Green Bonds Can Solve Our Climate Crisis

Those of us involved in the clean tech industry are well aware that financing is a key component of growing clean tech adoption. Despite a rise in Environmental, Social and Governance (ESG) investing, the financial services industry still has a lot of work to do to assist in the global effort against climate change. As with all things, this brings both social responsibility and business opportunity. 

As a heat wave roasted Europe, a small hurricane once again threatened New Orleans and fires ravaged the Amazon rainforest, ratings firm Moody’s announced that green bond issuance reached an all-time high in the second quarter of 2019. Investors are clearly aware of the challenges that we face from climate change, and green bonds have the power to finance our transition to a more sustainable world. 

Renewable energy is one of the most pressing use cases for green financing. However, of the $170 billion of green bond issuance last year, only about 40 percent were used to fund clean energy projects. While that is an improvement from previous years, investment in sustainable energy isn’t growing fast enough to meet the demand. 

Investment in renewable energy has increased by 55 percent in the last decade, but has stalled in recent years, even as energy demand has grown. Due to our use of fossil fuels to fill the gap, energy related CO2 emissions rose by 1.7 percent last year.

One of the reasons for this is structural. The first wave of renewable energy followed the traditional lines of energy projects – large projects connected to large utility grids followed old models and therefore were easier to finance. The new providers driving today’s wave of renewable energy are more distributed across sectors, geographies and industries. For example, telecom companies providing their own renewable power. These new business models and players are less easy for financial service companies to finance. The investment industry must adjust its business processes to follow the opportunity. 

Powering the Problem

Global demand for energy, driven by a growing population, rising incomes and the increased need for heating and cooling technology to account for extreme temperatures, is expected to grow by 25 percent by 2040. By midcentury, most of that growth will be driven by developing countries including Africa and South America, but predominantly in Asia (which includes China).  Last year, Asian power demand drove half of the global growth in natural gas, 80 percent of the growth in oil and more than 100 percent of the increase in coal power. Last year alone, demand for energy grew 2.3 percent worldwide. Fossil fuels were used to meet nearly 70% of that growth.  

When China is removed from the numbers, Africa and the Middle East become a very large part of the growth opportunity.

This shift in demand will have a significant impact on our climate. In order to meet long-term sustainability goals outlined in the Paris Accord, low-carbon investment would need to grow two-and-a-half times by 2030, according to the IEA. At current investment levels, that scenario seems like a long shot.

And from an ESG perspective, the energy investments in 401(k) portfolios over the next 100 years will need to be replaced by green energy investments. 

Realizing the Full Potential of Green Bonds

Green bonds offer a potential solution. Investments overall in sustainable investment strategies have grown significantly in recent years as demand has grown, particularly among institutional investors. According to the Forum for Sustainable and Responsible Investment (USSIF), 26 percent of assets domiciled in the United States are managed according to socially responsible criteria. For the investor, a waning profitable investment in legacy carbon stocks will leave a hole in their investment portfolio unless the green bond and investment industry steps up and quickly.

While much of the attention around ESG investing has focused on equity investments, the world’s fixed income market is much larger - and is increasingly a focus of investors’ attention. Green bonds, whose proceeds are designated to fund projects that benefit the environment, are the clearest example of this style of investing.

The energy sector has already begun to embrace green bonds. Globally, utility companies were among the largest issuers of green bonds in 2017 and 2018. However, U.S. utilities tend not to be very active issuers, likely due to the expense of issuing certified green bonds and ease of issuing conventional debt in the current interest rate environment.

There is significant “untapped potential” in the utility market to expand this issuance, according to a report from Boston University. That same report finds that, holding all other financial performance equal, U.S. utilities have the potential to issue at least $250 to $500 billion in green bonds in order to kickstart the transition to cleaner power immediately. 

Here are some examples of companies leading the charge:

Connecticut Green Bank

While not a utility, the Connecticut Green Bank completed an issuance of $38mm for Connecticut’s Residential Solar Investment Program (RSIP) in May. RSIP provides homeowners with a rebate of $0.46 cents per watt of solar installed in order to help offset the costs of installing residential solar power. 

Duke Energy

Last November, Duke Energy Carolinas raised $1 billion in green bonds to finance zero-carbon solar and energy storage projects in North and South Carolina. The company has a mission of reducing carbon emissions by 40 percent by 2030 by retiring coal plants, investing in nuclear and building or purchasing up to 1,800 MW of solar capacity by 2023.

Dominion Energy

Also in November 2018, Dominion Energy, which is committed to reducing carbon emissions by 80 percent by 2050, issued $362 million in privately placed notes to fund 20 solar projects developed between 2016 and 2018 across Virginia, North and South Carolina and California.