Global investment in green technology is gathering pace, and government commitments ahead of the Paris climate talks are adding to the momentum
The prospect of more than 150 countries including China and India committing to sharp cuts in carbon emissions – at the same time as renewable energy becomes ever more price competitive – has galvanised the green finance sector.
With hopes high for a new climate change deal in December, major banks such as Goldman Sachs have pledged to invest billions of dollars, directly or indirectly, into clean energy and adaptation schemes. Background sentiment is also increasingly positive as major institutions such as the International Monetary Fund (IMF) and Bank of England throw their weight behind the UN’s climate goals.
Some of the world’s most powerful political leaders have already tied up political capital in a successful outcome from the COP21 talks in Paris, and are seen as likely to be more willing to compromise than during the failed Copenhagen process six years ago. The overall aim is to agree measures that limit global warming to 2°C.
Further underpinning has come from the US-China deal on climate change struck in 2014 and the EU’s 2030 climate-energy framework, as well as the US Clean Power Plan and other national strategies around the world.
However, the outlook for green finance is far from upbeat on all fronts – at this stage it is best described as patchy. Concerns include Africa, where estimated climate mitigation and adaptation costs far outstrip the level of funds now available, and the UK, where pension funds and other potential investors say they are put off by lack of clear policy. Earlier this year, Brazil, China, India and South Africa also told the UN they were disappointed in rich countries’ failure to fulfil a promise made at Copenhagen to raise $100bn a year by 2020 for climate finance.
“Overall there’s a growing sense of hope and expectation globally,” says Mark Campanale, founder and executive director of Carbon Tracker. In late October the NGO hosted an event at London’s Guildhall attended by the UN’s chief climate official, Christiana Figueres, as well as many institutional investors.
“The speed of technological change is making renewable energy very price competitive and people can see it’s possible to scale it up,” Campanale says. “When you combine that with the individual national targets that have already been established before Paris, it adds up to a scenario where eventually we will see fossil fuels being priced out.” He cites support for Carbon Tracker’s thesis of “stranded assets” from Bank of England governor Mark Carney, who has spoken of the risks of a disorderly transition to renewable energy if strategists rely on unburnable fossil fuels.
A key statistic is that for all new investment in energy globally, more than half of new installations are now renewables, Campanale says. “Which is why Goldman Sachs is so smart to get involved, hence their announcement.” The US investment bank said on 2 November it would nearly quadruple its clean energy target to $150bn by 2025.
In 2012, Goldman Sachs set a clean energy target to invest $40bn by 2025, and has invested and financed $65bn since 2006 in clean energy around the world, structuring more than $14bn in weather-related catastrophe bonds and investing $3.3bn in green operational investments. Now it has announced that it will expand that target to $150bn, and include clean energy financing and investments. “Over the past 10 years, we have built on our commitment to harness market-based solutions to help support a healthy environment and address the problem of climate change,” Lloyd Blankfein, chairman and CEO, told a news event.
Goldman had already begun to ditch fossil-fuel assets, divesting from coal holdings this summer, when it sold its stake in Colombian coal mines to Murray Energy. The company’s push towards renewables and low-carbon assets is a hard-headed business strategy, driven by a bigger investor base increasingly “focused on environmental opportunities”, Blankfein says. It makes ethical sense too, he adds.
As of early November, a total of 155 countries, representing about 88% of global greenhouse gas emissions, had submitted their intended nationally determined contributions (INDCs) – climate action plans – to the UN in the run-up to Paris. These include China and India. Taken together, they commit the world to a reduction in fossil fuel demand by 30-40% over the next 20 years, culminating in net zero emissions by around 2080. Over 80% of the plans include quantifiable objectives and the same proportion feature intended actions for climate adaptation, the UN says.
Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change, says: “The INDCs can be seen as an impressive portfolio of potential investment opportunities that are good for each individual country and good for the planet. “[The shift to renewables] is unstoppable. No amount of lobbying at this point is going to change the direction.”
Green finance activity has been growing along with confidence in renewables as capacity has expanded beyond recent forecasts and costs have dropped sharply. Significant advances in energy storage have added momentum. When the Copenhagen climate summit failed in 2009 amid gloom about the high costs of green energy and mitigation measures, the International Energy Agency (IEA) was predicting global solar power would barely reach 20GW by now. In fact it has soared to 180GW – more than three times UK total power output – and almost half of all new electricity installed in the US in 2013 and 2014 came from solar.
However, the oil and gas industry is still projecting increases in fossil fuel use of between 35% (Exxon) and 55% (Opec) by 2035. One UK economics commentator has derided these forecasts as “pure fiction” by a hydrocarbons sector in denial. Kirsty Hamilton, associate fellow at Chatham House and policy head of the Low Carbon Finance Group, agrees the countdown to COP21 has helped create a healthy momentum towards zero-carbon or low-carbon solutions.
