Mark Davis introduces a local investment vehicle that he says could help local communities achieve Net Zero.
Two-thirds of UK councils have declared a Climate Emergency. They have set ambitious Net Zero Carbon targets for their regions that will require billions of pounds in low-carbon investment over the coming decade.
Despite being on the frontline of delivering the green public infrastructure projects necessary to meet those targets, councils also face a colossal funding crisis.
Councils remain at the mercy of political changes that have reduced their borrowing options. Rates for the Public Works Loan Board (PWLB) have fluctuated, grant income has fallen, and government finance provider, Salix, has scrapped its 0% loan offer for energy efficiency measures. Clearly, councils will struggle to finance their Net Zero projects while maintaining front-line services without new sources of stable, low-risk borrowing. And there is a further challenge. At the latest count, only about 10% of local residents know that their council has publicly declared a Climate Emergency and is committed to delivering Net Zero projects in their community.
Faced with these financing and public engagement challenges, where might councils turn to secure the kind of funding they so urgently need? And, as citizens, how can we find new ways of moving our money so that it stays within and helps to green our own regional economies?
We don’t have very much say at all in how our money is put to work.
After all, when we hand over our money to a high-street bank – very likely the one you’ve always banked with, perhaps since being provided with your first savings book at school – we empower that bank to decide where and how our money is invested. This is true of our current, savings, and investments accounts (a cash ISA maybe). In each case, aside from agreeing a financial rate of return to reflect the risk we are willing to take, we don’t have very much say at all in how our money is put to work.
I want to change that. In partnership with the crowdfunding platform, Abundance Investment, and the public sector body, Local Partnerships, I co-created Community Municipal Investments (or CMIs). This model uses investment-based crowdfunding to help local people receive a decent return for putting their money to work by supporting local green and social projects. Crucially, this is not a donation-based model, which is often what people associate with crowdfunding. CMIs are backed by a business model that uses debt or equity structures to provide a meaningful financial return to those who invest.
Local councils typically fund their public infrastructure projects through the PWLB. This includes: installing solar panels on schools and council buildings; building wind farms and electric vehicle charging points; retrofitting social housing to make homes cheaper to heat and so warmer; and, installing LED lighting on transport highways for buses and cycles. These are all crucial projects if councils are to meet their Net Zero targets.
But since 2010, UK councils have lost, on average, 60p in the £1 of central funding under the austerity measures of successive administrations. Further hit by the economic impact of Covid19, some councils have now lost as much as 80p in the £1. In all cases, council budgets are squeezed hard so precious central resources are rightly being protected for health and social care, emergency services, and waste management.
CMIs are intended to help by allowing councils to finance “hard to fund” green and social projects too. They are structured as long-term investments (anything from five to 30 years) with a fixed repayment for investors. They are issued by local governments via a crowdfunding platform and delivered to market as Local Climate Bonds because they are tied to specific green infrastructure projects in the region.
The cost of borrowing this way for councils is lower than the PWLB, although CMIs and PWLB can be blended to support projects where local connection and larger funding packages are required. CMIs are also designed to offer councils an alternative to complex, shareholder-facing and sometimes controversial Private Finance Initiative (PFI) or Public Private Partnership (PPP) structures that are infrequently aligned to local Net Zero strategies.
One of the major innovations of CMIs is to de-risk Net Zero investment by disconnecting retail investor risk from project risk. This means that those who choose to invest take local government risk. In other words, the risk being taken is that the local government itself somehow ceases to exist during the term of the investment, not that an individual infrastructure project fails.
Councils are robust organisations, enjoying an institutional longevity beyond high-street banks.
Capital is at risk, based on the council’s ability to raise its taxes, which is about as low a risk as one can imagine. Despite stated threats to their financial well-being, councils are robust organisations, enjoying an institutional longevity beyond high-street banks. It is a fact that, since the global crash of 2008, more high-street banks have ceased trading than councils have been forced into restructuring or placed under spending restrictions.
With a 1%-1.5% return reflecting that low risk (equivalent to national Gilt markets), CMIs provide a better rate of return to citizens than most current high-street products. Crucially, they also generate positive social and environmental returns by transparently funding real projects in local communities. Investors may walk, cycle or drive by a new solar panel installation on a local school, knowing that their money helped to put it there. While receiving an equivalent or better return than their current high-street savings, they have helped to finance green energy savings in local education.
CMIs are aligned with the principles of the European Just Transition Mechanism which asserts that a healthy economy and a clean environment can and should co-exist. They have been designed with a minimum investment threshold of just £5 so as many people as possible can participate in helping their community to achieve Net Zero, playing their part in responding to the Climate Emergency. Whilst the financial return on any investment at that level is negligible, research shows that there are tangible social co-benefits to participating in civic projects. CMIs therefore provide a short and simple answer to a question I hear a lot in my research, which is “what can I do to support the Climate Emergency?”
The UK’s first two CMIs were launched as Local Climate Bonds in late 2020 by Conservative-led West Berkshire Council and Labour-led Warrington Borough Council, two very different socio-economic and political contexts. The former is in the wealthy and rural South East of England, and the latter in the poorer, urban North West of England (see box). The CMI proved to be sufficiently attractive for people across the country to move £2 million in support of local Net Zero projects using this new finance model, all within the context of economic uncertainty generated by the pandemic.
As my recent report shows, there are wider benefits for councils too. The offer of a CMI can open up communication channels with residents to build new relationships of trust around a shared mission to meet local Net Zero targets. I saw this in action when one-in-six investors in the West Berkshire CMI decided to donate their first interest payment back to the council for a local rewilding project, which would otherwise have been hard to fund.
On 13 July 2021, the UK’s Green Finance Institute launched a national campaign to help local authorities to issue CMIs as Local Climate Bonds. The campaign is targeting all 404 local authorities in the UK, helping them to fund hundreds of green local projects in the run-up to and beyond the critically important COP26 summit to be held in Glasgow this November.
CMIs aim to empower more people to make their money matter by investing directly in projects local to them to improve their communities. If we want the world to be fairer, more inclusive and sustainable by delivering a just transition to a decarbonised economy, then we are all going to have to do different things with our money. CMIs are signalling the way ahead.
For more on the Community Municipal Investment structure, visit: https://baumaninstitute.leeds.ac.uk/research/cmis-local-climate-bonds/