I had the pleasure to write an article Renewable Energy, Climate Change and Sustainability together with Prof. Ulf Moslener. The contribution is an opening chapter for the book Green Banking: Realizing Renewable Energy Projects edited by Dr. Jörg Böttcher.
Dr. Böttcher has authored and edited many books in the area of renewable energy and project financing. One of his earliest books was Finanzierung von Erneuerbare-Energien-Vorhaben (Financing of Renewable Energy Projects) from 2009. The new book upcoming April 2020 that Ulf and I contribute to have a focus on renewable energy and banking. Besides many other things, we were trying to answer one question in our article: is there a new meaning in green and renewable energy financing for financial institutions compared to more than a decade ago?
“Green” imbedded in sustainability
Renewable energy is a form of energy source that does not consume traditional fossil fuel sources. It is thus part of the solution to the climate change problem – which is one of the biggest challenges we are faced today. A variety of climate policy instruments at the regional and national levels has played an important role in facilitating the fast development of renewable energy around the globe. In 2004, the yearly new investment in renewable energy globally was about $45 billion; this volume reached $288 billion after ten years, as reported by the Global Trends in Renewable Energy Investment Report 2019.
Our article in the new book puts the action of financing the energy transition (in which renewable energy plays a big role) in context with the global trends towards sustainability. Renewable energy financing has been a heated topic for the past years. However, sustainability topic has caught up and is getting more and more prominent, e.g. fast regulatory development is ongoing under the Action Plan for Financing Sustainable Growth by the European Commission. The environmental factor stands together with social and governance factors in sustainability, allowing policymakers to have a holistic view on sustainability and development. There is such a need for market players to imbed the understanding of „green” financing within the broad framework of sustainability.
Changes ahead for financial institutions
Renewable energy has not always been attractive. In particular, the financing for renewable energy was traditionally faced with barriers. This is largely due to the capital intensity, long-term financing needs and technology-related risks of renewable energy projects. This was changed for the financial institutions when the attractiveness of renewables was significantly increased by various supporting policies. Many development banks also started to provide long-term financing for renewable energy projects to compensate the lack of such financing in the market. The decreasing costs of renewables in recent years allow them to be in an even better position to compete with fossil fuels commercially.
More changes are yet to come for financial institutions. In particular, there is a new portfolio risk management dimension in the discussion of “green” financing and analysis of “greenness” in portfolios. Faced with regulatory developments such as coal exit plan and climate protection law, brown investments bear risks, whereas green investments are in line with the Paris Agreement and the sustainable development goals. Sustainability issue is driving fast changes in the policy regime and in the financial market. Under structural change, the underlying portfolios of the financial institutions are likely to have a very different composition as compared to today. Climate-related risks are likely to have a significant impact on the real sector businesses, also affecting those of the financial institutions. What green finance (including that of renewable energy financing) means for the financial institutions will not only be investment opportunities, but also a potential safe buffer against climate-related risks in the course of substantial structural change. In particular, thinking on a portfolio level to see the portfolio-level consistency with a low-carbon future in order to mitigate climate-related financial risks is likely to be more important in long-term decision making than judging the short-term risk-return profile of single renewable energy projects based on solely financial indicators.