Loans to finance low and zero-carbon projects in the built environment have traditionally been difficult to obtain, but that is changing with the rise of green banks and the spread of the green bonds market.
A green bank is an institution whose brief is to help clients reduce greenhouse gas emissions. In several countries such as UK, US, Australia, China and Malaysia, they are accelerating the transition to a cleaner energy economy and facilitating the development of secondary markets for investors.
In the UK, the previously state-owned Green Investment Bank (GIB) was controversially sold off on 20 April to the Sydney-based Macquarie-led consortium for £2.3 billion (AU$4 billion) after having been set up by the government in 2012 to kickstart green projects that would otherwise not be touched by banks.
There were fears before the sell-off that Macquarie would asset strip the bank, but Robert Smith, independent chair of GIB, reached out to reassure markets that Macquarie had “made significant and important commitments to the UK government to maintain GIB as a discrete entity within its business, maintaining its investment focus and approach with a target to invest more capital each year than it has done historically”.
Macquarie has also pledged to uphold GIB’s green investment principles – including backing the planned Swansea Tidal Lagoon – to report transparently on its green impacts and to keep its headquarters in Edinburgh, Scotland.
It remains to be seen whether these assurances are adhered to. Green Party MP Caroline Lucas called them “worthless” on Twitter, arguing that the bank could invest in hydraulic fracking and may not invest all of the £3 billion (AU$5.2 billion) in the UK.
Macquarie has promised to set up three funds: for offshore wind investment, funded by Universities Superannuation Scheme (USS); Macquarie European Infrastructure Fund 5; and a “low carbon lending platform” to be funded by USS and GCP Infrastructure Investments.
Progressive states, including Michigan, Hawaii, New York and Rhode Island, are bypassing the Trump administration’s lack of interest in clean energy initiated by setting up their own green banks.
For example, New York State set up the NY Green Bank in 2013 with US$1 billion (AU$1.34 billion) backing, which issued two new requests for proposals a couple of months ago. These opportunities are open to private sector capital providers and other clean energy movers who wish to put forward potential transactions that could help finance clean energy project projects in New York.
One of them is specifically targeted at solar energy and the other at providing finance to commercial and multi-family building owners so that they can install energy efficient retrofits and renewable energy.
The bank has been working with other green loan providers across the US to standardise the loan application process so that solar and energy efficiency equipment becomes as easy for companies to finance as industrial machinery or vehicles.
Based on a new RFP approach, NY Green Bank has collected a set of best practices and defined standards for projects. Projects that match these are eligible for NY Green Bank financing, so project developers know exactly how to design a project in order to qualify.
On the other side of the continent in California, the green bank function is held by the State Treasurer’s Office. This invests a portion of funds from the state’s Pooled Money Investment Account (PMIA) in bonds that finance green projects throughout the world.
The office operates two authorities that finance and administer programs and projects that promote green jobs and green California industries, protect air and water quality, and encourage recycling, the conservation of natural resources and the use of renewable energy.
Australia’s $10 billion Clean Energy Finance Corporation (CEFC) was established in 2012 to “accelerate Australia’s transformation towards a more competitive economy in a carbon constrained world, by acting as a catalyst to increase investment in emissions reduction”.
By particularly backing solar power it has helped to progress Australia to a position approaching the top 10 of solar power-supporting countries around the world.
Just last week it announced finance for its 10th project in its large-scale solar program, which now totals investment commitments of over $370 million, in projects with a total estimated project value of $900 million and a total generating capacity of at least 400MW.
These loans are supported by the government, which bears two per cent of the total interest/profit charged by the financial institution to make the loans cheaper while carefully controlling the type of project that can be backed.
The world leader on green lending is China, which it supports by issuing green bonds to finance low carbon and other environmental projects. Green bonds pay interest like normal bonds, but dedicate funds to environmental cleanup and climate change.
China has gone from having no market involvement pre-2015 to becoming the planet’s largest issuer in 2016, accounting for almost three-quarters of the increase in global green bonds between 2015 and 2016, according to research by San Francisco Fed analyst Nicholas Borst.
Last year $90 billion in green bonds were issued in China alone. Issuers follow voluntary recommendations on verification and structuring and received a major boost following the Paris Climate Agreement when a major group of investors pledged their support for green bonds as a way to support the goal to limit average global temperature increase to 2°C.
However, $90 billion is but a trickle compared to the financing required to make the global economy less dependent upon fossil fuels. This is estimated at US$93 trillion (AU$125 trillion) across transport, energy and water systems over the next 15 years.
The success of the Chinese market is due to the size of the challenges the country faces, with the People’s Bank of China estimating that China will need hundreds of billions of dollars a year to fund climate change projects ranging from renewable energy to mass transit, pollution abatement and climate change mitigation.
Bonds are attractive because they have the potential to provide the long-term sources of debt capital needed by low carbon, climate-resilient infrastructure projects. These typically have a higher proportion of debt to equity than other potential projects.
This is because low carbon, climate-resilient projects typically have higher upfront capital costs and long-term, inflation-linked income streams. This means that the cost of the finance debt arranged by banks is often higher than the yield. But refinancing using bonds can be a way out of this trap. Bonds can raise capital directly.
Sometimes even just small changes in the average cost of capital can have a substantial and beneficial impact on the long-term levelised cost of projects compared with alternatives.
Were a value to be put on carbon that is agreed globally, this would greatly enhance the attractiveness of the market for financing low carbon, climate-resilient infrastructure projects.
Cities and municipalities also need bonds to raise financing for their own low carbon development plans, and are frequently issuing green bonds, as are private organisations such as Apple and Toyota.
Green investment is increasing just as investors are divesting from fossil fuel companies. As always, it is the most farseeing of organisations leading. The rest will follow suit as confidence increases and the process of due diligence becomes easier and cheaper.
David Thorpe is the author of a number of books on energy efficiency, sustainable building and renewable energy. See his website here.