Banking on the future

Written by on 3 February 2014 in Interviews

With the beleaguered UK’s banking industry under scrutiny, does the Green Investment Bank offer an ethical alternative?

When the Green Investment Bank (GIB) was founded in November 2012, one of the most damning criticisms, perhaps surprisingly, came from Caroline Lucas.

Writing for the Guardian, the Green MP for Brighton and Hove, rather brutally described the GIB as “neither particularly green nor a bank”.

Criticisms of the Edinburgh-based institution – created to stimulate investments aimed at helping the UK move towards a low-carbon economy – centred on its inability to borrow capital, while it is also required to make a yearly profit.

Some questioned whether it is possible to reconcile its green agenda with the need to generate private profit.

But meeting Lord Robert Smith of Kelvin, a man with a lifetime of financial experience, now based in an eco-friendly, grass-roofed office in the centre of Scotland’s capital, dispels any idea that the words ‘green’ and ‘banking’ are incompatible.

To Smith – the GIB’s chairman – the banks’ ‘double bottom line’ – the dual need to channel investment towards green technology while making a profit – is not a problem, but an opportunity.

 “We say to people, unashamedly, that we are here to make a profit,” he says, “because if we are not going in to make a profit then we will not attract in other private sector investors.

“The things we are into – offshore wind, non-domestic energy efficiency, waste management and waste energy – these are our priority areas but there has to be a profit.

“The whole point of being commercial is that other people will come in – they’ll see that you can make money and be green so hopefully, we’ll spawn an industry by encouraging others to join us.”

With an initial £3.8bn to invest, £635m of which has already been spent, and the entire green sector to stimulate, Lord Smith is clearly excited by the scale of the project.

The hope is that bringing together expertise in finance and renewable technology will see a growth in environmentally-friendly projects capable of generating profit.

Doing so, he argues, will provide an example for other private sector investors – which operate without the scruples of GIB – to follow.

The logical conclusion to this then is that others will take over once the GIB shows them how. But surely aiming to become driven out of the market is a fairly strange strategy for an investment bank?

To Smith, the Industrial and Commercial Finance Corporation (ICFC), set up following the Second World War, provides an example for the GIB to follow.

After years of fighting, Britain was in a dire state, with banks strained and left unable to invest in small and medium-sized companies, to get the economy back on track.

“They were constrained – it’s almost exactly like now – and the ICFC was set up to provide equity capital and long-term loans – which is the same as us, we can lend for up to twenty years if necessary.

“The ICFC was incredibly profitable and so within a couple of years, NatWest ventures was set up, Barclays Development Capital was set up, Schroders Venture was set up – all these imitators came along and, yes, maybe it looked like the ICFC wasn’t needed anymore.

“But it just got bigger and bigger as part of a thriving market and it spawned a whole industry, while moving into more and more interesting areas.

“It’s my proud hope that after I’m dead and gone that we will have sufficient size and balance sheet that we will get much more involved in emerging technologies, wave, tidal, battery – who knows what might come up.”

The ambition to support emerging technology is admirable, but many critics are unable to wait until Smith is ‘dead and gone’ to see it bear fruit.

Campaigners argue that the decisions are too safe, the investments too secure.

For some, the bank should be making these smaller, riskier investments now.

“We are less than one hundred people and if you take £3 billion and you invest £3 million a time you’ll end up with a thousand investments and it won’t work – our cut off is usually £30 million. But we can put money into funds which do invest in these emerging areas.

“We can’t run before we walk but I think in five years you will see quite a different business.

“Once you get a bigger balance sheet you can take different risks. At the moment if I get one big, bad debt then Vince Cable would have me in there beating me around saying, ‘what went wrong?’”

Talking of risk brings up the second part of Lucas’s scathing criticism – how can the Green Investment Bank even be called a bank if it lacks the power to borrow from capital markets?

The GIB was expected to have been granted these powers by now, with the Treasury seemingly concerned about GIB debts appearing on its balance sheets and dragging government finances further into the red.

Certainly Smith recognises the need to move towards borrowing powers, but it is not his biggest concern.

“We are applying to the authorities to be able to borrow. I think some politicians – especially Labour – feel that we should be able to borrow right now. I’m not particularly concerned about that, it will come and £3.8 billion is a lot.”

But has this delay affected his relationship with the Treasury, and the very people who set the bank up in Edinburgh?

“No one is restricting us unreasonably – they are looking at those options – and eventually they will need to sign off on us borrowing but in exploring these things we are getting nothing but encouragement.

“For every pound we get we can get three more from other parties. We got £3.8 billion so if you multiply that by four then you have a rough idea of what impact we can have without borrowing powers.

“We have cross-party support – the Labour Party reckon they came up with the idea, David Cameron sanctioned it, the Lib Dems are certain that they invented it and I guess the Greens have a decent claim too. I know that success has many fathers but I have never known so many as here.

“Even right-wing Tories – do they like the idea we are profitable? There’s more money coming in than going out, and as an accountant, I can tell you that usually means you are doing OK.”

Meetings with Alex Salmond followed.

“He had me in on day one to discuss how we can work in Scotland and he set up the Scottish Green Investment Portfolio to help us find deals and package them so they are a size that we can actually invest in. He is a realist, we’re on his doorstep and he wants renewables to succeed – which suits me.”

Salmond’s support is certainly valuable in a year which could see Scotland vote to leave the UK, along with the government which set Smith up in his environmentally-friendly office.

In fact it has been claimed that the decision to base the GIB in Edinburgh was an attempt to stave off support for the Yes campaign.

But what does the referendum mean for Smith and for a bank proudly boasting of providing twenty-year loans?

“If it is a Yes, then I suspect that a lot of the acrimony would die down and people will say, ‘what are we going to do about this’. We are headquartered in Edinburgh and we have quite a big staff in London and I think people of goodwill are going to sit down and say – who wants to do anything that would get in the way of our progress? Not Westminster, not Holyrood, they will want this thing to continue – it is in everyone’s interest.”

The first year has gone well, with the GIB policy of splitting investment between new infrastructure projects and existing ones, which are already in operation, meaning that the effects of its work are already being felt.

One such example is a £100m loan to Drax to help cover the energy plant's partial switch from coal to biomass.

But although the investment helped the move towards biomass, campaigners were not impressed, raising questions over the ethics of procuring the biomass, and propping up a carbon intensive producer in the process.

Was Smith surprised by opposition from green campaigners?

“Some would argue that taking Drax from burning coal to burning biomass - alongside or as a replacement for coal - is a step in the right direction. Others would say, ‘come on, even if there’s ethical procurement of biomass you’re not kidding me.’ Some people think off-shore windfarms aren’t green – you are manufacturing the stacks and the blades, maybe you are importing them, shipping them from overseas, and is that really green? Even hydro-dams mean chunks of concrete in water.

"Everyone has a view and there will be people who take it to one extreme or another. We have a green advisory board and we talk to green campaigners - we want to be as green as possible. But you can't work against the grain and expect to get things done. We have to be pragmatic."

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