The UK’s new bank: what shade of green and how much investment?

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Chancellor Darling’s green investment bank promise this week was well received by the majority of the green lobby and the other parties. But enthusiasm for the scheme needs to be tempered with caution if it is to avoid the pitfalls of its forebears.

The government’s latest green proposal, to create a ‘green investment bank’, has been welcomed by a host of green groups including Friends of the Earth, Greenpeace and the Green Alliance as well as by the renewable energy industry. While government green proposals receiving such a positive response is news in itself, the fact that this proposal has been endorsed by both the Conservatives and the Lib Dems means that with a bit of luck it should survive the party politics of the forthcoming election relatively unscathed. A green investment bank should therefore be up and running sometime in 2011.

The idea of a green investment bank is something that has been championed by a number of prominent green groups for the past year and the key premise, increasing funding for clean technology, green energy and other environmentally focussed projects, is one that ClientEarth definitely supports. The devil is, as ever, in the detail, and suggestions that the European Investment Bank (EIB) might be a good model for the new bank have been ringing alarm bells for us. Our work with the EIB has clearly demonstrated that, quite apart from the EIB’s environmental performance (which needs serious improvement) the structure, management, policies and culture of the EIB do not allow it to be the transparent and accountable provider of public funds it should be.

Like the EIB, the new green investment bank will be responsible for spending public money. This role brings with it obligations to act transparently, to consult the public on key policies and decisions and to ensure the bank’s activities can be challenged by members of the public and interested organisations via appropriate complaints mechanisms. The EIB has been channelling public funding for many decades and although its policies are improving, the bank still struggles to act transparently and to apply European legal principles such as those guaranteeing public access to environmental information. The new green investment bank will need to understand exactly what its obligations are to facilitate public engagement and public access to information and will need to ensure these obligations are reflected in the bank’s policies and accountability mechanisms.

One of the first questions the new bank will need to address is what sort of green projects it  is going to fund. Initial indications suggest the focus will be on large scale wind and clean energy projects but it will be important for the bank to also finance energy efficiency projects and a range of smaller scale developments. The EIB has recently been trying to increase its lending to Small and Medium sized Enterprises (SMEs) but has struggled with the tension between a pressure to lend and a pressure to lend well. Extending multiple smaller loans requires considerably more management by the bank than providing one large loan, and therefore requires additional staff capacity. If the UK’s new green investment bank does plan to finance small as well as large scale projects it will need sufficient staff resources and expertise to be able to handle such loans effectively. We hope such considerations will be taken into account when resources are being allocated to the management of the bank.

One of the reasons the government wants to create a new investment bank to channel funding into green technologies and clean energy is to try to stimulate additional investment from the private sector. It will therefore be extremely important to ensure the new bank does not compete with the private sector. To avoid a clash it must either fund projects that would not otherwise be able to obtain funding, or provide sufficient funding to enable projects to attract additional private sector support. The EIB is precluded by its statute from providing funding to projects that could obtain funding ‘on reasonable terms’ on the commercial lending market. The EIB doesn’t always take note of this provision in quite the way it should but the idea behind this provision is a good one and something similar should be included in the statute of the new green investment bank. Creating a new bank from scratch, rather than trying to amend an existing institution, is a fantastic opportunity to think creatively about how to ensure the bank’s public accountability and green  aims are built in to the legal architecture of the institution. There are not many existing examples of public sector investment banks and we have to hope that in their haste to get the new green investment bank up and running the UK government won’t blindly follow the example of the EIB or other international financial institutions, each of which have their problems and none of which were established with an explicitly green mandate. Although investment banks do lend to clean technology, energy infrastructure and clean energy projects, none of the existing investment banks were established with environmental issues in mind and therefore none of them provide models that would adequately reflect the green aims of the new bank. The new bank is a good idea. Establishing it quickly would bring much needed support to the green technology and clean energy industry but making the new bank work from an environmental as well as an economic point of view will take careful planning and will inevitably take time. There is a danger that the political and economic pressures to start lending as soon as possible will lead to the environmental aims being compromised. But everyone wants this bank to work so with enough support it just might fulfil some of its environmental potential.

The wide base of support behind the green investment bank initiative means the next government has a golden opportunity to drive forward its green agenda with meaningful and committed financial backing. But it must not let political and economic pressures to hold sway – the government must create a bold new structure while keeping a watchful eye on the detail if the new bank is to make its mark.

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