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Lord Smith of Kelvin address to the National Association of Pension Funds

06 Mar 2014

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This speech was delivered to the National Association of Pension Funds (NAPF) Investment Conference in Edinburgh on 6 March 2014.

It is a great pleasure to be addressing you in Edinburgh today.

I am actually a Glasgow boy myself, but I say with real affection that Edinburgh is a city with great heritage, and some outstanding attractions.

The Old Town and the New Town, together a UNESCO World Heritage site, countless world-class galleries, the magnificent Museum of Scotland, the Scott Monument, Edinburgh Castle...

And, now, the UK Green Investment Bank.

Since 2012, this pioneering institution has called Edinburgh home (we are a few doors up from here in fact), and I am proud to be its first Chairman. GIB is the first investment bank of its kind in the world: our job is to act as a catalyst, helping the UK make the transition to a greener and stronger economy. Critically, we are investors not activists. That is an important distinction for this audience to draw, and if you leave here with one message today it is this:

The UK's green economy is a great, long-term investment opportunity and it will get better.

Nobody knows this market better than GIB. We are, already, the most active investor in this market. Our job is to make investments that are green and profitable. Both, together.  No trade-offs.  We are - unashamedly - a FOR PROFIT bank, delivering returns for the taxpayer and co-investors and creating jobs and wealth up and down the UK.

In the longer-term, it is our aspiration to build an enduring institution that exists outside the public sector. In our first 15 months, we have made what I believe to be an impressive start. So far:

  • We have built a team of over 70 dedicated investment professionals making GIB a world leading investment expert in the green economy
  • We have backed 25 projects, across all of our target sectors - offshore wind, energy efficiency and waste. And in every part of the UK.
  • We have worked with 60 co-investors, directly committing over £750m, which will mobilise over £3 billion when fully deployed
  • We have invested in 30% of the UK's operating offshore wind capacity
  • We helped deliver the UK's first listed renewable energy infrastructure fund
  • We financed the UK's first large scale coal to biomass conversion
  • We have brought in £3 of private capital for every £1 we have invested
  • And - crucially - every one of our 25 investments have been on fully commercial terms, generating market returns for our capital, and are on track.

We have lots more to do of course; these are challenging times for our market and early days for GIB. However, given our mandate and our ambition, we should be a transformative institution - very clear on our purpose and role.

I have a very personal connection to and deep passion for that type of purpose. It is the same type of mission that started me out in my professional life. My first job was with an organisation that offers the team at the Green Investment Bank today some lessons and some inspiration. It may even make you as professional pension fund investors pause for thought, and I hope that it does so.

At the end of 1945, the UK began the fight to recover from the second of two catastrophic world wars. The pre-eminent problem of the time was growth. How could the country create the conditions for a sustained economic recovery that would help rebuild the nation and take it forward? To make it better than it was before.

At that point our banking industry was itself damaged, stretched and - by today's standards - immature. Small home-grown companies, always the engine of sustained growth, simply couldn't access the finance they needed to grow. There was a market failure that was limiting growth and the achievement of the nation's goals.

Government recognised this and intervened, creating what I believe to be one of the most important institutions of post-war Britain - The Industrial and Commercial Finance Corporation, or ICFC. Some people at the time said that if the banks weren't prepared to invest in these smaller companies, off their own backs, it couldn't - or even shouldn't - be done. Some even frowned on its avowed social purpose as being, in some way, incompatible with what we believed to be the capitalistic spirit or the effectiveness of the market. Could you really pursue a cause and make money at the same time? Undeterred, ICFC started to invest. It did it well. It did it commercially, like we at GIB do today. The banks noticed and the banks followed.  The whole market grew.

So what did it achieve? First and foremost it succeeded in its mission to tackle a market failure by sowing the seeds of a market solution. By showing what was possible - and this next bit is crucial - doing that at a pace that others believed they could replicate and follow, it helped build a market. In doing so it became an enduring institution. It moved on from its Government ownership and changed its name, ultimately, to 3i. And in the process it spawned dozens of copycat companies across the world.

But one of the most important and overlooked contributions it made to that new and growing market was how it provided a training ground for the development of expertise and the production of experts. The people who worked there took their expertise and ethos to hundreds of other companies across the world. And the market got even bigger.

