Euan McVicar General Counsel, Green Investment BankEuan McVicar General Counsel, Green Investment Bank Article1_McVicar_ELM Article template 24/11/2014 11:16 Page 70 great importance

Introduction

Thank you very much for your welcome, and to theAssociation for inviting me here today. It is a good oppor-tunity for the Green Investment Bank (GIB) and for me to engage with what we recognise as being a broad churchof those involved in environmental law and policy, andhopefully it could be the start of a dialogue between theAssociation and the Green Investment Bank, which wewould welcome and I will return to later.

I thought Richard Kimblin’s remarks on different disci-plines were very pertinent.1 To my mind there is a range ofdifferent disciplines that are absolutely vital in helping tolook at the interaction between energy and environmentallaw. Until recently I did not think of myself in any way asbeing a ‘private finance’ lawyer, but looking at environmen-tal legal issues is becoming increasingly pertinent to howwe go about doing what we do and I see these disciplinescoming closer together.

First, however, a few remarks about how timely I thinkthis topic is as a theme for the UKELA conference. Energypolicy, energy law and energy strategy have always beenvery political in nature. The exploitation of natural re-sources to deliver energy, how energy feeds into industrialstrategy, how it impacts on the life of individual consumersof energy, and the difference between energy consumptionin rich and poor countries are all political issues. Added tothat, in recent years, is the impact of energy consumptionand generation on the natural environment and on our climate, which is a very political subject. Over the last 12months in particular in the UK we have seen a real maelstrom of political activity and political debate aroundenergy, which has highlighted a number of things that arekey to the debate.

The ‘trilemma’It sometimes surprises me that people of different politicalpersuasions have become almost ideological in their ap-proach to the different energy technologies, strongly sup-porting or condemning nuclear power or wind power generation or forms of energy from waste recycling forinstance, rather than looking at the techniques objectivelyon their merits. There seems to have been a real politicisa-tion of some technology types. There is talk about what iscalled a trilemma, not a particularly nice word, in terms ofenergy policy. The trilemma is how do we deal with thecost of energy; how do we deal with security of supply andhow do we deal with the impact energy production andconsumption has on the climate and the environment?Over the last 12 months we have seen at different timeseach of these being focused upon by the media, by com-mentators and by politicians.

The Labour Party Conference of 2013 heralded anintense debate about energy pricing and whether thereshould be a price cap on the amount that individual con-sumers are paying on their energy bills. The amount thatpeople are paying for their energy then has an impact onhow energy infrastructure will be financed going forward,particularly if the move towards more expensive forms ofelectricity generation is part of other policy objectives. Atthe same time it opened up a debate about whether therewas sufficient competition between the big six suppliers, asthey are known, and whether the structure in the electric-ity supply industry is efficient, as well as whether the sup-pliers are acting in a way which is fair and delivering theright kind of pricing. Competition law has become a bigpart of the debate, which has led some of the industrialcommunity in the UK to question the payment of addi-tional subsidies, or green subsidies, or the imposition ofother forms of ‘climate change mitigation’ regulation, sayingthat Britain was being too proactive in pursuing the climatechange agenda and making British industry uncompetitiveon a global basis.

Security of supplyEvents in the Crimea, the Ukraine and more recently in theMiddle East have brought back to the fore the question ofsecurity of supply. Is the security of supply of energy in theUK sufficient? Many people would say the supply is notsecure, that we are too dependent on imports of gas fromoverseas and that we do not generate enough of our ownelectricity to rely on over the medium and short term. Ona longer-term basis, that position becomes even more sus-pect and this has raised the question of fracking of uncon-ventional gas, leading to an examination of whether this isgoing to be a valuable income stream that can help thecountry economically and will improve security of supply –but at what environmental cost? Is that cost quantifiableand manageable?

PoliticisationDuring the last 12 months there have been two eventswhich have led to the return of the climate change agendato the forefront. The dreadful flooding in the south-west ofEngland, particularly in the area of the Somerset Levels,brought into focus that the volatility in the weather may begrounded in climate change and raised questions as to howthe government is planning to deal with it. Cost was off theagenda and climate change was back on. And then the publication of the UN IPCC report2 in March 2014 was of

70 (2014) 26 ELM : UKELA : FINANCING THE TRANSITION TO A GREENER ECONOMY : McVICAR

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1 See Foreword.

2 Intergovernmental Panel on Climate Change Climate Change 2014:Impacts, Adaptation, and Vulnerability C B Field and others (eds)Cambridge University Press, Cambridge, United Kingdom and NewYorkhttp://www.ipcc.ch/report/ar5/wg2/.

