Ep79: Rhian-Mari Thomas 'A Greener Future Made Possible By Finance'

“The City is absolutely full of incredibly smart people who with the right incentives, can come up with the right solutions all day.”: Rhian-Mari Thomas on incentivising green investment.


In this episode of Cleaning Up, Michael Liebreich speaks with Rhian-Mari Thomas, Chief Executive of the Green Finance Institute in the UK and formerly a banker with Barclays.

Michael and Rhian-Mari begin by discussing how the Green Finance Institute was formed and what its goal is.

They go on to discuss the institute’s work with home heating in the UK and how homeowners can be incentivised to invest in their homes.

Finally, they look beyond the UK to how green investments can be encouraged in countries like South Africa.

This is an abridged transcript of the conversation, edited for clarity.


Michael Liebreich: Why don't you start off by talking about the Green Finance Institute (GFI): what is it and what do you do?


Rhian-Mari Thomas: The GFI is two and a half years old. We were formed in response to a recommendation made to the government by the Green Finance task force. There were 30 recommendations that were put to the government in March 2018, of which one was to issue a green belt, which obviously has been done very successfully. Another was to set up the GFI, an organisation that would sit between the policymakers and mainstream financial institutions, and look at how we would accelerate the mainstreaming of green finance. I was absolutely delighted to be made the first Chief Executive of the GFI back in July 2019. Previously, I was at Barclays, where I'd spent 20 years in finance. I thought there was a real gap in the market for people who were starting to understand this agenda and say, how do we finance green? How do we look at different real economy transitions that need to happen, and not only look at a top down, commitment based or framework based approach, but really get people in the room that have made money move, they know how to do deals, and sit there and work through with central policymakers, with industry, increasingly, with local authorities, and also with finance providers and go ‘Well, what are the barriers here?’. You and I both know that there are genuine barriers in the way: a lot of it's got to do with risk adjusted returns, but also the complexity of what we're dealing with. We've primarily been focused on decarbonisation of residential buildings and road transport, and we're increasingly looking at nature based solutions. We're now starting to expand some of that work into Europe. I am also very focused on the need to look at developing and emerging markets. And using the UK as a starting position, strong in so many ways, but particularly in finance, to see how we can help with that. 


ML: I'd like to dive into the home heating work that you've done. How do you debug the flows of capital and get more investment flowing into that sector?


RMT: So specifically on how we finance the decarbonization of homes, which is a big focus for the UK Government. We're independent of the government: we're an independent company limited by guarantee. Our two guarantors are the City of London Corporation, and the UK Government. We always make sure that what we're focused on is aligned with supporting UK Government ambition when it comes to net zero and nature positive. Homes are an obvious place to start because the technology is well known. When we first started looking at the energy efficiency of buildings there were only two green mortgages that were offered in the UK market, now there are over 31. We got hold of the Loan Market Association, and we got 30 organisations across the finance industry, and we came up with a set of principles. Of those 31 green mortgages, 20 of them are aligned with our principles. Green mortgages are not the solution to the entire residential housing sector. We need very, very different approaches when you're looking at private rented social housing versus owner-occupier. And these are conversations that you need to have with different individuals across the finance ecosystem as well. I'll give you one example of something that we're about to launch in the next couple of weeks which is green rental agreements. One of the split incentive challenges for private landlords has long been: the landlord has to pay up front for renovating a building, but it's the tenant that gets the benefit of lower utility bills. It was illegal, or breaks regulation for the landlords to charge their tenant for anything other than the rent. So you couldn't just say ‘Oh I'm just going to depreciate this cost and charge my tenants for it.’ But we've worked with a number of lawyers to figure out how you could put a rider into regular rental agreements that would enable there to be a benefit share between the landlord and the tenant in a way that's done in New York, for example. Another initiative is our lenders handbook which got such a strong and favourable response from lenders. It explains to them all the different technologies for retrofitting homes as well as the carbon benefits, the likely payback period, and all the different types of financing instruments that are out there. We've also just been approached to see if we'd do something similar for consumers, which we'll consider doing with the right partners. Another thing we did was digital passports which provide an action plan to the homeowner of what they should be doing to retrofit their home. We've been working now for a while since last summer, with an abundance of local climate bonds. Obviously we don't have a municipal bond market in the UK, and most local authorities raise their finance directly from the Works Board. But what we wanted was to provide them with alternative financing options and also help capacity build and support as to how public finance can be used wherever possible, as a guarantee, or another mechanism to try and crowd in private finance.


