Sustainable finance matures despite the prevailing lockdown
Oh, the disappointment of coming out of the holidays to again settle into our solitary home offices, with our collaborators staring back at us from their little Brady Bunch squares. But as we continue to face the challenges associated with the global pandemic, we’re also met with the excitement of realizing that, as the new year begins, our commitment to deliver on the Sustainable Development Goals (SDGs) by 2030 is starting to bear fruit into this second year of the United Nations Global Compact’s (UNGC) decade of action.
Despite the inevitable economic disruption this pandemic continues to cause, investment in decarbonization is accelerating. During last year’s myriad lockdowns, top-down drivers of investor and regulatory pressure were finally able to connect with bottom-up quantification of climate change-related risks and opportunities. We’ve been talking about sustainable finance’s elusive tipping point since 2002, starting with Kofi Annan’s vision of sustainable development as an opportunity that could build markets and create jobs, and continuing with the promise of what we had hoped to be a definitive conclusion on the financial materiality of ESG matters by Freshfields Bruckhaus Deringer. This tipping point, however, remained tenuous until the launch of the Task Force on Climate-related Financial Disclosures
The tipping point for sustainable finance became tangible during the lockdowns of 2020. Here are three reasons why:
- Economically viable GHG emission reduction projects were prioritized. Over the past year, most of the large global emitters have identified and analyzed as many as 150 Scope 1 and 2 GHG emission reduction opportunities. The opportunities that are technically and economically viable today—mostly smaller energy efficiency and process improvements—weren’t previously pursued due to competing priorities. The top-down pressures have pushed these initiatives to the top of corporate investment agendas, which will result in meaningful global reductions as they're implemented over the next several years.
- There is an unprecedented appetite in the financial sector to allocate capital to the low carbon transition, which now finally means material reductions in the cost of capital linked to emission reduction targets and KPIs. For example, in December 2020, Lundin Energy secured a US$5 billion corporate refinance with a 0.9% reduction in the cost of capital, which could translate into potential savings of over US$40 million per year. The lower margin incorporates performance criteria on the carbon intensity of production and the level of renewable electricity generation, providing a first-of-its-kind financial incentive for the delivery of the company’s decarbonization strategy and 2030 carbon neutrality target. This type of financing will support larger emission reduction initiatives that require a higher level of corporate investment.
- Although evidence of a price advantage for green bonds is still under debate, the accelerating demand for green bonds and potential weakening of credit quality is expected to result in increased tangible benefits for green bonds over equivalent vanilla bonds through 2021. For those hard-to-abate sectors, the late 2020 issue of UK-based Cadent Gas’ six-and-a-half times oversubscribed transition bond demonstrates increasing investor demand for and opportunity in products that enable high emitting companies to finance their carbon reduction strategies.
To achieve this decade’s decarbonization agenda, however, government support remains vital to realize transformational opportunities such as biofuels, hydrogen, and carbon capture, utilization, and storage. Electrification requires cheap low-carbon energy. Job creation strategies must be developed in parallel to ensure everyone benefits. It’ll take diversity of perspectives to solve. Luckily, we're all just a frequency away.
Global Director, Climate Change and Sustainability Services
Susan supports clients with strategies to maximize positive social and environmental impacts of projects, investments and other activities. She specializes in environmental, social and governance (ESG) risk management, including climate change risks and the development of investment opportunities through innovative financing structures for low carbon energy technologies at different stages of commercialization. Susan has also developed value creation strategies, climate change action plans and multisectoral partnerships and collaboration, as well as conducted climate and sustainability-related financial due diligence for companies in the finance, energy, mining, and infrastructure sectors.