Financing the transition to a greener economyEuan McVicar General Counsel, Green Investment Bank

Article1_McVicar_ELM Article template 24/11/2014 11:16 Page 70

great importance. But it seemed to fade away very quickly.The message that was probably given more emphasis wasthe fact that there is a manageable solution to deal with climate change rather than the true message of the report,which was that if we do not do something soon we aregoing to have a very big problem. We have to do what wecan now to help manage the consequences of climatechange and recognise that there will be some climatechange but also recognise that it is manageable if we act inthe right way.

These important worldwide as well as national issuesare bubbling away in the public debate and I think we aregoing to see increasing politicisation of the energy, climatechange and environmental debates, with the political par-ties seeking to differentiate themselves on their attitudes.The part played by environmental law and by the GreenInvestment Bank will become increasingly critical.

Environmental law and energyIn the 1990s during the ‘dash to gas’, when I was workingprincipally in CHP (combined heat and power) and on theCCGT (combined-cycle gas turbine) projects, environmen-tal law was very much seen as an area to be left to theexperts in the backroom to go and fight about indemnitiesand it was not really at the forefront of an energy project.As a much wider range of energy projects began to bedeveloped, it was environmental law and environmentalpolicy that became the drivers, and provided the incentivesfor particular types of energy project. It is environmentallaw and policy that drive the policy instruments that createthe financing and income stream of a renewable energyproject and make it deliverable. Without the environ-mental agenda, these projects do not become financeableor attractive; and a market can be created through thoseinstruments which have more than one objective. Thus,having more than one objective is very much at the heartof GIB policy.

As I understand it, UKELA defines environmental law asthe body of law that seeks to protect and enhance the en-vironment. This is also core to our mission. It is the languageenshrined in the legislation which set up the GIB and whichis hard-wired into our constitution. Our mission is to helpaccelerate the UK’s transition to a green economy, to cre-ate an enduring institution and to operate independently ofgovernment; all for reasons I will come back to. So, with therole of protecting and enhancing the environment, as wellas operating independently – which means becoming aprofitable institution – the bank sees itself as being at theinterface between energy and environmental law. Energy isthe biggest single area that we invest in and green energyprojects provide the greatest scope for the bank and havethe widest impact on achieving the bank’s mission.

When the bank is assessing whether to be involved in aproject, it has to be confident that the project is going toprotect or enhance the environment in some way. It willalso examine the typical legal concepts around good prac-tice, what makes for a firm and robust project, and whatmakes an environmentally acceptable project. Sometimesenvironmental law can be a barrier to raising finance whenthere are particular objectives or planning conditions to be

met, or concerns about the regulatory environment. Webelieve it is very important to try to work constructively tofind ways to overcome those issues, to try and meet theneeds of a variety of stakeholders and still promote proj-ects that are financially viable, as well as environmentallyacceptable and in accordance with the legislation.

The GIB

To introduce the Green Investment Bank, first, there is £3.8billion available to the organisation. The bank is 100 percent owned by the UK Government, which requires us toact independently as a normal listed plc. The governmenthas given an undertaking to Parliament that it will not inter-fere with the management of the bank. And because weand the government recognise that £3.8 billion is nowherenear enough to have the impact that is required, we haveto mobilise private sector investment. We are trying to usethat money as seed capital to build on and help the transi-tion to a green economy.

We do have to work within certain legal requirements– some of which I will mention here (see diagram 1 p 72).The bank is established as an institution under theEnterprise and Regulatory Reform Act 2013. It has fivegreen objectives, which can only be changed by a resolu-tion in both Houses of Parliament, thus protecting usagainst political interference on a short-term basis. Thebank is subject to state aid rules and has to comply withthose when making investments. Investments can only bemade in certain areas that have been agreed with theCommission, and are ones where there has been an element of market failure, where it is clear that the marketneeds the products the bank is offering.

We also have to comply with the concept that wasentirely new to me when I joined GIB, that is the marketeconomy investor principle, which is that even if there is noother investor in one of our projects we have to show thata hypothetical market investor would be prepared to investon the same terms as us. Lastly, the bank has to be addi-tional. It cannot crowd other money out of the market; ithas to bring other investors into the market to supportwhat it is doing. The bank is also subject to all the otherusual things that apply to a public body owned by the gov-ernment, such as procurement rules, the Freedom ofInformation Act etc and all of the financial regulations thatyou would expect to apply.

This is embedded into our policy and our work. Ourboard of directors has to be satisfied that every investmentmade will contribute to one of the green objectives, sothere is a governance structure in place to check out everystage of what we do. Vince Cable, the Secretary of State forBusiness, Innovation and Skills requires the bank to make an overall portfolio return of a targeted amount, to showthat it is building the capital base, producing an enduringgreen impact and mobilising private sector investment (seediagram 2 p 72).

