My proposal is for the government to develop a crowdfunding platform that would allow individual savers to invest in businesses that need capital to develop green projects. The proposal meets the challenges and opportunity outlined in question one.
Opportunity for businesses
Interest rates and bond yields are very low. This allows the government and large companies to borrow very cheaply. However, such a privilege does not necessarily extend to smaller companies, who are unable to access wholesale capital markets and must rely on the banking sector. My proposal would give them an additional source of capital for sustainable projects, through using stored up savings.
Opportunity for savers
Individual savers face a tougher task earning a return on savings, with bank accounts paying little or no interest and the National Savings and Investment (NS&I) products paying out less than before. My proposal would allow them to earn a better yield. It also allows them to invest in truly sustainable projects, and those that help local communities, something that taps into the demand among savers and investors for responsible, impactful investment opportunities.
Opportunity for environmental policy
The government is looking to meet its commitment to reach a net zero carbon economy by 2050, and is preparing to host the COP26 conference this year, a chance to showcase progress in the battle to combat climate change. It has also produced a Ten Point Plan for a Green Industrial Revolution, and some of the economic activities identified in the plan could be funded through the crowdfunding platform.
The transition to a net zero economy does not have to weigh down the economy, and the costs of not acting on climate change are higher than those of acting. However, transitioning will have a distributional impact. My proposal gives a greater range of stakeholders buy-in to environmental transformation and to levelling up, as either borrowers or investors.
Some examples of activities that could be financed through the platform are:
• Green building renovation (perhaps along the lines of “C-Pace” in the US, which allows property owners to conduct energy efficiency and renewable energy projects without having to make a large initial payment, and with debt tied to the property, not the owner);
• Green transport operators and companies in the green transport supply chain;
• Retailers selling environmentally-friendly alternatives to common products;
• Companies pledging to protect and enhance the natural environment.
Practicalities
SMEs could request equity or debt investments. It would also be worth exploring the potential of a specific profit participation instrument allowing business owners to avoid taking on more debt, without diluting control of the company. The Association for Financial Markets in Europe proposed a similar idea for the EU in January.
Savers could either invest in specific projects, or in a bundled portfolio of them for diversification. These bundles could be categorised by type, e.g. building renovation or renewable energy. Investors would also be able to trade in and out of holdings via a secondary market on the platform, which increases demand by adding the benefit of liquidity for investors. The platform would only be open to retail investors, and, to be clear, while the government would establish and run the platform, it would not actually be investing itself.
Companies would have to disclose certain financial information onto the platform. They would be able to set the terms of the investment, but with certain default options and contracts suggested by the platform.
The platform would have to be able to handle large flows of money. It would also have to provide quality control, ensuring that the businesses seeking investment would put it towards projects that are not just real but also really green, and in doing this would have to determine what counts as green.
Thankfully, it would have tools for this at its disposal. The government is planning to create a taxonomy to determine which activities are sustainable, and it is also setting up a new infrastructure bank, whose remit is set to include supporting the net zero policy and offering advice to local government on infrastructure; it could also play an advisory role in the platform. The platform could also use specialist private companies that rate projects on green criteria: these firms are already well-established in the investment sector.
The platform could be operational within a year, meaning it would be able to provide support during the recovery phase of the crisis.
Why not the private sector?
Investment and crowdfunding platforms for retail investors do exist in the private sector. However, the government can add value with this platform for the following reasons:
1. It can act as a trusted arbiter of green activities.
2. It can provide scale through a national campaign in a way other platforms do not.
3. Investors would not have to worry about the platform getting into financial difficulty and not being able to meet obligations.
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