ML: How can you incentivize homeowners to invest in making their homes greener?


RMT: We've done a fair bit of consumer behaviour analysis and a lot of people would gladly just pay a monthly amount for having somebody else do all the hard work of retrofitting their home. I'm in the process of doing it at the moment and personally, I would just happily write the check rather than do some of the things I'm having to go through at the moment. The second aspect is that what we don't see at the moment is a clear correlation between energy efficiency of a property and its valuation. There are lots of reasons why that's the case, including how valuations are drawn up. There are regulations in this country to make sure that your property will always be valued in relation to the properties in the vicinity. So you don't get an additional premium or an additional valuation from the fact that your house is energy efficient. It doesn't have this huge contingent liability that you're going to have to pay over the next decade or so, to get it retrofitted. So that's something we’ve been working on. One of the quickest ways of forcing that valuation mechanism to get that correlation between the valuation and its energy efficiency would be through stamp duty. There's a mound of research that's been done on this. And that's a very live conversation that we have had with government departments. This isn't just the GFI, coming up with this, we went in with seven banks, to have the conversation and to say if you were to consider doing something with the stamp duty rebate, so that it would force this correlation between energy efficiency evaluation, this is how it would impact the finance industry, this is how people that provide green credit, green mortgages would think about it. So we are using our role as a conduit to have a more sophisticated conversation about some of these challenges. 


ML: How are you broadening your work to the rest of the world?


RMT: The work that we do has one common thread, which is looking at where the finance is stalled or missing, and trying to figure out what the barriers are. The City is absolutely full of financial markets, full of incredibly smart people who with the right incentives, can come up with the right solutions all day. One of the things that had been troubling me for a while was why blended finance wasn't working better, this idea of using public balance sheets and private capital, especially as a solution to emerging markets or developing markets, investment requirements. It started off the same way: we brought practitioners together and asked what was going on. We learned some really quite important stuff, especially in South Africa, which is the most advanced financial market in Africa with the most assets under management and the most active stock exchange. What we heard from financial practitioners on the ground in South Africa was ‘Look, we see plenty of deal flow, we see plenty of infrastructure transactions, climate smart infrastructure transactions that we would love to invest in.’ So it's a myth that there's no pipeline of projects, there's been a lot of investment in capacity building and technical assistance. They said ‘what we really need is a first loss guarantee that would make those infrastructure projects investment grade’, because they’ve got deep pools of pension capital in Nigeria, in Kenya, in South Africa, in Ghana, in Rwanda. But they don't invest in infrastructure, they primarily invest in government securities, including bills, because that meets their credit. That means investment grade criteria. So if we could structure a first loss guarantee or partial first loss guarantee, so the banks have still got skin in the game, they can underwrite these infrastructure projects that we know are there. And they can then distribute that money to onshore domestic pension and institutional investors. You're deepening the green finance market in the country. And if you structure that guarantee in such a way, that it's a fund that can be drawn down on, you can do leverage on leverage. So the way the fund would work is: you would put government concessionary finance at the bottom, you could put some development bank finances, the middle tranche, and then your model will work so that you can then go to the large institutional investors in the north, the Blackrocks and Legal & Generals etc. and they can make a return. So you've set up your fund, the banks in the country can draw on that fund as a guarantee. And then they can distribute the paper locally. What's not to like?