For the world to transition to a low-carbon future, substantial investment in the form of ‘green finance’ will be necessary. Michael Nelson looks at the importance of green financing, and highlights some of its achievements to date.
According to the G20 policy brief on fostering sustainable global growth, countries face an enormous investment gap in funding projects designed to fuel a revolution in green technology. Research suggests that the cost of investment required in infrastructure for energy, transport, potable water supply and sanitation, as well as telecommunications over the next 15 years could be as much as $90 trillion.
With available public spending not being sufficient to drive this change, focus is turning towards those in the private sector who seek to support investments that are aligned with positive environmental impacts. This is known as green finance, which includes schemes such as the issuance of bonds by public and private sector borrowers whose proceeds are deployed in environmentally beneficial projects, direct investments in green infrastructure and venture capital investments in new, clean technologies.
“Few new products are launched today without the manufacturer exhibiting greater resource efficiency, reduced energy consumption and improved recyclability,” says Ian Thomas, managing director at Turquoise, an investment company focused on energy and the environment.
“Drivers for this include government policy, reflected in regulation, product standards setting, carbon pricing and incentives, as well as societal demands from consumers. Pressure from the investment community is also increasing in importance, proving a big factor in getting companies to take action to mitigate the risks posed to their business by climate change and other environmental threats.”
One such venture capital fund is Low Carbon Innovation Fund 2, which invests in innovative, low-carbon technologies in the UK. Several investments have already been made in the last year via this fund, which Thomas says highlights the breadth of opportunities available in the sector.
Connected Energy Ltd is one company which has benefitted from this investment. They re-purpose de-commissioned electric vehicle batteries to give them a ‘second life’ in grid-scale energy storage systems, needed to smooth fluctuations both in demand by energy users and in supply by wind and solar farms.
So too have Kubos Semiconductors, who develop LEDs using cubic gallium nitride to deliver green and amber light in an energy efficient way, and SkootRide, who have developed a digital ride-sharing platform to allow friends, students, co-workers, and other communities to share car journeys.
“We have also seen that there are opportunities for fossil fuel companies to adapt their business models to the low-carbon economy,” says Thomas.
“Turquoise recently advised GT Energy, a portfolio company that develops deep geothermal heat projects, on its sale to IGas Energy, a leading UK onshore oil and gas producer. Under IGas ownership, GT Energy are progressing their 14 MW project to supply zero-carbon heat to the city of Stoke-on-Trent through a council-owned district heating network.”
Investors focus on the sustainable economy
In March 2021, the Institutional Investors Group on Climate Change (IIGCC) launched the Net-Zero Investment Framework, with the aim of enabling investors to maximise the contribution they make to decarbonising the economy and tackling climate change.
22 asset owners, with a combined $1.3 trillion of real-world investment portfolios, have already agreed to work towards achieving alignment to net-zero emissions targets.
“This further validates the finance market’s swift action on climate change and heightened sense of accountability,” says Vincent Manier, CFO at sustainability and energy management company ENGIE Impact.
Investors can be powerful players in the climate crisis, argues Manier, and they are key to accelerate the decarbonisation of the real economy. Investment management corporation BlackRock, for example, are beginning to shake up their business to focus on sustainable investing, while Barclays are being placed under pressure for their continued interest in fossil fuels.
By outlining a comprehensive framework that covers sovereign bonds, listed equity, corporate fixed income, and real estate, Manier says that the IIGCC is providing a more specific roadmap for assets owners and assets managers versus yet another vague reporting framework that can be interpreted in many ways.
“Instead of having a niche, opt-in only approach, the entire finance portfolio will be evaluated, powering climate-aligned finance to the front of the stage. It shows that the institutional investor community is capable of developing and designing actionable tools that recognise current challenges and act on ambitions, focusing on setting a comprehensive strategy based on science-based targets.”
The Net Zero Investment Framework also shows that companies must go well beyond the status-quo to drive change and make an impact.
“I was pleasantly surprised by two specific call-outs,” says Manier. “Firstly, the integration of activist strategies to influence carbon-intensive companies to reduce their carbon emissions; and secondly, the necessary evolution of the strategic asset allocation process by combining traditional backward-looking approaches and forward-looking climate-related tools and data.
“It will be interesting to see how this alliance and the framework will make its mark in the coming months and how it will influence the decisions that investors make in the future.”
Environment social and governance criteria providing commercial success
An important consideration for investors who are looking to finance businesses focused on sustainability is how their outcomes are measured. There are several aspects to focus on, but chiefly this will comprise of a series of environmental, social and governance (ESG) criteria which preserve and enhance the value of the business as it moves forward.
John Creaton, CEO and founder of business support platform Planet Arborist, says that from an environmental perspective: “Companies need to accelerate their response to the climate transition through finding strong, market acceptable solutions for mitigating climate risk. This is critical for retaining and capturing new customers as well as identifying other growth opportunities.”
This includes measures such as incorporating clean energy, sustainable transport, and other solutions into the supply chain. Companies can also reduce emissions through energy efficiency efforts, engage in responsible waste management, support forests, water, and biodiversity, and can directly and indirectly manage resources sustainably through a climate programme.
In terms of their social responsibility, companies can support inclusive growth by managing all stakeholders including suppliers, workers, and customers.
“Those that drive inclusion to improve work conditions, healthcare access, access to education, affordable nutrition, financial inclusion or community investment will be well positioned for future growth in this ‘need to have’ category,” says Creaton.
He also states that companies have a powerful role in advancing opportunity for all stakeholders, helping to close opportunity gaps in their local and connected community, and strengthening stakeholder loyalty in the process.
Finally, companies must put in place a best practice for governance, ethics, diversity, and inclusion with an overall focus on delivering on climate and social goals. A strong governance regime will keep goals on track, identify issues and prevent negative operational impacts sooner.
Creaton says that: “By focusing on social inclusion and sustainability, we can achieve better stakeholder outcomes while reducing carbon dioxide emissions, preserving water and promoting biodiversity.”
“Early-stage investment in clean technologies has been through at least two cycles since the signature of the UN’s Kyoto Protocol in 1997 and subsequent ratification in 2005,” Thomas explains.
“The initial wave of enthusiasm pre-dating the 2008 financial crisis for ‘moonshot’ technologies, such as novel forms of solar power generation, carbon capture, fuel cells and batteries, largely ended in failure for investors who had underestimated the technical challenges and overestimated the speed of market adoption.”
With the acceptance of net-zero commitments by governments and companies globally, lessons have been learned in providing a more favourable backdrop for clean technology development.
“The appetite for private investment in clean technologies and products will continue to grow provided that companies maintain the pace of innovation in their products and services. Indeed, investment opportunities across the industrial and energy sectors are now far wider than they have ever been.”