Today, at the Green Investment Bank, we have Europe's largest and most experienced team of renewable energy investors and technical experts. In what is a relatively new market place our team has already amassed almost 800 years of experience in our target sectors. I see this same virtuous cycle beginning to form at the Green Investment Bank.

The challenge we face now is as large as it was then, but different. Back then an economy had to be rebuilt. Now the challenge is to rebuild the economy on a low-carbon footing. The fact that we need to do that is not up for debate, despite the recent political challenge to the UK energy market (which I will come back to). The task is to do it well, so we in the UK capture all the benefits.  If we do that we create new, sustainable growth.

Is there a market failure holding us back? All the signs say yes. Are we seeing signs of that failure correcting itself? On the contrary, we seeing a fall in investment instead of the rise we so badly need. Can GIB help fill that gap? Can it do it by being both green and commercial? Is it even possible? I believe so.

As anyone who knows the deal-making business understands, it takes time to get them over the line. But we are up, running and investing. So far this year we have invested in nearly 40% of all the projects in our markets. Our business model is working. So, we are clearly making good progress in building an important enduring institution here in Scotland. It is something that's achieved through sustained hard work, and we have an excellent team here and in London, headed by our energetic and respected chief executive, Shaun Kingsbury.

We are particularly sensitive to our role as stewards and guardians of £3.8bn of public money. It is a privileged role, the responsibilities of which sit permanently at the forefront of our minds. Now, today, our world - energy - is a highly politicised business....for understandable reasons.

Following the market crash and a prolonged downturn in the economy, consumer focus, and therefore that of politicians, has sharpened around the cost of living, and the cost of energy is obviously one of the largest single factors in people's weekly and monthly outgoings.

I also chair SSE, so I know the strength of feeling that exists out there. Times have been hard; for many it has been a struggle to make ends meet. As a result of this heightened sense of economic concern, the importance of the environment, decarbonising our economy, is inevitably viewed by some as being less of a priority than it once was.

So, it is to their credit that our political leaders have continued to support the Green Investment Bank throughout these tough years. They understand the potential scale of our transformative impact. It is politics at its best - taking a principled view of what must be done to secure our long-term prosperity and security, and refusing to be blown off course by short-term problems. It is politics with a legacy.
 
Recently, the Prime Minister said one of his proudest achievements in office was launching the Green Investment Bank. We know that Mr Cameron's Liberal Democrat coalition partners feel the same. We work very closely with Vince Cable, Alistair Carmichael and Danny Alexander. And no one would doubt the environmental credentials of Ed Miliband, who was a pioneering Secretary of State at the Department of Energy and Climate Change and who remains a committed supporter of the move towards a low-carbon economy and the Green Investment Bank. Here in Scotland, the Government have been tremendously supportive, both in campaigning to bring the Bank's HQ to Edinburgh, and in helping form a pipeline of Scottish projects. So we at GIB are determined to repay this confidence and support. We have a great platform to strengthen and grow our business.

I said earlier that we are investors and not activists. Don't get me wrong: we care very much about the environment, but it is not our role to opine on one form of energy or another. It is our role to identify good, investable projects that meet our green criteria. From there, our job is to 'crowd in' capital and encourage people like you to think carefully about investing in the UK renewable sector. We have a shared interest. Both of us are capable of providing long dated money to long dated assets. The type of assets that will provide good, stable long term yields. The renewable energy sector offers this. We have a shared interest in the UK. Not just because we are based here but because it is one of the world's most attractive markets for renewable energy investments.

That is particularly true of the offshore wind market where the UK has taken an early lead in realising its potential. According to Ernst and Young's Renewable Energy Country Attractiveness Indices, the UK is the most attractive location in the world for offshore wind investment. So we should be positive and confident about the opportunity we have here. But we need to do more and we need to do better.

One obvious example of this is for the market to develop structures to provide investors access to the investment opportunity. That's why we are so proud of the role we played in helping to launch the UK's first listed renewable energy fund - Greencoat Capital - last year. We advised the UK Government on its cornerstone investment. The listing was over-subscribed and has performed well since. But most importantly it provided the market with a replicable model. The Greencoat model has now been successfully copied at least four more times to date in the UK alone with the market now providing in excess of £1.2bn of capital. This is a great example of how we can bridge the gap between investors and opportunities. This is how we can bring capital, at scale, to finance the UK's transition to a low carbon economy. Green and profitable investments. This is an area we spend a lot of time thinking about and you can expect to hear more about, from us, in the months ahead.

