Sustainable finance: alternative funding mechanisms for a green economy

24 August, 2020Ouida Taaffe

Bank lending may not always be suitable for funding a sustainable economy but there are alternative ways to invest in green projects. Ouida Taaffe talks to Bruce Davis at Abundance Investment about an asset class designed to boost grassroots, local sustainable investing – community municipal investment.

Planting-bank-notesIf good things have come out of the Covid-19 crisis, one of them may be more debate on organising society for the greatest good.

As many traditional sectors – such as retail, travel and hospitality go through painful change – how can we invest to create fulfilling employment and ensure a sustainable future?

Bank lending and the green economy

In principle, bank lending should be central to funding a sustainable economy.

The UK aims to become carbon-neutral by 2050. That will require its financial system to back green investment. However, getting there may not be straightforward.

One of the problems will be investing while also delivering fairness, social justice and greater wellbeing. Another is the current financial system itself.

Bruce Davis is Co-Founder and joint Managing Director of Abundance Investments.

He says, “Banks need to do more than just assess risk and produce policy. They need to think about how they are going to innovate and change their lending practices to enable ‘green lending’ – which may have different risk and return profiles to the ones their existing lending businesses are built on.”

One of the challenges for banks, Davis says, is that riskier, innovative investment may be both beyond a retail bank’s risk appetite and require too much due diligence.

That applies particularly to projects for sequestering or removing carbon.

But even if banks did find it easy to invest in green projects, their depositors might see sustainability as an abstract issue – particularly in an economic downturn.

Is it possible for people to get close enough to the investment decision to feel their money is making a tangible difference to what matters to them?

Alternative investing in the green economy

To increase investment in green projects that banks will not fund, one idea is to sell community municipal investments directly to retail investors.

Yes, investing through crowdfunding is riskier than doing it through a bank account. None of the capital or the returns are covered by guarantees and the account is much less liquid.

However, the funds can be put to work in ways that a bank deposit might not be.

Abundance Investment, for example, is launching its second Community Municipal Investment, with Warrington Borough Council, on 25 August.

The funds will go towards the development of a solar farm, which is part of Warrington council’s plan to become the UK’s first carbon-neutral town.

The first Community Municipal Investment set up by Abundance, for Berkshire Council, will also fund a solar farm.

It offers a return of 1.2% a year over five years and capital and interest is paid back in instalments. There will also be a secondary market on the site for those who want to exit before the five years are up.

Is this a good way to save and to help sustainable growth?

Plant shoot growing on a pile of gold coinsIt is riskier than putting the money in the bank, but it allows people to target particular projects – something that the risk-spreading at banks cannot accommodate.

It also helps local areas reach particular sustainability goals. Again, this is something that individual investors would otherwise struggle to influence.

Further, value is not just about returns. Research suggests that many private individuals are less interested in absolute returns and more interested in supporting sustainability than institutional investors realise.

Yes, they want savings to grow but they are also guided by ‘self-transcendent values’ about society and the environment. That is particularly the case for millennials. And, while many of them have little money to invest now, they will be the investors of the future.

What will the future bring for investors?

The UK government announced in early August that it is investing £1.3bn in homes, infrastructure and jobs and “laying the foundations for a green economic recovery”.

If that works, what currently seem like isolated and risky projects will be part of the UK economy’s growth drivers.

Related content

Find out about our Centre for Sustainable Finance