In 2010 the UK proudly announced that it would be the first country in the world to create a bank dedicated to investing in greening the economy.
Although it was originally announced by the previous Labour Government, the Conservative – Liberal Democrat coalition has pushed ahead with proposals as part of its green agenda. When it comes to green credentials, the UK has a strong tradition in wanting to be top of the class, even if only on paper.
By passing the Climate Change Act in 2008, it became the first country to formally commit to carbon reduction targets, however, although some progress has been made, there is still a long way to go if the pledge of being "the greenest government ever" is to become reality.
The Green Investment Bank (GIB) seems to fit with this concept of wanting to be the best but being unsure how to achieve it. Government statements suggest that everything concerning the Bank is still up for grabs, in other words it has failed to give a clear idea of what it will invest in.
The initial focus has been on the more glamorous end of the green economy, such as wind turbines, tidal barrages and other large-scale schemes. While these are essential and provide an excellent opportunity for growth, they may not be the best investments to immediately tackle climate change. Investment should also be considered in the low hanging fruit of energy efficiency improvements in existing building stock. If everything is up for grabs, large scale non-domestic property schemes should be eligible, along with other measures that will improve overall sustainability, including green infrastructure like parks, gardens and woodlands.
Sir Adrian Montague heralds the Green Investment Bank as a "radical innovation". From the perspective of a dedicated investment bank focussing on environmental issues, this is certainly true but a short trip to mainland Europe suggests the general approach may not be as radical as first thought.
Using state-owned specialised finance institutions to stimulate private investment to implement specific public policies or respond to emergencies is an established concept across Europe and North America. They have even been used before in the UK to fund reconstruction after the Second World War and to support small businesses and regional growth.
In France, the idea of a government-backed financial institution has been around since the time of Napoleon in the form of the Caisse des Dépôts et Consignations (CDC), which has the aim of mobilising long-term savings towards financing public housing and municipal infrastructure. Being the leading financing body in France for affordable housing, CDC offers social housing providers low interest energy efficiency loan conditions, allowing the construction of high performing buildings in the social housing sector.
Between 2009 and 2010, in support of the French Grenelle de l'Environnement, an environmental stakeholder round table, bringing together government, local authorities, trade unions, business and voluntary sectors, the CDC also developed a package of low interest rates of 1.9% to finance the thermal refurbishment of the 100,000 least energy efficient social homes.
CDC now works closely with the French Oseo Group which operates with capital from both public and private institutions. This organisation provides financing through government back bond issues, special budgetary allocations and "patient investment", giving long-term loans to leverage additional finance.
Oseo was set up to have a similar structure to the German KfW, a financial institution owned by the Federal Government and regional states which was originally used to channel Marshall Plan funds to rebuild Germany after the Second World War. As well as funding a series of business and development schemes, it now views climate and environmental issues as its most important activity. In 2010, KfW committed more than €25 billion to environmental and climate protection. Compared to 2008 figures, in Germany alone, the financing volume reached a new record level of €16.5 billion, leading to a reduction in CO2 emissions of over five million tonnes. These are real and tangible savings.
If the GIB is to work effectively it must look at the experience of schemes such as these. It must focus on providing gap finance, particularly for SMEs, and long-term patient capital to allow innovative companies to attract private finance. To help achieve this, the GIB must be supportive of private sector players, leading to a genuine public-private partnership.
If these lessons can be learned, appropriate funding committed by the Government and a wide range of sustainable activities are eligible for investment, the GIB has an excellent chance of allowing sustainability to drive growth in the wider UK economy.