18 Mar Developing Scotland for tomorrow
Willie Watt, Chairman, Scottish National Investment Bank, is setting a blueprint for a new type of finance in Scotland that is green, socially conscious and practical.
How would you characterize the evolution of Scotland’s financial industry, and what have been some of the driving forces that have shaped the sector to what it is today?
Scotland’s financial service industry has been here for a long time. It really started at the end of the Industrial Revolution when large capital surpluses were created. In the 19th century people wanted to diversify their investments, so the industry grew up out of that, and the late 18th and 19th centuries saw the development of a banking system. Some of the biggest innovations historically came from Scotland in terms of things such as checking accounts and closed-end mutual funds. Things that we take for granted across the global financial system came from this part of the world. Scotland was very good at exploiting the British Empire and internationalizing its investment.
If we fast forward to today, you find that outside London, Scotland is the largest equity investment center in Europe. Some of continental Europe’s financial centers are bigger, but they tend to have more of a focus on bonds rather than equities. That is now a global business for Scottish companies and the client basis of those businesses are truly global.
We have some world-leading investment institutions based in our country. Baillie Gifford would be one that I would highlight as being very innovative and having a very important business model. That is the kind of external shape of the investment business here in Scotland, which employs a lot of people and creates a lot of wealth which is then hopefully spent in the local economy.
We also have our normal Western banking system, and that banking base of Scottish banks which are now primarily owned by either U.K. or international owners but still have a uniquely Scottish presence that works well. There is a large insurance sector as well, which is largely life insurance based. Abrdn sold their life insurance business, which was called Standard Life, but it is still based in Edinburgh. That is what the overall shape of the sector looks like.
In your opinion, in this post-pandemic world and the current crisis context, how do you see the Scottish economy turning challenges into opportunities?
That is a very big question for anyone or any region. The economic consequences of the invasion of Ukraine are far-reaching and probably deeper than most commentators are thinking about at the moment. The challenge to living standards through higher energy and food prices is a significant risk to economies, including our own. Clearly, the oil and gas spike is akin to the 1974 oil shock caused by the Arab-Israeli War of 1974, which had many impacts on a plethora of factors, not least the financial system. Hence the risks around the Ukraine war are very serious, particularly if it is protracted and becomes more than a spike. Having said that, I would say it will accelerate the move to a low carbon economy. A lot of commentators have said that they think that a focus on climate change and low carbon will essentially be sidelined by the war. I do not agree with that because high prices form the clearest incentive to move out of a dependence on oil and gas. One of the challenges for hydrogen is price. If oil and gas is now much more expensive than hydrogen, it becomes a more viable fuel, particularly green hydrogen, which is developed from sustainable renewable sources like wind and solar.
I also believe that the U.K. sector of the oil and gas industry will have a fillip from this because we have reserves in the North Sea. There has been a big debate as to whether those reserves should be accessed because of the move toward net-zero. However, in a period of very high oil prices when the world does not want to buy Russian oil, it makes sense to use the reserves that are local and within our political and economic control on a short-term basis. That could be five years or so.
We are in a world of deep uncertainty, but as chair of the Scottish National Investment Bank, our remit is to finance the transition to net-zero, to focus on place-based inequality, and try to ameliorate that through investment activity, while also focusing on creating a more innovative economy with higher productivity. Those three things do not change because of the Ukraine War. They are still critical objectives. Low productivity is a problem for most Western economies, but it is a particular problem in Scotland. Hence, we do need to help to catalyze a change to our business base so that we have more scaleup companies that aid that productivity.
Could you share with us what have been the priority development areas that the Scottish National Investment Bank has targeted?
We have been in existence for about 17 months, which is quite a short time. However, we have made 13 investments and committed nearly $262 million in that period. There are three themes in our portfolio. The one that has the largest number of companies in it is about scaling up on innovative businesses. These businesses, often technology and digitally driven, are already revenue-producing, mostly profitable, but have an opportunity to go through a step change. That step change is something that the bank is really interested in helping to finance. Some of those companies are existing in the low carbon space. One of the companies we are excited about is called Sunamp, which makes heat storage batteries and is already exporting its technology globally. As moving domestic heat from dependence on gas is a huge challenge for the Western world, Sunamp’s technology is very relevant.
The second area is based around inequality of place. We are looking for projects that play into that geographical inequality. That can be rural as well as urban. For example, we have invested in that space in affordable housing and in tourist infrastructure in the Scottish Highlands. We are also looking at other projects that have a geographical and economic dimension that plays into that space.
The third area is infrastructure. Recently, we invested $39 million in the transformation of Aberdeen harbor. The oil and gas industry is very much based in Aberdeen and is its key port. However, the demands of offshore wind, and particularly floating wind, require very different port configurations. Consequently, Aberdeen has gone through a very large capital expenditure project. We were very pleased to be able to help finance that, which will keep Aberdeen at the forefront of port competitiveness, allowing that pivot from oil and gas to offshore renewables. That type of infrastructure project is also something we are truly interested in. Those would be some examples of the kinds of things we have done in our first 17 months.
Tell us about your investment philosophy and what it is that you are looking for in a company to give it the green light?
We look for projects that are commercial because we think that our job is to crowd in private capital, and we can only do that by being in viable projects. They have to have mission benefits that align with our missions of net-zero, innovation and place-based equality. The first thing we look at is if this project meets one of our missions. If it does not, we very politely say it is not for us. If it does, we then check its commerciality. The third element of that is that we have a long-term time horizon. We describe ourselves as a patient capital investor. We are comfortable being invested in companies or lending to companies over a 10- or 20-year time horizon. That differentiates us from quite a number of other potential investors. The final part is that we do not compete with the private sector because we are a state development bank. We must not compete with the private sector. We need to be additive to what the private sector is doing.
