Much of the focus on combatting climate change has focused on the energy industry — the major source of global carbon dioxide (CO2) emissions, according to the International Energy Agency’s (IEA’s) 2021 report, ‘Net Zero by 2050’. The sector, the report states, holds the key to responding to the world’s climate challenge.
Despite pledges and efforts by governments to tackle the causes of global warming, CO2 emissions from energy and industry had increased by 60% from the time the UN Framework Convention on Climate Change was signed in 1992.
To reach net-zero emissions by 2050, annual clean energy investment worldwide would need to more than triple by 2030 to around $4tn, the IEA reports. This would create millions of new jobs; significantly lift global economic growth; and achieve universal access to electricity and clean cooking worldwide by the end of the decade.
“Financing the investment needed in the net-zero economy (NZE) involves redirecting existing capital towards clean energy technologies and substantially increasing the overall level of investment in energy,” said the report. “Most of this increase in investment comes from private sources, mobilised by public policies that create incentives, set appropriate regulatory frameworks and reform energy taxes.
“However, direct government financing is also needed to boost the development of new infrastructure projects and to accelerate innovation in technologies that are in the demonstration or prototype phase today.”
The report continues: “Projects in many emerging market and developing economies are often relatively reliant on public financing, and policies that ensure a predictable flow of bankable projects have an important role in boosting private investment in these economies, as does the scaling up of concessional debt financing and the use of development finance. There are extensive cross‐country co‐operation efforts in the NZE to facilitate the international flow of capital.”
The role of banks
Banks are among the biggest stakeholders in the race to net-zero emissions, Jon Moore, CEO of research organisation BloombergNEF, said at its recent BNEF summit in London. To date, he added, $1.1tn had been invested in the global energy transition, with China accounting for half of that amount. He said: “There is room for improvement everywhere else to get all the stakeholders involved, to mobilise government, financial industry and private company investment in the new technologies needed for the transition to net zero.”
In the US, the Inflation Reduction Act of 2022 (IRA) is already having an impact, said Mr Moore. The act, which came into effect on January 1, 2023, offers funding, programmes and incentives to accelerate the transition to a clean energy economy. The US government hopes it will drive “significant deployment of new clean electricity resources”. Mr Moore said it had already attracted around $84bn in investment.
Tom Atkinson, portfolio manager at Axa Investment Managers, agrees on the impact of the IRA, which he says should “spearhead a new wave of growth and innovation”. Similarly, he says, Europe’s Green Deal Industrial Plan aims to “create a more supportive environment for scaling up the EU’s manufacturing capacity for net-zero technologies and products”.
Just to put this in numbers, 50% of the global gross domestic product in 30 years will be from emerging markets.
When it comes to the role of emerging markets in the global transition, Joaquim Levy, director of economic strategy and market relations at Brazilian banking institution Banco Safra, told BNEF delegates that many of these markets will be part of the solution for climate issues. “To the extent that global companies are being pushed to find solutions to address their emissions, they are looking at where they can find solutions that are more affordable,” he said. “And then, of course, you are going to see Africa, you are going to see Latin America, you are going to see a lot of places that have natural resources, and some that have institutional arrangements and markets that can have solutions and much more affordable conditions than in some advanced economies.”
Nakul Zaveri, partner and co-head of climate investment strategy at impact investment company LeapFrog, also spoke at the summit about the need to focus on emerging markets. “Just to put this in numbers, 50% of the global gross domestic product in 30 years will be from emerging markets and 80% of the global population will come from emerging markets,” he explained. “When low-income emerging market consumers move into the middle class and prosperity, a six-times increase in emissions is expected.
“The fact is that, if the emerging consumer grows on the back of traditional energy sources, then decarbonising the West is meaningless. If emissions rise in emerging markets at the same rate as they did between 2000 and 2019, then by 2038 emerging countries would have exhausted 100% of the carbon budget required for us to be under 1.5 degrees Celsius [increase in global temperatures].”