Our chief executive, Shaun Kingsbury, recently spent time talking to international investors about the role of GIB and highlighting the opportunities within the UK green economy.  He got a good hearing, and it is a timely reminder that in a world of constant change the UK remains one of the most attractive investment environments in the world.

However, we don't need to go to the other side of the world to find capital keen to invest in the UK.  Today, in front of me, I see substantial amounts of capital seeking the appropriate risk adjusted returns that the UK green economy offers.  We will be spending more time with UK based pension funds identifying ways that we can all benefit from this investment opportunity, and hope to meet as many of you as possible, to explain the merits of investing your members' money here in the UK, in good, responsible, profitable projects.

I know very well how investment management works; I spent a career looking after other people's money. And if there is one thing I learnt, it was the need to be aware of how markets develop.

In today's unpredictable world, responsible investment should be considered the norm - it is one of my hopes that we at GIB play a modest part in making it so. Sustainability and investor values can sit comfortably together creating more resilient business models. As Al Gore famously said: "Sustainable investing is not a feel good exercise."

We all want to retire with a good pension and into a world with a healthy environment, vibrant economy and peaceful society. Our hosts today, the National Association of Pension Funds, put it well at the beginning of its 2013 Responsible Investment Guide. They said..."The management of extra-financial factors, which encompass governance and material environmental and social factors, is an integral part of good corporate management. Further, the successful integration of such factors within decisions by investors can moderate against investment risk and thus potentially improve risk-adjusted returns."

So the investment landscape is changing, and it will continue to do so. I'm sure many people will soon choose to invest their pensions and other financial products, where they believe they are earning good money at a suitable return and feel that they have done some good. It is no longer one or the other. You can have both, and so can your members.

Another plug for our hosts today... I looked at the NAPF 2013 Workplace Pensions Survey, which was based on more than 2,000 responses. The survey took views on auto-enrolment, investment risk, pension charges, corporate governance and expectations for their retirement. Two in five of those people who replied (42 per cent) stated that they would invest in a fund where they could get a financial return and feel like they had made that important contribution to society. Further research shows that 93 per cent of CEOs believe that sustainability issues will be critical to the future success of their business.

I hope I'm preaching to the converted here, but I do believe that pension fund investors should be thinking carefully about their long-term investment profile and the associated risks. The UK remains one of the world's most attractive markets for renewable energy investment with an attractive currency, strong rule of law, a stable and reliable regulatory regime and a growing economy. So there is no better a place to realise these twin benefits - green and profitable.

UK offshore wind is an attractive asset class with an investment need of over £30bn. Operational offshore wind parks are particularly attractive investment opportunities because they can be lower risk, unlevered and yield-generating from day one of investment. Also appealing is the fact that there are a number of existing assets ready for investment as well as a strong pipeline in development.  As well as the Greencoat listing, GIB has committed £160m of debt or equity to three other operating wind projects.

In the UK waste sector, we are investing in infrastructure to take millions of tonnes of household waste from landfill and turn it to good use - making energy from waste.  We've backed major new projects ranging from £200m new facilities to manage local authority waste for the next 20 years to the introduction of innovative new gasification technology.

In energy efficiency we have an emerging new sector where the UK is racing to catch up with the US and Europe. We see great opportunities within the NHS and in things like streetlighting. I was delighted that our first transaction on streetlighting was with Glasgow City Council - a great project that will save the city money, reduce its carbon footprint and give its citizens better light.

All of these are commercially investible projects that provide good, stable returns over many years. They also yield a great economic, social and environmental dividend.

So, to summarise: -

The UK Green Investment Bank is up and running, we are investing across a number of sectors and we are making good returns. I said at the outset, the UK green economy is a sound investment opportunity and it will only get better, so I look forward to seeing some of you round our deal table soon.

I will end by repeating the words of Al Gore, because they are clear: "Sustainable investment is not a feel good exercise." He's right. However, I think we will all feel better about ourselves if we invest well to successfully build a greener and stronger economy, and you provide a more stable long-term deal for your pensioners. Thank you for listening.