Funding a New Green Investment Bank

Local government pensions fund investments in England and Wales were collectively worth £287 billion as of March 2019, according to central government figures. Many funds, in their schedules of investments, show substantial direct stock holdings in major oil companies. The reason for this is not hard to guess at: oil companies (unlike e.g. tech stocks) pay regular dividends and by investing in them directly, pension funds avoid management fees associated with indirect investment, via unitised trust funds. Trustees will be attracted to investing in oil stocks especially where they interpret their fiducial duty as being purely to maximise medium- and long-term financial gain. Less progressive trustees may be resistant both to adopting an ethical investment policy and to acknowledging the (increasing) longer term risk attendant in oil industry investments, as the energy transition progresses.

The notion of a UK green investment bank was first proposed in 2009, by the think tank E3G (Third Generation Environmentalism). After being promoted by Friends of the Earth, crucially, the idea received backing from the Liberal Democrat Party, followed by the Labour and Conservative parties. The proposal became part of the Coalition Agreement following the May 2010 General Election and The Green Investment Bank (GIB) was created under the coalition government. Regrettably, the GIB was sold under the succeeding Conservative administration in 2017, for £2.3 billion, even though it was successful in accelerating green investment in the UK. Arguably, a New Green Investment Bank is now needed, but in these difficult times, public funding might be difficult to find.

It is proposed that the UK government creates a set of oil industry mirror (or tracker) funds, where funds invested flow to a New Green Investment Bank and thence to green investment projects. The returns on these funds would track either a particular oil stock, or a basket of oil sector stocks and be underwritten by government, always to exceed (by a small premium), the returns yielded by direct investment into those oil stocks. This premium would effectively undermine any fiducial argument that trustees might make, supporting continued direct investment in oil stocks. By this mechanism it is hoped to switch a significant percentage of public sector pension fund holdings from oil industry based to green investment. In releasing a large new source of funding, the UK government would be exposed only to a differential risk that oil stocks outperform green investments on the longer term. Since the government has committed to a UK target of net zero carbon by 2050 it is now implicitly aligned in the conviction that the opposite will be the case. The government expectation should likewise be that the scheme would be a positive to the exchequer over the longer term.