Our investment activity sits in three rings. The first ring is the missions. The second ring is that it has to be a viable commercial project. The third ring has to be that there is a gap in the financing that the private sector does not want to fund. That landing ground in the middle is where we see our investments being based.
Could you briefly share some examples of how your investments have already fueled growth and positive outcomes for any of these companies and the sectors they serve?
One of the things we are doing is collecting information on the impacts that we have made. Because we are a patient investor, we do not have very good statistics today, but we will be able to share more information with corporate and civic Scotland, and indeed with the media, over time. I can comment on the areas we are looking to make those positive impacts. Employment and job creation are important. The amount of private capital that we bring into projects that we finance, thus far around $240 million, is augmented by the amount of capital that is invested around us. It is much higher, and we need to report that.
We are also interested in metrics around equality. A state development bank needs to be a champion of diversity and equality, and that is very much written into our charter. We do talk to the companies we invest in before we invest in them about the importance of that, and we expect them to develop policies around being an equal opportunity employer and having a balanced workforce.
In terms of scaling up companies, revenue growth is an important measure of that. These companies are doing well as small businesses, but their ambition is to be much bigger, and one of the metrics for that is revenue growth. The ability to sell more and to do more projects is an important part of dealing with this productivity challenge.
The final thing is we are often investing in projects where something has to get built: a factory, social housing projects or the refurbishment of a series of hotels. Some of the matrices are hard, such as if the factory has been built on time and to budget. Because these are really important parts, the impacts will come years down the line for those communities; but unless you actually have the thing built, you cannot have those impacts. We have to make sure that the things we invest in actually get built properly and on time.
What are your main priorities for the portfolio in the medium term? Can you also give us a glimpse into some of the most exciting companies you may be in talks with?
We have over 100 live opportunities that we are looking at which, in a country of 5 million people, is pretty good. There are quite a lot of innovative companies around providing products and services into the net-zero space. There are also interesting companies in the health space, both in terms of drug discovery, but also in digital health. There are quite a lot of spinouts from universities in the health and medical sphere. We have not invested in much of that in our first 17 months, but I would not be surprised to see us do more in that health space.
After 17 months the pipeline continues to be very healthy. That kind of drive toward the creation and building of more innovative, vibrant businesses is not a one-off thing. There is positive momentum in the development of our economy, and I do not see the challenges around the Ukraine war in oil prices choking off that innovative and entrepreneurial search. I genuinely believe that it is so well-bedded and that digital businesses, in particular, are well capable of dealing with the challenges that come out of that. It is harder for businesses that have a reliance on energy costs and global supply chains, but certainly, all our companies are looking to bring the supply chain back to at least a kind of Western European supply chain that has less risk built into it.
How can this just economic transformation and handover occur without needlessly endangering too many livelihoods in some unsustainable industries?
This is the biggest industrial revolution that there has ever been in the history of the planet, and therefore there are huge opportunities. Of course, there are also risks around the pivot away from oil and gas. That is something that has been debated quite a lot in Scotland, given the importance of the oil and gas industry to the country and its economy. That focus on a just transition is important, but that means very different things to different people. The skills in the oil and gas industry in Scotland are high-level skills, based on engineering, project management and supply chain excellence. All of these factors are relevant to the low carbon future. I am quite optimistic about Scotland’s ability to make that just transition.
In terms of the more global shift, who controls wealth, and what they want to do with that wealth, again, is an interesting question. There are two elements to it: one is that impact investing—what the Scottish National Investment Bank does—is clearly very much aligned with the values of the younger generation who may become more relevant to how wealth is invested. Sustainability is incredibly important and growing in its importance, and that is a force for good in the investment world.
As a steward of public money, how do you see your responsibility to Scottish entrepreneurs? What types of conversations do you usually hear from younger people about optimism for the future?
It is important that entrepreneurs understand what we do. Because we are a new institution, you cannot take that as a given. We probably need to do more to explain what we do to companies and entrepreneurs. COVID-19 has been really tough, particularly on the younger generations. They have less financial resilience, less physical space, and less job security. Often, they are at pivotal points in their lives around education and career. That two-year period has been disproportionately difficult for the young and therefore we have to recognize that and be mindful of it. Having said that, it astonishes me that people have launched businesses during that period, have found ways to get around the problems of COVID, and are driving ahead with things in ways that you would almost think impossible. The entrepreneurial spirit and a sense of social justice are alive and well in the young. As somebody who is chairman of a development bank, I would like to see those two things coming together. Sometimes people see them as an either-or thing. They are not antithetical to each other. They are definitely capable of being brought together.
What do you have most at heart to accomplish as chairman of the bank?
I want to see the bank created as a foundational institution in Scotland’s economic and social fabric, to be respected across the political spectrum and in both corporate and civic Scotland, to intervene and catalyze change, and to address the key problems of our society. I want it to have a long life, compounding and growing its influence as it grows as an organization. We are really in the early foothills of all of that, and we need to earn our way in. Thus, we are being thoughtful about what the next steps are toward those kinds of long-term goals.
Do you have any final comments for the readers of Newsweek magazine?
Scotland is a really exciting region which has huge things to offer investors and individuals who want to start or develop their businesses. There are a lot of really exciting things going on in our major cities, and it is a great place to live and work.