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Determination of Committee priorities for Session 6: Submission from the Scottish National Investment Bank

Submission from Scottish National Investment Bank for the evidence session on 21 September 2021

Dear Convener

Thank you for the opportunity to speak with the Committee on 21 September 2021. During that session we undertook to follow up with further detail on a few points of discussion. This is now set out below. I hope this further detail is helpful to the Committee.

I also wished to advise you of a further investment announcement and the publication of the Scottish National Investment Bank’s Annual Report and Accounts 2020-21 and key strategic documents.

The Bank has announced an investment of £6 million in Sunamp, a thermal energy storage technology company. The Bank’s investment will allow the Company to continue to scale up production at their factory in East Lothian and to continue their global expansion by growing their national operating teams in at least 10 countries. This investment primarily aligns to the Bank's net zero mission, and also supports the innovation and place missions.

Several Bank strategic documents were also referred to in the previous session that have now been published on the Bank’s website. These are the Bank’s:

• Annual Report and Accounts 2020-21;
• Business Plan;
• Investment Strategy;
• Mission Report;
• Ethical Investment Policy; and,
• Risk Management Framework.  

Budget

Since its launch in November 2020 to the period ended 31 March 2022, the Scottish National Investment Bank has been allocated a total of £275 million for investment. From launch to date the Bank has committed £120.9 million across eight separate investments. £79.3 million of that commitment has been drawn. The difference in commitment and drawn amounts is reflective of the difference between the ‘cash’ accounting of the public sector versus contractual commitment of an investment business such as the Bank. From the Bank’s launch on 23 November 2020 to 31 March 2021 the Bank was allocated £75 million for investment. In this period the Bank committed £52.5 million in investments, and £22.9 million was drawn.  

In Financial Year 2021/2022 the Bank’s allocation for investment is £200 million. In the period to date the Bank has committed £68.4 million, and £56.5 million has been drawn.  We expect to commit our full allocated £200m investment for this budget year.

Operating costs for the period 23 November 2020 to 31 March 2021 were £2.9 million

As I set out to the Committee, the Bank’s total operating costs in Financial Year 2021/22 are anticipated to be £15 million. The Bank’s operating costs in this Financial Year will be met through a combination of the Bank’s income and its grant in aid allocation. In the medium term the Bank will be able to become financially self-sustaining, and able to cover its operating costs entirely from its income on an ongoing basis. The timing of which will be dependent on the build and mix of the Bank’s portfolio over its first few years. 

I have passed your query on the costs incurred prior to the Bank’s establishment in November 2020 to the Scottish Government who will respond separately.

Investment Portfolio Management

As an active and responsible investor, the Bank will manage its investment portfolio continuously to ensure that it effectively stewards the public capital it is investing, and that its investments deliver the expected mission impacts and financial returns. A key means by which the Bank will develop this is through embedding mission covenants into its investments, both to ensure that the businesses and projects in which it invests not only deliver mission impacts but report on these in a regular and timely manner to the Bank for inclusion in the Bank’s regular non-financial investment portfolio performance reporting.

An Investment Management team is in place to manage the Bank’s investments after they have been made. The Investment Management team manages the collection and collation of mission impact investment data on an ongoing basis following on from the Bank’s investment in a project, business or fund. 

Where the Bank is investing equity and depending on the nature of the equity stake itself, the Bank may require an ‘Investor Director’ board position on the investee business to contribute to the general governance of the business and specifically to report to the Bank on the Bank’s investment.  The investee business itself will appoint and remunerate this Investor Director. The Bank may not always exercise its right to require an additional non-executive director depending on the skills and experience already present on the investee business board, and the needs of the business at that point in time.

As I intimated to the Committee previously, we are in the process of working with the Chairs/Boards of three businesses the Bank has invested in to support the identification of suitable candidates to augment the boards of these businesses and report to the Bank on the Bank’s investment specifically.  These are Forev, IndiNature and Nova Innovation. We also retain seats on the advisory committees of both Funds that we have committed investment to – the PfP Capital mid-market rent fund, and the Gresham House Forestry Fund.  These advisory positions are held by internal Bank employees.

Gresham House Forest Growth & Sustainability LP (“FGS”) 

As the Committee is aware the Bank has committed £50 million of investment to the FGS. While Gresham House has considerable experience in Forestry Fund management this is a newly established Fund, distinct from its existing and previous forestry ventures.

The FGS is a new type of forestry fund focused on wide scale new planting and woodland creation in Scotland. Although the scope of the Fund is UK-wide we have secured agreement that at least 60% of the Fund will be directed to Scotland. As the Bank’s commitment currently represents around 40% of the Fund’s total subscriptions, with Gresham House aiming to raise further investment in subsequent subscription rounds, this represents significant crowding in of additional institutional capital to forestry creation in Scotland.

I can confirm to the Committee that Gresham House’s UK assets work to the UK Forestry Standard and are certified to the UK Woodland Assurance Standard and international Forestry Stewardship Council accreditation.
Prior to any investment it makes, Gresham House considers how robustly an asset can meet and exceed these standards as part of its due diligence reports, and in its Investment Committee decisions. The UK Forestry Standard sets out requirements across biodiversity, climate change, historic environment, and other key elements of forestry management.

The Committee had also requested further information about the percentage of planting that will be constituted of native and non-native species respectively. Since its launch FGS has either secured or put under offer a number of sites for woodland creation. Based on the proposed planting of those initial sites, it is anticipated that 54% of the planted land will be for non-native species and 46% will be for native/broadleaf species. Within that split it is anticipated that broadleaves will constitute up to 18% of the total planting. The species composition reflects the draft design of the planting projects which FGS have purchased or are currently under offer. The exact composition will ultimately depend on the final outcomes of the planting approval processes managed by Scottish Forestry.

In practice there will be some variance in the precise blend of native and non-native species at each site according to the availability of site and soil conditions optimal for the growth of each species. A design process is undertaken for each site obtained for woodland creation to ensure that within the new woodlands the most appropriate tree species are planted in the most appropriate areas.

Across its portfolio FGS is targeting a blend of native and non-native species, combining productive conifers and broadleaf trees, to create modern sustainable forests which deliver multiple long-term benefits.

While FGS is primarily focused on creation of new productive woodlands, in some cases it will purchase existing woodlands. A blend of native and non-native species will also be sought at those sites but may take longer to realise in practice due to the maturation period required for the trees already on site. I trust that the Committee will find this additional information helpful. 

Yours sincerely  

Eilidh Mactaggart, Chief Executive, Scottish National Investment Bank

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