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Welcome to the RES policy
webinar
The webinar will begin shortly.
If you have questions for the speakers, please email these to webinar@res.org.uk
Finance for a strong and sustainable recovery
Royal Economic Society
May 15th, 2020
A strong and sustainable recovery
This webinar series will explore how to build a strong, inclusive, sustainable and resilient
recovery from the COVID crisis and how it can embody and foster the government’s
overarching objectives:
Reaching net Forging role
Levelling up Boosting Investing in
zero GHG as “Global
the UK productivity infrastructure
emissions Britain”
Webinar 1: Strategy Webinar 2: Policy Webinar 3:
expressed in terms of to foster this Finance for
investment and growth. investment. investment.
The webinar series will take careful account of the transition from rescue to recovery, and
will recognise the importance of social capital, social cohesion and natural capital
Finance for a
strong and sustainable recovery
Nick Robins
Royal Economic Society
May 15th, 2020
Building blocks The COVID health and economic crisis along with the recovery to come is shaping the next phase in the evolution of sustainable finance: • A Step Change is Required: To achieve sustainable growth, the UK needs a step-change in “amount of public and private investment and in the coherence of policies”(LSE Growth Commission, 2020). • Linking the Environmental and the Social: The COVID Crisis has deepened inequality and shown the need to to accelerate the shift to a net-zero economy that is inclusive (Thallinger & Robins, 2020). • Rethinking Assumptions: The crisis is fast-forwarding high-carbon asset stranding (aviation, oil & gas), accelerating the Fourth Industrial Revolution and driving relocalisation strategies. • Deepening Commitment: Investors and banks are deepening their commitment to financing climate action through a just transition as part of the sustainable recovery (Investor Agenda, 2020) • Attractive Options: Governments have a suite of investment options with high potential in terms of the economic multiplier (job creation) as well as environmental impact: clean infrastructure, building retrofit, education & training, natural capital and clean tech R&D (Hepburn et al, 2020)
A system-wide response 1. Join up real economy priorities & incentives: national resilience; productivity, investments in infrastructure, innovation and skills; sustainability and net-zero economy; levelling-up and just transition; interlinkages between human health and nature conservation. 2. Stimulate private investment through ambitious public action: fiscal stimulus with job-rich, net-zero focus front and centre, central bank operations & climate risk, innovative instruments (green sovereign bonds) and institutional strengthening (national investment bank) 3. Build on growing financial sector commitment to sustainability: rising importance of purpose and stewardship in banking and investment, as well as desire among savers to connect ISAs and pensions to long-term sustainability. 4. Connect UK-wide frameworks with place-based delivery: strengthening institutional capacity at the local, regional and devolved government levels to attract & deploy capital for place-based recovery strategies, including small business & community enterprise, industrial & innovation clusters. 5. Taking a global approach to financing a sustainable recovery: recognising the severe needs for capital in emerging and developing economies, supporting a coordinated global response, not least through COP26 and G7: an intergovernmental Sustainable Recovery Alliance (Allan et al, 2020)
References Allan, J., Donovan, C., Ekins, P., Gambhir, A., Hepburn, C., Robins, N., Reay, D., Shuckburgh E., and Zenghelis, D. (2020). A net-zero emissions economic recovery from COVID-19. Smith School Working Paper 20-01. https://www.smithschool.ox.ac.uk/publications/wpapers/workingpaper20-01.pdf Hepburn, C., O’Callaghan, B., Stern, N., Stiglitz, J., and Zenghelis, D. (2020). Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?. Smith School Working Paper 20-02. http://www.lse.ac.uk/GranthamInstitute/publication/will-covid-19- fiscal-recovery-packages-accelerate-or-retard-progress-on-climate-change/ Investor agenda (2020). The investor agenda: a sustainable recovery from the covid-19 pandemic. https://theinvestoragenda.org/wp- content/uploads/2020/05/FINAL-THE-INVESTOR-AGENDA_-A-SUSTAINABLE-RECOVERY-FROM-COVID-19-CLEAN_v1.pdf Thallinger, G., Robins, N., (2020). Post-Covid recovery packages must quicken the pace to net-zero carbon emissions. Responsible Investor. https://www.responsible-investor.com/articles/post-covid-recovery-packages-must-quicken-the-pace-to-net-zero-carbon- emissions Unsworth, S., Valero, A., Stern, N., et al. (2020). Delivering strong and sustainable growth in the UK: A special decade for innovation and investment. Special Report for the LSE Growth Commission. London: Grantham Research Institute on Climate Change and the Environment. http://www.lse.ac.uk/GranthamInstitute/publication/delivering-strong-and-sustainable-growth-in-the-uk/
The role of banks in delivering a strong and
sustainable recovery
Stephen Jones
Royal Economic Society
May 15th, 2020
Mobilising the banking sector Stephen Jones Chief Executive
Introduction
Lessons from the crisis and rescue phase
The response so far
Ongoing emergency policy design
The legacy of crisis policy choices
Normalisation strains
Consolidating crisis learning
10Recovery phase
How can banks support a strong and sustainable recovery across customer groups and regions?
