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An introduction to the Green Investment Bank

30 January 2014

The UK Government recently set up what is being described as the world’s first investment bank solely focused on green finance. It was set up under the Companies Act – UK Green Investment Bank PLC as a public company limited by shares and has its registered office in Edinburgh.

First Scottish Investment

In July 2013, the Bank made its first investment in Scotland, as part of the Equitix fund, to the value of £1.2m, in a biomass boiler at the Tomatin Distillery near Inverness. The boiler uses steam utilised in the production of whisky and replaces 80% of the heat load usually generated by an oil fired boiler. CO2 emissions are expected to be cut by 96.5K tonnes over the 20 year life of the investment.

The Establishment of the Bank

The Bank has £50,000 of share capital registered in the name of The Secretary of State for the Department for Business, Innovation and Skills. It is intended that the Bank will use its initial capital of £3bn to leverage increased private sector investment. It will have the double bottom line of sustainability impact and financial returns.

The establishment of the Bank has three phases:

  1. Incubation prior to state aid approval. This was achieved in October 2012 when the European Commission gave its approval to the £3bn funding from the UK Government.

  2. Establishment. This is the current phase. Following state aid approval, the Bank is now a stand alone institution.

  3. Full borrowing. From April 2015, the Bank will be given powers to enter the capital markets subject to public sector net debt falling as a percentage of GDP.

Green Purpose

The Enterprise and Regulatory Reform Act 2013 embeds the green purpose and independence of the Bank. The Bank’s purpose, as set out in its Articles of Association, is to carry on investment activities in order to contribute to one or more of the following green objectives:

  • The reduction of greenhouse gas emissions
  • The advancement of efficiency in the use of natural resources
  • The protection or enhancement of the natural environment
  • The protection or enhancement of biodiversity
  • The promotion of environmental sustainability.

This green purpose will be enshrined in legislation so that it cannot be amended other than by Parliament.

The Bank will be based in Edinburgh and London and will remain small in the period to 2015, with staff levels expected to rise to around 100 during that period.

The Government as shareholder has appointed the Chair (Lord Smith of Kelvin) and Deputy Chair (Sir Adrian Montague), in addition to the appointment of a shareholder representative non-executive director (Anthony Odgers). A further 6 directors were appointed in October 2012.

What are the Bank’s priorities?

The Bank’s Articles of Association have appended to them a “Shareholder Relationship Framework Document” which is declared to form part of its constitution for the purposes of the Companies Act. This is an interesting document that sets out the Bank’s operating principles and strategic priorities, and that seeks to ensure the board’s operational independence from Government.

The operating principles relate to responsible investment, green impact, mobilising additional investment, alignment with the Government’s green policy objectives and seeking to overcome market failures whilst minimising adverse impacts on competition. The Bank has a stated plan to deliver a minimum 3.5% annual nominal return on total investments, after operating costs (excluding set up costs) but before tax.

The framework document sets out the priority areas of the Bank as follows:

  • Offshore wind power generation
  • Commercial and industrial waste processing and recycling
  • Energy from waste generation, including gasification, pyrolysis, and anaerobic digestion for the production of heat and/or power
  • Non-domestic energy efficiency, including onsite renewable energy generation and heat
  • Support for the Green Deal, targeting energy efficiency in property,

with the stated objective of ensuring that, by 31 March 2015, the Bank should seek to have 80% or more of funds committed by it allocated to these priority sectors, with the balance being committed to other sectors the board considers likely to deliver the green impact.

Is the Bank independent?

The board’s operational independence from Government is sought to be achieved through provisions in an operational independence undertaking that forms an annex to the framework document. The Government’s undertaking is to not interfere in day-to-day operational or commercial matters or decision-making by the Bank, and not give direct investment instructions to the Bank.

 

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