Taking advantage of sustainability
Michael Wilkins, Head of Sustainable Finance, S&P Global Ratings, explores the key positive disruptors of the energy transition, namely climate initiatives and advancing technology.
*Disclaimer: The content of this article does not necessarily reflect the official views of the International Chamber of Commerce. The opinions expressed are solely those of the authors and other contributors.
As the global decarbonisation effort has intensified, so too has awareness around “green” investment – that is, investment considered environmentally beneficial. Such capital allocation may be considered a competitive differentiator in portfolios due to the potential for assets with improved cash flow, greater risk mitigation, and a more sustainable business model in the long-term.
Against this backdrop, we have seen a plethora of diverse industries – many from traditionally “non-green” sectors, including metals, mining, petrochemicals, heavy industry, energy and power – looking to broaden sustainability strategies.
Policy: the driver of change
What’s driving development? In part, greater awareness of climate risks among corporates, investors, and wider society has followed national and regional climate initiatives.
China’s recent surge of investment into clean energy and sustainability initiatives signals an acceleration of the country’s agenda to become a green superpower. It already accounts for nearly 71% of global production of solar panel technology, and China manufactures more lithium ion batteries than any other country in the world.
China’s greening policies – an integral part of the country’s transformative Belt & Road Initiative – could represent an acknowledgement of the role that sustainable investment plays in attracting foreign capital. Indeed, the country’s energy and climate goals for 2015 to 2020 are estimated to require between US$480 billion and US$640 billion of investment. And by 2040, China plans to have invested in excess of US$6 trillion into low-carbon power generation and clean technologies, which, if fulfilled, could far exceed many EU countries and the United States.
Such ambitious and publicised targets emanating from China have triggered rivalry in other corners of the globe. This, combined with the Trump Administration’s announcement to withdraw from the Paris Agreement, have sparked concerns in the U.S. that technological developments will stall in a more isolationist environment.
Yet hope for the US remains in the form of state-led initiatives. This September, Edmund J Brown, the Governor of California, formally confirmed the state’s commitment to achieving a carbon neutral economy. He signed SB100, a mandate to set California on a path to deriving 100% of its power from clean sources by 2045 – up from today’s figure of 35%. California now also boasts a carbon trading system that includes transport fuels and a low carbon fuel standard, both of which are likely to incentivise development of advanced biofuels and associated technologies.
Across the pond, the EU-wide goal of reducing CO2 emissions by 40% compared to 1990 levels by 2030 has served to raise the profile of global sustainability efforts. Even oil-rich Norway has been looking to decarbonise further, tightening its standards with a focus on its transportation sector, where there is still room for improvement.
For both private investors looking to diversify their portfolios and governments looking to meet sustainability targets, investment in low-carbon and renewable energy sources will likely grow in importance.
Such opportunities must be analysed with a different lens when assessing credit quality – especially because low-carbon energy technology remains nascent. Additionally, renewable energy developments, such as wind and solar, like any other construction projects, are subject to long lead times and significant upfront costs. And wind or solar farms are also exposed to unpredictable weather conditions and resource availability challenges once operational.
If low-carbon projects and renewables are to proliferate, the energy supply needs to be guaranteed. In order to provide vital back-up to the grid and bridge supply shortfalls during intermittent weather, energy storage via batteries will need to improve and become commonplace.
But there is still some way to go. For example, storage capabilities would have to increase 200-fold to meet California’s renewables target. But once capacity increases, growth could be exponential. And as renewables technology advances, forecasts can be benchmarked against real operating performance, providing more clarity and data, and ultimately encouraging increased investor appetite for renewables assets.
Overcoming technological hurdles and navigating complex political and regulatory environments are imperative for green investment to continue to grow. Low-carbon power projects reside at the intersection of economics and politics and the continued deployment of energy technologies will require ongoing access to capital markets. Even with improved economics, this will require a higher level of transparency around the performance and cost of these assets. This may be an expensive proposition in the short term, however, it may well be one that pays off in the future.