11Recovery phase
What is the policy framework that investors need to enable them to do this?
Public spending Market pricing Monetary Financial Public finance
policy regulation
Levelling up Net-zero Previous Tax system
strategy commitments
12Recovery phase
What are the critical risks and breakthrough opportunities?
Reset, refocus, rebuild
Institutional investors
Real assets
Customer support
The UK as a global leader
13Annex
• Financing climate ambition in the context of covid-19. Statement by Professor Lord
Nicholas Stern as part of the St Petersburg Climate Conference, 29 April 2020.
• Will covid-19 fiscal-recovery packages accelerate or retard progress on climate
change? Smith School working paper 20-02 by Cameron Hepburn, Brian
O’Callaghan, Lord Nicholas Stern, Joseph Stiglitz and Dimitri Zenghelis, 4 May 2020.
• Letters to the UK and Scottish governments from the Committee on Climate
Change, 6 May 2020.
• The other global crisis: what next for climate change and environment policy?
Policy Exchange webinar with Mark Carney and Hon Malcolm Turnbull, 7 May 2020.
14Mobilising institutional investors for the
investments of the future
Ian Simm
Royal Economic Society
May 15th, 2020RES Policy Webinar 3 - Finance for a strong and sustainable recovery (15 May 2020) Ian Simm (Founder & Chief Executive)
Institutional Investors and a Sustainable Recovery
• A recovery based on Sustainable Development – let’s inspire the public with a 30-year vision
• Government, business & investors should “jump together”
− Obliging companies to become “net zero” without international policy commitment may destroy value for
savers
• Let's build on 30+ years of experience of UK sustainable development – but go faster
• Let's build “Global Britain” on these foundations and deliver success in COP261 and beyond
1 COP26 = 26th United Nations Climate Change conference.
17Reliance on a Resilient System
• COVID-19 has reminded investors of the benefit of:
− effective public health policy and resourcing
− a vibrant science/research base
− a constructive dialogue with government re emergency support for job preservation
• Delivering Net Zero will create opportunities but also “losers” – we need a Just Transition
• Diversity & Inclusion: a vital requirement for robust institutions
• Strong alignment re risk & the long term: pensions & savings fund our "investments"
18A Strategic Opportunity based on Sustainable Development
• Compelling investment case for backing the green economy
− over 10 years an environmental index has produced 25% more profit than a generic index1
− during the current crisis, funds focused on sustainable development have outperformed
• Exciting opportunity to align finance with climate & environmental policy
− Net Zero 2050 requires Sectoral Roadmaps underpinned by Policy Trajectories
− investors looking for clear energy roadmaps e.g. EV charging, Smart Grid, heat, hydrogen
− development of UK offshore wind provides a (mainly positive) blueprint
− enormous benefits for growth, jobs, exports, national self-esteem!
1FTSE Environmental Opportunities All Share Index vs MSCI World All Country Index; data to 31 March 2020
19Getting Information, Expertise & Incentives Right
• Information from companies – major opportunities, but pitfalls too
− TCFD a timely catalyst for new international standards
− cost to companies to collect/process data - risk of "drowning in data"
− investors, regulators & companies should debate what is "decision-useful information"
• “Green taxonomies" helpful, but better promoted by the private sector than government
− “green” isn't black & white – trade-offs are common
− views on "green" evolve with science & technology change - political process reduces responsiveness
− opportunity to create consumer choice – “highly trusted” intermediaries can signal quality
• UK pension funds short of resources/expertise - scope for further consolidation/partnering
• Asset owners & managers very interested in funding long-term investment
− regulation post Covid19/Woodford shouldn't deter fund formation
20 − closed end companies (e.g. investment trusts) well suitedRealising the Potential
• Nationwide scope: let’s cast a wide net to contribute to & benefit from the energy transition
− renewable energy inherently local – much more to be done e.g. biomass, wind, tidal, solar
− Environmental Land Management (Agriculture Bill; 25 Year Environment Plan)
− transportation - scope for a more radical, decentralised vision, e.g. workplace parking levies, cycle
networks, zero emission buses/taxis
− buildings - more ambitious policy/enforcement required re energy efficiency
• Barriers to overcome include:
− insufficient project origination/support (let's invest in local government capabilities!)
− shortage of “catalytic” funding (case for a national investment bank)
21Important information
This document has been approved by Impax Asset Management Group plc (“Impax”, authorised and regulated by the Financial Conduct Authority).
The information and any opinions contained in this document have been compiled in good faith, but no representation or warranty, express or implied, is made to their
accuracy, completeness or correctness. Impax, its officers, employees, representatives and agents expressly advise that they shall not be liable in any respect whatsoever for
any loss or damage, whether direct, indirect, consequential or otherwise however arising (whether in negligence or otherwise) out of or in connection with the contents of or any
omissions from this document.
