Energy Buzz: The Future of Green Banks

Challenges to the form

If properly managed and regulated, green banks have the potential to create positive returns for both shareholders and society. They are aimed at harnessing both public and private capital to bridge the "funding gap" in the energy transition, aiming to provide value on investor and taxpayer funds and to deploy investment to 'green' projects and technologies, with the stated goal of reducing the world’s reliance on high-emission technologies and methods of production. 

But their "dual purpose" does not come without compromise. 

Firstly, there is the inherent tension between the maximisation of profits against positive social and environmental outcomes. To maximise the impact of the money invested, it makes sense for green banks to focus on achieving stable returns which can be reinvested into future projects - but this discourages investment into novel and unproven technologies. A key consideration is data inequality. Returns on investments are an easy metric for green banks to evaluate their performance, but it is significantly harder (and more costly) to ensure that the money invested is being deployed to the projects with the greatest social and environmental impacts. 

Green banks are clearly aware of these issues. Many even pursue wider "market development" activities in addition to financing, to bring less proven projects to market. However, such activities require industry expertise which comes only from experienced staff, who banks must also retain long enough to build up institutional knowledge. 

Secondly, green banks may also face challenges of distraction. Green banks formed in one political administration may be asked to justify their existence in the next. Their mandate may also face changes over time to reflect shifting political focuses; many green banks focus not just on the climate crisis and the energy transition, but also on more specific local goals such as developing particular green industries in their home country, or creating employment in less productive regions. 

Uncertainty as to the exact mandate for green banks may result in a reduction of their efficacy in achieving their stated goals. As with any other market participant, uncertainty within the institution or in the market will likely result in green banks tending towards safe and short term investments in established markets. In doing so, they may be in danger of undermining their core purpose: to invest in projects which are underserved by private capital. 

What's next?

It’s widely acknowledged that additional public funding is needed for the world to meet its commitments to reduce CO2e emissions and mitigate the worst effects of the climate crisis. The Climate Change Committee estimates that the UK, in particular, must increase its low-carbon investment from £10bn per year in 2020 to £50bn per year by 2030 if it is to meet its target of net zero by 2050. 

If properly funded, green banks have the potential to fill an important piece of that gap, providing focused investment which also delivers value for money. However, shareholders and governments must provide them the conditions to succeed. This means clear funding plans, including commitments to provide further funding if banks struggle to achieve profitability; consistent goals and performance metrics to enable banks to focus on long term investments; and proper investment into staffing, to empower banks to build up institutional expertise. 

Authored by Nathan Seedall and Rufus Dobson.