The next shift in green finance

The world has made great strides in the push toward a greener future and sustainable finance is playing an important role in that. The COVID-19 pandemic has in many ways accelerated that push, and we are set to enter a new and important phase.

In late September, China drew significant attention after pledging to be carbon neutral by 2060. The economic giant will see greenhouse gas emissions peak by 2030, Xi Jinping recently told the UN general assembly.

For many markets, this position and that taken by many countries and their regulators as part of the Paris Accord will be transformational.

For some time now China has been shifting the focus of its economy and investing in renewables. This will also drive the way it approaches outbound investment and the Belt and Road initiative. The latest announcement reinforces this message and will lead to a sizeable shift in the energy mix globally.

The ESG (environmental, social and governance) imperative for institutional investors and banks like ANZ is to shift our portfolios away from the traditional fuels to new energies. And with costs falling and encouraging policies in places like Europe, the UK and in pockets of Asia, the next phase looks like being a very interesting one for investors.

At ANZ we’ve watched as our customers have embraced green and sustainable financing as they switch their businesses to power on renewable energy, and invest in new technologies. Some of our customers are investing in the electrification of transport, building out electric vehicle supply chains.

But many new technologies under development are yet to be viewed as economically sound. There is an important role for governments and development banks to play in supporting investment in this technology.

In May, the European Investment Bank pledged to invest €1 billion in building a pan-European battery industry. Government support like this can go a long way in the development of new technologies, helping drive energy efficiency, enable storage, and development alternative fuels.

With a change in the energy mix comes a shift in supply chains, which are moving from traditional regions like Asia to areas closer to where the end users are based. This is a really interesting shift and has become more acute through the pandemic, as we have seen numerous disruptions to supply chains as a result of restrictions on freedom of movement and goods.

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“With costs falling and encouraging policies in places like Europe, the UK and in pockets of Asia, the next phase looks like being a very interesting one for investors.”

- Stella Saris Chow

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Demand

There are varying levels of green stimulus and support as part of the post-COVID recovery, but it is clear there is growing interest from both investors and banks to finance renewable energy. A healthy mix has already developed around the world, including offshore wind in the UK, solar in various markets, or onshore wind, significantly in Australia.

That demand is not only being supported by governments and enabling policy but utilities are seeing demand for renewable energy from large corporates who are signatories to RE100. Companies like Apple, Amazon and ANZ have their own commitments to be 100 per cent renewable this decade.

Challenges around supporting infrastructure and the intermittency that comes with renewable energy remain. Solving for those issues will be critical for facilitating mass growth in renewable energy, particularly in Asia.

In terms of the energy, a managed transition is required. If fuels such as hydrogen are the future for 2030 and more likely beyond, gas will remain an important transition fuel, especially in markets which cannot support large scale roll out of renewable energy.

To take Hong Kong as an example, that is a market which is building out a gas receiving terminal to convert its coal-fired power to gas. There is a positive environmental impact as a result of this shift. As a market, land is at a premium and is better used for much needed housing – building solar at scale is not possible, neither is wind. Gas is an effective short to medium-term solution.

Other markets, like Bangladesh and the Philippines, are looking to build import terminals for gas as part of their transition. I think that too is an important piece of the puzzle and the market acknowledges that.

Funding

ESG has always been an important part of the evaluation when it comes to securing bank funding but over the past three years, particularly at ANZ, environmental sustainability has become deeply embedded in these processes.

At ANZ, we've been engaging with many of our clients on the question of transition and what their plans are over the short term. Capital can’t be simply switched on and off so a staged transition is mandatory – to ensure energy security.

Like many financial services providers, ANZ has been pleased to see customers really embrace this change and start to think about climate risk and how it can be mitigated.

Through the pandemic there was a concern companies may retreat from such commitments and be much-more focussed on operational matters. However major pledges on emission reduction and setting of sustainability targets has been really encouraging and will drive interest and investment in all the things mentioned.

That presents a significant opportunity for the sustainable finance market which, while it hasn't been immune to the broader slowdown, has seen volumes hold up quite well and innovations coming to market, such as energy transition bonds and loans, increase in social bonds and more recently sustainability linked bonds – which go beyond green. And we'll continue to see that.

Not a given

The pandemic has certainly accelerated the discussion on green recovery, but the outcome is by no means a given. There are some scenarios that could prevent the world from getting to where we want to be, notwithstanding the targets set by governments and companies. Targets are just that – action is required and there's a lot of work that has to be done to achieve that.

I think we're on the right path and there are a lot of very clever people on the side of the environment.

Stella Saris Chow is Head of Sustainable Finance International at ANZ

This story is an edited version of comments given to an Australia-United Kingdom Chamber of Commerce event in September on “Rethinking Energy in 2030”.