Decarbonising the current energy system does present challenges, Claudio Facchin, CEO of Hitachi Energy, told BNEF delegates. The bottlenecks throughout the energy industry and its supply chain need to be addressed “with urgency”, he said. “We need to increase investment across the entire value chain, including energy grids.”
Building the talent and resources for clean energy across all of the activities associated with the energy system should not be underestimated, he added. “We need to re-skill, upskill and innovate on technology, business models and how we collaborate in the industry as a whole. We must work more horizontally across countries, sectors and industries.”
Funding new technologies
While financial institutions undoubtedly have a role to play in the transition to a NZE, and that involvement will extend beyond the energy industry, there are many different paths to take. Marc Borghans, head of sustainable structured finance at ING, says the bank is interested in “any promising new technology or business model in clean energy or the circular economy. Scalability and potential for impact will be key factors for determining our commitment to engage and, depending on the maturity level (start up, scale up or mature), we can offer a mix of debt, equity or mezzanine financing solutions.”
Companies involved in this may be corporates or innovative small and medium-sized enterprises (SMEs), where partnerships between the two can improve bankability with investments by corporates validating a SME’s business proposition, he adds. Some examples of where ING Sustainable Structured Finance is currently involved are innovative geothermal and biogas clean energy projects, and first-of-a-kind circular plastics recycling projects.
Mr Borghans notes that innovative companies may be small and in an early stage of development, resulting in a higher risk profile. “The bank can assist in de-risking the investment by, for example, advising on setting up partnerships in the value chain by means of contracts (offtake, supply) or joint venture partnerships,” he explains. “[This] can substantially improve bankability and open up possibilities to apply, for example, for project finance structures. In addition, the bank can bring in higher risk/return equity or mezzanine solutions complementary to debt financing or in an earlier stage of maturity.”
This is an opportunity for new business and new clients for the banks, with substantial potential for growth.
New sustainable technologies and business models enable the banks’ clients to realise their transition plans, says Mr Borghans. “Banks can assist in financing the related capital expenditure investments, and advise on the required capital structure or potential merger and acquisition opportunities. And as many of these new technologies and business models cut across values chains and are often creating new value chains, this is also an opportunity for new business and new clients for the banks, with substantial potential for growth.”
Like ING, China Construction Bank (CCB) also sees opportunities in transition finance. It has launched the Transformation Financial Treasure Box, which provides high-carbon enterprises with transition financial services and continuous financing support in the process of low-carbon transformation.
“The Treasure Box is not only a financing support tool for transforming enterprises, but also an intelligence support tool,” a spokesperson for CCB’s investment banking department says. “In addition to financial support products, such as debt financing, equity financing and fund financing, the Treasure Box also provides financial advisory, consulting services and research reports, and can co-operate with transformation-related third-party institutions to provide enterprise transformation roadmaps and other comprehensive service plans.”
The Treasure Box covers thermal power, petrochemical, chemical, building materials, steel, non-ferrous metals, papermaking, aviation, textile and other industries, according to the CCB spokesperson. To date, it has provided 10 customers with a new transformation financing scale of Rmb11.5bn ($1.6bn), including transformation bonds and sustainable development-linked bonds.
This article is part of the Special Report: Making meaningful progress in sustainability
Axa’s Mr Atkinson cites what he believes are the most promising technological advances aiming to secure a net-zero future:
- Low-carbon transport, such as electric vehicles;
- Renewable energy;
- Agritech, which is improving crop yields, farming performance and profitability in a “climate and biodiversity friendly manner”;
- Waste management and recycling, where artificial intelligence is being used to identify and process recyclable materials; and
- Emerging areas, such as sustainable aviation fuel, as well as carbon capture and storage.
“Ultimately, there will not be a single silver bullet, but rather many solutions with which to fight against climate change and biodiversity loss,” Mr Atkinson says. “All efforts that can improve processes, efficiency, design and construction across industries will add to CO2 reduction efforts, and, in turn, create new potential investment opportunities.”