This document does not constitute an offer to sell, purchase, subscribe for or otherwise invest in units or shares of any fund managed by Impax. It may not be relied upon as
constituting any form of investment advice and prospective investors are advised to ensure that they obtain appropriate independent professional advice before making any
investment in any such fund. Any offering is made only pursuant to the relevant offering document and the relevant subscription application, all of which must be read in their
entirety. Prospective investors should review the offering memorandum, including the risk factors in the offering memorandum, before making a decision to invest. Past
performance of a fund or strategy is no guarantee as to its performance in the future. This document is not an advertisement and is not intended for public use or distribution.
The views expressed here are of Ian Simm only and are not representative of Impax Asset Management Group plc.
22The role of public sources of finance in
delivering a strong and sustainable recovery
The case for a National Investment Bank
Tim Besley and Nick Stern
Royal Economic Society
May 15th, 2020The Context
Pre-Crisis
• Expecting ambitious plans for investment in infrastructure in the context of three core
challenges: Brexit, Net zero 2050, Levelling up.
• Investment (public and private) is key to meeting these plans and the UK productivity
challenge.
• LSE growth commission argued that new institutional architecture is needed; three
pillars:
• Government (HMT/BEIS/Local)
• Infrastructure commission
• Creation of a development bank.
Post-Crisis
• Still greater challenge to drive economy forward in a sustainable way and create
confidence in a clear new growth path that can foster investment and employment. 24Infrastructure Priorities
• Pre-crisis commitment of 1.2% GDP spending; ambition now higher to build back better
(EU is 2%)?
• With National Infrastructure Strategy providing the framework.
• Private investment also important
• Many parts of infrastructure are in private hands
• Co-investment important to leverage public capital.
• Now more than ever we need the right institutional framework
• Recognizes centrality of political risk
• Creating long-term commitments across electoral cycles
• Bringing financing costs down.
• Three pillars combine to anchor investment in long-term strategy, including inclusive
and sustainable growth, resilience, net-zero target, technological change.
• They also combine to create and clarify revenue streams, which can support investment
by capturing (in part) spillovers and externalities flowing from infrastructure, including
for the long term. 25How an NIB adds value to both public
and private investment
• Can help bring forward and prepare sound projects at scale (from large complex projects to aggregation models). Creates
platforms for scale. Set new examples and facilitate their multiplication.
• Builds partnerships to overcome capital market failures (particularly for early stage risk). Capital markets are often weak
in managing, for projects/programmes, large risks, long-term horizons, and government-induced policy risk and other
political risks. An NIB can make a major difference in unleashing private finance. Examples from EBRD, IFC, EIB, national
investment banks…
• Strengths of an NIB; ability to look to long term; its presence reduces policy risk; it can have a range of instruments,
equity, long-term loans, mezzanines, political risk guarantees, etc. to manage risk; it can be a trusted convener and
syndicator; it can build sector and other skills.
• It has the institutional strength to overcome market failures and be profitable without subsidy in context of good policy.
It enhances and complements private sector activity using its institutional strengths.
• It improves governance and transparency of public investments and financing facilities by being a public entity
accountable to parliament. Takes some decisions involving finance and investment out of the innards of ministries and
reduces political interference. Some private sector share holding possible.
• Can work with private retail banks on taking to scale, e.g. mass replacement of gas boilers, building retrofitting…
• Can work alongside British Business Bank which is oriented towards SMEs. Strong complementarities, including via
infrastructure.
26Mandate, strategy and principles
• The mandate would be to foster investment, including infrastructure, in pursuit of
national strategic goals, including sustainability and levelling up.
• It could lend to private sector, national government and local government.
• Operating principles
- Sound banking (make sound risk-return decisions and be profitable)
- Additionality (make activities possible which private sector alone could not manage without excessive cost
or risk)
- Foster delivery on national strategy goals.
• The bank should use its strength to innovate and help push the frontiers of investment.
• Operating principles would be applied transparently and rigorously by staff, with an
overall strategy for investment in the context of UK growth and development.
Accountable to Board. Staff should have financial skills.
• Board established by government responsible to parliament. Should have financial and
investment skills and private sector and civil society members.
27Possible capital structure and scale
of lending
• £20bn paid-in capital and £80bn callable; £100bn total. Paid-in capital could be, for
example, paid in over 5 years at £4bn p.a.
• With a 1.5-1 gearing ratio and turn-over of portfolio, on average 5 years, could lend
around £30bn per year (comparable to what EIB is planning for Europe).
• Would seek private sector co-financing of projects and programmes of, say, one-to-one
which could give, over time, total project value at £60bn p.a.; around 2+% of GDP and
arguably commensurate with challenge.
• If NIB uses its institutional strengths to help reduce and manage risk well, particularly in
early stage of projects and investments, it should be able to turn over its portfolio
profitably.
• Could have private sector share-holding to add to paid-in capital.
28Finance for a
strong and sustainable recovery
Royal Economic Society
May 15th, 2020You can also read