The UK commitmentsThe UK has statutory commitments to move to a moresustainable low carbon economy and despite all of the

UKELA : FINANCING THE TRANSITION TO A GREENER ECONOMY : McVICAR : (2014) 26 ELM 71





Diagram 1.

Diagram 2.




political discussion there is still, across all the political par-ties, a real commitment to a low carbon economy in thelonger term. Those commitments are backed by someambitious and familiar targets, set out in international andnational regulations:3 reducing greenhouse gas emissions isclearly important, increasing the proportion of renewableenergy and being more efficient in generation and use ofenergy. This last aim is a hugely important aspect of thedebate, and one that is frequently overlooked. Reducingbiodegradable waste sent to landfill is also important – lessimmediately relevant, perhaps – but there is considerableoverlap.

So, by our reckoning, an almost unprecedented amountof infrastructure investment is required to achieve thosetargets: £330 billion of investment by 2020, an average of£33 billion every year, and that in what has been a strait-ened financial environment (see diagram 3 above).

However, the amount of investment in the green econ-omy to develop infrastructure falls well short of what isrequired. That £33 billion in 2014 will not be met. This is thechallenge facing the bank: to have a serious impact in realterms, to have a meaningful green impact whilst makinggood use of the public purse and attracting other people’smoney to support green projects and make them profit-able. The best way of achieving this is not by giving softloans or grants or financing the unfinanceable, but by show-ing institutional investors and private capitalists that theycan be green but also profitable. Many large institutions see the attraction of being green – maybe cynically from aPR perspective, or maybe because they are concernedgenuinely about sustainability in the longer term – but ifthey can be green and profitable, the projects promoted bythe bank will benefit.

We are expecting to be able to invest our £3.8 billionby the end of March 2016. We can do everything acrossthe financial sector in terms of products: we can do senior

debt, we can do equity investments and we could also actas guarantors, and so on. However, what we will not do, forthe reasons I have outlined, is provide soft capital, regionalassistance grants and development capital. We need tomake sure that we offer incentives and policies which aregoing to attract people’s support.

Where the GIB is investing – purposes and principlesDiagram 4 (p 74) sets out those areas on which the bankis concentrating. Of these, 80 per cent of capital will bedirected towards energy efficiency, offshore wind, wasterecycling and energy from waste. The other 20 per cent ofcapital is targeted at a wide variety of projects that can beresearched, such as carbon capture and storage (whichcould be very exciting but is probably not financeable atthe moment), biomass power, marine energy, renewableheat and biofuels for transport, all of which will come onstream in the future.

The bank has been involved in 29 complex transactionsso far (see diagram 5, p 74). It has invested £1.3 billion ofits own money and brought in a total of £4.6 billion, whichis a mobilisation ratio – as it is called – of one to three. Themessage of being green and profitable is having the desiredeffect.

In diagram 6 (p 75) on the left side of the equation, youcan see the five green purposes. The bank has been able todemonstrate that any project it wants to invest in will haveat least one of the following benefits:

n reduce greenhouse gas emissionsn result in improved efficiency in the use of natural

resourcesn protect or enhance the natural environmentn protect or enhance biodiversityn promote environmental sustainability.

We take this very seriously. A team of experts helps us toreview any investment proposition, to test whether it isgoing to meet one of those green purposes. Clearly, whatthe bank will not ever want to do is to make an investmentwhere it turns out there is no green, which looks green on

3 Including the Kyoto Protocol, the EU Renewable Energy Directive, theEU Waste Framework Directive and the Climate Change Act 2008.

Diagram 3.


the face of it but is not delivering the results. We would becriticised hugely and it would be very detrimental to theachievement of our mission if that were to be the case.Next, on the profitable side, we make sure that we areoperating on market terms, for profit, within state aid rules,on the same commercial terms that equivalent investors atthe same part of the capital structure would look for, andensuring that capital is additional.

The bank has therefore developed some green invest-ment principles, drawing considerably on concepts fromenvironmental law (see diagram 7, p 75).

The bank is also keen to help implement best practice.In October 2013 we gathered together what we grandlycalled a Green Bank Congress, bringing together similarorganisations from around the world that have been set up

with similar aims to those of the bank. In the discussionsthat followed, the one thing that stood out was that, whilstthere are many well known and well understood principles– like the Equator Principles, for example4 – there is notmuch that is tailored towards helping investors and organi-



Diagram 4.

Diagram 5.

