. Gavin has worked in finance and commodity markets for 20 years, beginning his career at BP before moving to Morgan Stanley, Rabobank and VTB Capital. Over his career, Gavin has worked in both physical and financial emission and commodity markets covering sales, marketing, finance, origination, trading and analysis. He has worked on the sustainability agenda since the beginning of the European Emissions Trading Scheme and United Nations Clean Development Mechanism, as well as financing renewable energy and emission reduction projects across Europe, Africa, Asia and the Americas.
NDCi.global co-founder Tessa Tennant is a non-executive director of the GIB but was not involved in the preparation of this article