Climate change has become the defining political and economic issue and is likely to remain so for many years. Globally, governments, investors, corporations and private citizens are starting to take actions to respond to the climate crisis with a particular focus on decarbonisation strategies.
Moving to a decarbonised economy is going to require an unprecedented level of new capital investment particularly in the form of green finance to support activities to reduce greenhouse gas emissions and to help corporations adapt to the impact of climate change.
While the estimates of the funding requirements differ – they are all in the trillions. The G20 estimates that global investment of US$90trillion would be required over the next 15 years to achieve global sustainable development and climate objectives. According to the International Energy Agency, cumulative investment of US$53 trillion is required by 2035 in the energy sector alone.
Therefore, there is an urgent need to enhance the ability of the financial system to mobilize private capital for green and sustainable investment. In turn, this requires the development of new financing tools in order to match potential investors with the green financing requirements and to help mobilise capital in the scale required including:
Green bonds have become the investment vehicle of choice to finance projects with environmental benefits - in particular low carbon transport, clean power and energy efficient buildings have availed of this type of financing. This has now become a highly recognised asset loss attracting ever increasing amounts of institutional capital and is likely to be a mainstay of the green finance revolution.
Green Equity Funds
A green equity fund is a structured investment vehicle that selects investments based on a commitment to a green investment strategy. This structure enables different investors to pool their capital with qualified investment managers to pursue an agreed investment strategy. This type of investment structure has been used extensively to support investment in renewable energy over the past 15 years and is now a well-accepted investment tool.
The bundling of green loans into securities can unlock additional capital to finance the transition to a decarbonised and climate resilient economy. Securitisation enables the aggregation of multiple small-scale loans and helps to attract a different investor base. Importantly, securitising existing loans also gives banks and other primary lenders an opportunity to refinance existing loan portfolios and recycle capital to create fresh portfolios of green loans. Different structures such as collateralised loan obligation and asset backed securities transactions can be utilised.
Leasing is one of oldest and most popular financing structures available to finance the acquisition of planted equipment – however it is still only at a nascent stage when considering the potential for funding green assets. Emerging areas where green leasing has been used include:
- Green property leases
- Green car leasing
- Energy efficiency
- Green mortgages
Other solutions include:
- Public/private partnerships - These have been used extensively to support infrastructure projects and represent a viable financing tool for climate finance
- Climate insurance - This includes Sovereign Risk Insurance and Technology Insurance products.
- Transition and sustainability bonds - These are used by companies in carbon intensive sectors such as oil and gas or heavy industry as where green bonds may not be accessible
- Green Islamic finance - Climate mitigation strategies are consistent with the principles of Islamic (or Sharia) finance
- Green loans - Green loans are loans aimed at advancing environmental sustainability and are similar in nature to green bonds
Therefore, we are likely to see some or all of these products being increasingly utilised to attract investment capital for the fight against climate change. We expect that over time more sophisticated variations of these products will ultimately emerge.
Get in touch
For assistance with the issues outlined above, or related queries, please contact Michael Hayes, Global Head of Renewables, via this form.