4 The Equator Principles (EPs) is a risk management framework, adoptedby financial institutions, for determining, assessing and managing environ-mental and social risk in projects and is primarily intended to provide aminimum standard for due diligence to support responsible risk deci-sion-making. The EPs have also helped spur the development of otherresponsible environmental and social management practices in the finan-cial sector and banking industry (for example, Carbon Principles in theUS, Climate Principles worldwide) and have provided a platform forengagement with a broad range of interested stakeholders, includingnon-governmental organisations (NGOs), clients and industry bodies.http://www.equator-principles.com.


sations to understand the environmental impact of theirinvestments. A greater degree of standardisation could helpto attract capital from investors who see the benefit of sus-tainability in their investment strategy (see diagram 8, p 76).

The policy is to ensure ‘green impact’ throughout theproject lifecycle, and to share that best practice with themarketplace in due course. First, assessment is made on the basis of the green purposes, followed by identifying thegreen impact that is envisaged, where that is quantifiable.Every stage of the investment process is monitored goingforward. Under the contractual position agreed with bor-rowers and investee companies we ensure that all theinformation needed to continue to show the green impactof our investments is transparent. Finally, the reporting

process is carried out; we think that we have ensured thatgreen reporting is now up to a very high standard.

The requirement that has been introduced through theCompanies Act 2006, which took effect in October 2013,to disclose in our annual report and accounts our own car-bon emissions is beginning to drive activities, particularly ofFTSE 100 and 250 companies, and this is a developmentthat can only improve the ‘greening’ of companies.

Examples of the five green purposes (see diagram 9, p 76)Looking at the five green purposes referred to above (diag-ram 7), an example of reducing greenhouse gas emissionswould be an offshore wind project that will ultimatelyreplace fossil fuel power generation, measured in terms of



Diagram 6.

Diagram 7.


the greenhouse gas avoided by the wind power coming on to the grid. In respect of increasing natural resource effi-ciency, an example would be investing in a waste recyclingfacility, leading to energy demand reduction, which countstowards the efficiency of natural resources.

Protecting or enhancing the natural environment might beachieved through diverting the waste away from landfill. Aspart of the investment process, the impact identified by theenvironmental impact assessment (EIA) process would beexamined so as to ensure there is not some downside thatwould otherwise escape attention. That tool is used in help-ing to assess whether a project does meet the objective.For protecting or enhancing biodiversity, there is perhaps

more of an art than a science associated with this purpose.Again, the EIA summary is important, looking, in effect, atecology and biodiversity and the presence of biodiversityoffsets where appropriate; although we are aware that thisis a controversial topic.

Finally, with regard to promoting environmental sustain-ability, this might be something that will have a demonstra-ble effect on the market, and will encourage others toinvest in similar projects or develop similar projects. As animportant driver the bank reports a ‘double bottom line’that is consistent with this purpose – profitable and green– showing an environmental profit and loss publishedalongside the normal financial profit and loss.



Diagram 8.

Diagram 9.




Continuing projectsFinally, we continue to invest, and have committed morethan £1.3 billion by investing in 27 projects, as well as capitalising five funds. We have invested in all our principalsectors all over the UK, including financing the UK’s firstlarge-scale coal to biomass conversion project and we haveclosed the funding gap for a new high-technology wasteplant that had been held up for four years owing to a lackof funding. Other projects have included investing in theUK’s operating offshore wind capacity, Northern Ireland’slargest waste wood power plant and we have delivered theUK’s first listed renewable energy infrastructure fund. Wehave backed a large NHS energy efficiency project, whichwill save trusts £20 million. When these projects are com-pleted, our investments will have produced sufficientrenewable electricity to meet the energy needs of 2.7 million homes and will have cut CO2 emissions by theequivalent of taking 1.4 million cars off our roads.

It is important to us to learn what is holding back thedevelopment of green infrastructure. Many of you here willbe involved in different stages of projects, going through aplanning process or assessing whether they’re having theright impact. So feedback on where you on the front lineare seeing projects around the green economy being heldback would be valuable. Are there legal barriers thattogether we could all try to diminish? Are there ways wecan identify that would achieve a positive impact on theenvironment? And can we help influence a pragmatic envi-ronmental law or indeed energy law environment? Wethrow out an invitation to the Association. If you think itwould be helpful to form some sort of working group orperhaps a one-off workshop to investigate joint working onthis we think that would be a very helpful and constructivedialogue. And any other thoughts that you may have onhow to mobilise the market or maximise green impact,please let us know.


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Euan McVicar General Counsel, Green Investment BankEuan McVicar General Counsel, Green Investment Bank Article1_McVicar_ELM Article template 24/11/2014 11:16 Page 70 great importance