“The key after Paris will be translating that appetite for climate solutions into investible propositions for financial institutions. And government will still have a big role to play in that,” she says. “But there are certainly grounds for optimism. If you look at the energy sector, there’s a clear sense that we are in the midst of a transition. How far along that path we go and how fast that proceeds – that will be the big prize after Paris.”
Hamilton cites Bloomberg New Energy Finance data on costs in clean energy that shows for many technologies a clear, quite steep, downward trend. “The implementation of solar and wind have wildly exceeded predictions made 15 years ago,” Hamilton says. “As Christiana Figueres and others highlighted at the Guildhall event, if you look at what people thought possible in the year 2000 and what has happened, it is hard not to be hopeful as long as we can turn that into action beyond Paris.”
There are multiple reasons why renewable energy has attracted the interest of investors, including energy security and the utilisation of indigenous resources, Hamilton says. “We need to throw everything we’ve got to continue that trend and create the conditions that turn that into investments. That’s what going to be required to enable investors to build at a larger scale and faster pace.”
However, in the UK, the Conservative administration has not really stated what it wants in the medium term for renewables. Under the UK Climate Change Act, the government must set itself a carbon budget and trajectory just before Paris, setting out the strategy up to 2030.
“In order to get policy stability, financiers agree that it needs to be economically sustainable and affordable. But they also want to understand the pace and scale of action, and the details of implementation policies,” Hamilton says. “When they get that lack of clarity in the medium term, that can be detrimental. In the UK it’s not that investment has stopped but it’s based largely around existing transactions.
The question is what happens to new development.” Subsidies for renewable energy are not the only issue – it’s also about making sure the right infrastructure is in place. However, the broader thrust of green finance is markedly positive, Hamilton says.
While the INDCs indicate governments’ ambitions, they will want to move quickly to demonstrate they are committed to taking action after Paris, according to Hamilton. “I can imagine that some countries will have got all the actors lined up domestically to get those INDCs in place – others may still have that to do. That may influence how fast they get on with implementation.”
Accessing finance – particularly for protection in developing countries against the worst effects of rising sea levels and loss of arable land – will be a crucial area. The Institutional Investors Group on Climate Change (IIGCC), a London based forum of pension funds, insurers and fund managers with a combined $11tn of assets under management, expects early progress in Paris on climate finance up to 2020 but a rockier passage for the period beyond.
“Post-2020 climate finance will be a major stumbling block for the Paris agreement,” the group notes. “Donor governments are reluctant to commit budgetary resources this far in advance. The reason is that this would infringe on parliamentary control of public spending which usually operates in one-year cycles.”
Scaling up private sector investment will be crucial to implementing the INDCs and thereby tackling climate change, the IIGCC says, whether in developed, developing or emerging countries. It makes five key recommendations to this end:
Blend public and private finance to improve risk-return. “Government buy-in for projects that will last for decades is essential. In addition, the unique risks in emerging and developing countries require reduction,” it says. State-backed guarantees and seed capital for new funds can help bring more investment into the countries concerned.
Provide predictability and transparency on future public climate finance flows, in order to signal the size of low-carbon infrastructure markets in emerging and developing countries.
Aggregate infrastructure assets in emerging and developing countries in order to make it easier to tap into the market for large investments.
Put in place a powerful national infrastructure development plan to implement the INDCs.
Ensure key transaction enablers are in place: thorough project preparation, robust project pipeline, efficient capital markets, good bank intermediation and a favourable macro-economic environment with political stability are all essential.
Anne-Marie Williams, senior analyst and engagement officer at ShareAction, the UK NGO, agrees that UK government energy policy, including the recent decision to partner with China in building several nuclear plants while cutting subsidies for renewables, has been a disincentive to investment. “One of my roles is talking to pension funds – asking them to look at the risks of climate change and how it might affect their portfolios and what they might do about it. We generally recommend investing more in low carbon areas and renewable energy but they say they are not prepared to because there is no clarity of policy.”
Another area where climate finance is lacking is in addressing the problem of energy access in developing countries and specific relief of poverty, Williams says. There are public/private partnerships leveraging investment into those countries. “But more should be done to ensure that investment is made in genuinely green renewable energy projects and also that it is reaching those in need who are off the grid.”
In Africa, scaling up international climate finance for adaptation will only bring worthwhile implementation if it is accompanied by effective national and regional policy planning and governance, according to Richard Calland, director of The Climate Finance Hub, based in Cape Town. “The international climate finance landscape is changing in significant ways and new opportunities are on the horizon, especially the Green Climate Fund (GCF),” Calland says. “The GCF has entered a promising period of capitalisation. Since the GCF’s board has decided that 50% of funds allocated should go to least developed countries (LDCs), these developments are of particular importance for many African countries.”
Campanale of Carbon Tracker says the emission reduction commitments that nations are making will not be static – they can be improved over time. “Paris won’t be a single golden piece of paper so the direction of travel is important – which is downwards. “What’s going to influence the trillions now invested in fossil fuels is ultimately the changing economics to favour clean energy and renewables.”green finance renewable energy climate change fossil fuels COP21 green tech