The Institute will be led by Sir Roger Gifford, former Lord Mayor of London and SEB’s senior UK banker, as chairman, and by Rhian-Mari Thomas, former head of green banking at Barclays, as its chief executive.
Both are bankers, but the organisation has been set up by the government and the City of London. It is intended to act as an interface between the government and the private sector.
“It’s a unique organisation,” said Thomas. “The way we think we can use that advantage to mobilise more capital is to use our convening power to look right up and down the value chain, at supply and demand, and look at some real economy challenges where there are barriers, and what can we do to help unlock those.”
The Institute has £4m ($5.03m) of seed funding from the UK Treasury, via the Department for Business, Energy and Industrial Strategy, and from the City of London Corporation. But it will only have a small staff of six to 10, and is expected to become “a fully commercial, standalone organisation” in its third year, Thomas said.
The work of the Institute will be done through “coalitions”, or working groups, of interested market participants —rather like trade associations do their work through experts who work within an industry.
“Our coalitions will be 12 to 15 experts who will draw even more broadly and consult across markets globally,” Thomas said. The Institute could also take people on secondment from the financial industry “to co-create new solutions to create revenue opportunities for banks and institutions, and then go back to their organisations with a new level of expertise”.
Commercial revenue could come from providing consultancy services to other countries wanting to learn from the UK’s experience in green finance — something that would also create markets for UK services, Thomas said — and from “creating a digital hub that acts as a showroom for what we’re doing in the UK”.
But the first source of income could be the private sector itself, according to Thomas. “If we do the coalitions well, we will be creating new commercial opportunities for those participating, so we hope the private sector organisations and financial institutions will be willing to invest and contribute,” she said.
Four point plan
The Institute’s mission has been set out in four headings.
The first, “convening mission-led coalitions to structure and scale green finance solutions”, involves forming expert coalitions drawn from the public and private sectors, academia and civil society to “unlock barriers to greater and faster deployment of green capital” by “focusing on well-defined, real economy challenges”, the Institute said in a statement.
Work could include arguing for new policies, gathering data, “developing new products or asset classes” and spreading knowledge.
The second, “driving the global green finance agenda through international dialogue”, will involve “jointly developing and supporting the UK government’s green finance objectives overseas” and “creating a recognised brand for UK leadership and innovation in green financial products”.
Thirdly, the Institute will “showcase developments across all aspects of UK green finance” by building an accessible digital platform and hosting roundtables and conferences.
Finally, it will “support the greening of the financial system” by collaborating with regulators and policy makers and helping the industry comply with their demands.
Pushing for top spot
The Institute was one of the measures suggested by the UK’s Green Finance Taskforce, a government-commissioned inquiry that reported in March 2018, putting forward a remarkably far-reaching array of policies. Gifford chaired the Taskforce and Thomas sat on it.
The Institute, like the Taskforce, has a strong emphasis on bringing commercial opportunities to the UK.
“Despite the fact that we have the largest asset management industry in Europe, the largest insurance sector, and our banking assets are the largest in Europe, there is no reason to believe we will transform by osmosis into the leading green financial centre,” said Thomas. “Smaller and less developed financial centres are starting to develop green finance sectors, such as Amsterdam, Copenhagen, Luxembourg, Zurich, Stockholm, even Hamburg. Yet look at New York: the number one ranked financial centre in the world, but 38th for global green finance depth and 32nd for green quality, according to the Global Green Finance Index report in March.”
The UK was fifth for depth and number one on quality.
“We are starting nearer the front of the pack, but there is more we can do,” said Thomas. “We can’t be complacent, when other financial centres are starting to see this opportunity.”
However, the Institute has higher aims, too. Green finance can be a vague concept in aggregate, but the Institute intends to look for specific problems that need solving.
“There’s been some really good policy signalling in some sectors,” Thomas said, “but one of the challenges is the difficulty of interpreting some of that high level discussion into genuine business strategies.” The Institute would “help people pivot what they do in financial services and move from brown to green”, she said. “How do we get people in the room and use our collective smarts to get this moving at pace?”
So far, the Institute has six projects to work on. Top of the list is developing financial solutions to improve the energy efficiency of UK buildings. This ties in with work Thomas did at Barclays on developing green mortgages.
“We have the oldest and least energy-efficient building stock in Europe, and we don’t have a thriving green mortgage market,” said Thomas. “In the US, Fannie Mae has over $27bn of assets in energy-efficient mortgages. We don’t have that, and the Green New Deal was not a success in helping retrofit UK buildings.”
The problem was as much lack of demand for finance as lack of supply.
“What are the conditions we need to create, such that banks are comfortable innovating into a new and nascent market?” Thomas asked. “It’s worthwhile doing it when you can see there will be revenues. But when you primarily extrapolate historical trends you are going to miss out on disruption and opportunities.”
Different countries have used different combinations of regulation, state support, commercial finance and investment by the building owner to encourage efficiency upgrades, and the Institute’s coalition will seek a solution for the UK.
Asked whether the government would be part of the discussion, so that if policy action was required, it would be listening, Thomas said: “Absolutely, that is our [unique selling point] right there. This is about partnership and collaboration, and about helping policymakers hear what the City needs.”
The group will also look at ways to aggregate loans to households for green retrofits, to make them suitable for capital markets financing.
Financing the unfinanceable
A second coalition will look at ways to finance climate-resilient infrastructure, in the UK and overseas.
“The challenge there is different,” Thomas said. “What are the types of securities and financial market products needed to channel money to resilient infrastructure, where you don’t necessarily have an immediate cashflow?”
Unlike wind farms, which produce electricity, flood defences, for example, do not generate revenue to pay for them. This is an even bigger problem for countries which are poorer and more vulnerable to the effects of climate change than the UK.
The UK Department for International Development is working on proposals in this area, but the Institute could play a role by bringing together the insurance industry, capital markets experts and development banks, Thomas said.
On the question of how independent the Institute could be from government policy, Thomas said: “We are not a lobby group, but I would hope that as the government is thinking through new legislation, they do it in a spirit of collaboration with financial services, so we have policy that is most effective at helping create those revenue opportunities. Our role is not to be a mouthpiece for government, but a conduit, to make sure policy is as effective as possible.”
The Institute’s focus will be on environmental issues, but it will work closely with a sister organisation, the Impact Investing Institute, which will have a specific social agenda and greater focus on retail investors.
“Having worked in banking, I know not many people have the mandate or, frankly, the luxury of being able to sit at round tables with smart people to figure out how we do stuff,” said Thomas. “The Green Finance Institute could become that conduit.”