How can finance accelerate transition to renewable energy?

Renewable energy has taken a huge step forward in the last decade. Companies that want to demonstrate their green credentials have embraced renewables as part of their energy mix. This is partly because the sector has shaken off some of the obstacles that inhibited mainstream adoption – although some still remain.

It’s normal for emerging technologies to experience slow growth at the beginning of their life, says Mike Penrose, Co-Founder and Partner at FuturePlus, which helps businesses to benchmark their environmental performance and find ways to improve. As emerging technologies scale, they become more affordable, which in turn drives broader adoption.

What challenges are there in adopting renewables?

Renewable energy is often seen as less reliant than conventional energy sources. “Unlike thermal energy, most renewable energy sources – like wind and solar – are intermittent, meaning their power generation is affected by factors like weather conditions,” says Kevin Chin, Founder and CEO of investment group Arowana.

But it’s not just a question of intermittency: heavy industrial applications, like steelmaking or cement production, often require high-temperature heat, which is challenging to generate just using renewables.

“There’s also a challenge with the initial investment costs involved in building dedicated renewable infrastructure, including for power generation as well as for energy storage systems,” Chin continues.

We are sometimes guilty of looking at renewable technologies through the lens of rich economies, where decarbonisation is clearly a priority. Indeed, emerging markets are another challenge within renewables; after all, it’s unrealistic to expect the same commitment to green energy when countries are operating under completely different economic conditions.

Marc Deschamps, Chairman for Climate at boutique investment bank DAI Magister, believes that more help is needed: “International organisations and governments need to invest to help diminish the risk layer regarding investment in emerging markets. This would provide security for private sector firms, who may want to invest in renewable technology but need risk alignment with developed markets risk and returns.”

Issue of energy security brings renewed attention

European countries in particular are currently wrestling with energy insecurity, prompted in part by the war in Ukraine. At the outset of the invasion, Germany was heavily reliant on imported oil and gas: more than 90% of its natural gas supply was imported, to note an example. That situation has since changed, with the German government working diligently to diversify its energy mix over the last 12 months. As countries race towards greater energy security, local production – including renewables – is taking centre-stage.

“The transition towards green energy is a double-edged sword during these times of energy insecurity,” explains Mike Penrose. “On the one hand, the recent acceleration towards renewable energy is a positive thing for the long-term health of society and the planet. But in the short-term, there are far-reaching social consequences of rising fossil fuel prices and the cost of the transition to a lower dependency on fossil fuels, causing hardship for millions of people.

“We need to strike a balance between our energy transition goals and the ongoing welfare of global citizens, making the journey towards net-zero affordable and sustainable for everyone. This should be top of the agenda for all parties involved, especially investors and financial institutions.”

Kevin Chin believes there are bigger lessons to be learned from the energy insecurity we’ve recently been witnessing: “The world must consider the importance of energy independence and energy system reliability. Part of the answer will no doubt come from greater investment to accelerate the availability of renewable energy infrastructure – including, critically, adequate energy storage infrastructure to cope with the increasing intermittency of electricity supply as the grid transitions.”

Banks and FIs must look at their financed emissions

Financed emissions, otherwise known as Scope-3 emissions, are one of the largest factors in calculating a bank or financial institution’s carbon footprint. Many are already using sustainability as a criteria before agreeing to finance some investments; the world’s largest banks, for instance, no longer bankroll new, coal-based power plants.

“Many of the major private equity, sovereign wealth, and pension funds are already – or planning to – reduce their investments in non-sustainable companies, so efforts are already underway,” Mike Penrose says. “We expect that this will increase the pressure on the wider financial community, including banks and other lenders, to follow suit.

“When a business can demonstrate they have a valid sustainability strategy in place, measured and verified by a third-party, it clearly shows a strong commitment to sustainable business practices that are increasingly being taken into account by larger financial institutions. We have helped customers to negotiate and reduce the fees paid on loans based on the commitment they have shown to their sustainability strategy, and we believe more investors and lenders should factor this into their decision making.”

Tips for smaller companies wanting to make a positive impact

• Focus on conserving energy, such as boiling the kettle less or ensuring that lights aren’t kept on unnecessarily
• If you’re sharing office space, encourage the landlord to explore renewable opportunities such as putting solar panels on the roof
• Ask your energy supplier what percentage of their power generation comes from renewable sources, and shop around to see if other providers can do better
• Align yourself with partners who have robust values when it comes to sustainability, or, if that’s not possible, influence your suppliers and customers to be greener
• Prioritising sustainability now, even at the expense of revenue, may be worth it in the long-term because you won’t have to clean up your act as your business scales

Should renewable energy be a source of philanthropy?

There is, of course, a wider conversation to be had about whether renewable technology should be seen as an investment opportunity at all. For example, should banks and fintechs be providing grants or donations – rather than just loans – to companies that are developing mass-market renewable technologies, like longer-lasting lithium batteries or cheaper solar panels? After all, it would surely accelerate the transition towards net-zero.

Penrose believes that banks and FIs should look to offer more favourable loans and credits terms, as well as other equity products, to renewable projects – but stops short of categorising the renewable energy sector as a philanthropic endeavour. DAI Magister’s Marc Deschamps, meanwhile, argues it isn’t necessary to think of renewables as a form of altruism.

“Financing for renewable energy needs to generate incremental, higher profitability for financing providers. For better or worse, we cannot expect lenders to back sustainable projects for altruistic reasons, and so those investments need to be at least as profitable as climate-damaging financing. The good news here is that, through a combination of growing incentives and maturation of renewable energy technologies, there are more profitable financing options available for lenders worldwide.

“One of the areas however where financial institutions can ‘up their game’ is differentiated sector expertise. The reason is that many valuable and climate-positive projects tend to be smaller, or on a regional or local scale, where more local or national financing is most appropriate. Many of these (generally smaller) financing sources do not have nearly as much expertise in assessing risk in these projects as the larger global lenders. 

“This expertise gap can be profitably filled by mid-size and smaller financing sources staffing up with more experienced sector professionals – and the payoff already available is sustainably higher-margin, climate-positive lending.”