Green asset financing: shaping a carbon-conscious world
by Ravi Naicker, Commercial Director Specialised Finance, Sopra Banking Software
ONGOING, AND VALID, CONCERNS about skyrocketing inflation wreaking havoc seem to have drowned out messaging on global efforts by many governmental and private sector actors on finding greener solutions for our planet’s long-term betterment.
Not too long before the crises we now face, many headlines were focused on the reduction of carbon footprint and finding better and alternative forms of greening initiatives to improve long-term sustainability. Now governments are under pressure, with tax revenues diverted to ease the burden on struggling households.
In the business arena, bold investments in large-scale sustainability efforts when money was “cheap” are scaling down as focus centres on the bottom line. So, is this the end of green initiatives? Are lenders, the private sector and governments globally throwing
in the towel?
The short answer would be a simple ‘no’, as there is more than meets the eye when it comes to greenifying our societies. The focus on improving our sustainability remains a top priority on a global scale.
The Tracking Clean Energy Progress (TCEP) annual analysis, assessed 55 energy system elements, including sectors, technologies, infrastructures, and emission mitigation strategies.
The report highlights advancements toward reaching milestones outlined in the IEA’s 2021 Net Zero Emissions by 2050 Scenario (NZE). Features and principles of the NZE pathway include:
- Limiting the long-term global temperature rise to 1.5 degrees Celsius.
- Meeting core energy-related United Nations Sustainable Development Goals (SDGs)
- All countries cooperating in an “effective and mutually beneficial way”, with advanced economies reaching net zero before others.
- Usage of technologies and emission reduction methods is determined by factors like costs, country and market conditions, and policy preferences.
- Systematic transition to clean energy, ensuring the security of fuel and electricity supplies, and aiming to avoid market volatility.
- Investigating carbon dioxide (CO2) emissions from land use, and outlining possible ways to lower them.
When it comes to TCEP, technological developments and government policies have led to meaningful “on track” progress across electric vehicles (EV), solar photovoltaics (PV), and lighting. Highlights since 2022 include:
- EV sales grew by 55%.
- Solar PV generation increased by a record 26%.
- LEDs account for over 50% of worldwide residential lighting sales.
However, the remaining 52 components were rated as “more efforts needed” or “not on track”, despite momentum accelerating across areas like renewable electricity, hydrogen projects, and carbon capture and storage facilities.
Moreover, nuclear capacity additions rose by 40%, heat pump sales increased by 11%, electrolyser manufacturing scope went up by over 20%, and overall energy efficiency more than doubled.
In September 2023, IEA Executive Director Fatih Birol said more progress is needed, but prospects have brightened: “Despite the scale of the challenges, I feel more optimistic than two years ago. Solar photovoltaic installations and electric vehicle sales are perfectly in line with what we said they should be, to be on track to reach net zero by 2050, and thus stay within 1.5 degrees Celcius, and clean energy investments have seen a staggering 40%
Dubai’s COP28 climate summit.
Taking place in November and December 2023, Birol believes the UN conference offers a unique opportunity for countries to discuss the Net Zero Roadmap and agree on stricter emissions-cutting plans – “a moment of truth and a critical juncture”.
At the same time, Birol has reservations, referencing disagreements over the Ukrainian war and still strained relationships between the US and China. “The most important challenge is the lack of international cooperation,” he said.
The summit is also a chance for participants to review a recent UN report that will form the basis of the first “global stocktake” – a process established under the 2015 Paris Agreement to track countries’ climate-related efforts.
So, countering climate change and environmental sustainability continue to gain momentum, businesses and financial institutions worldwide remain focused on more responsible investment strategies.
Green asset financing has emerged as a powerful tool for promoting the fact end users proactively chose environmentally friendly investments, helping drive sustainable business
practices. The scope is far-reaching, spanning a cross-section of industries, including agricultural, medical, renewable energy, and manufacturing.
In this article, we delve into the growing trend of green asset financing, explore its role in shaping a carbon-conscious world, and discuss the challenges faced by pioneers in this emerging field.
The rise of green asset financing.
Green asset financing refers to the provision of loans, leases, or other financial products specifically designed to support investments in eco- friendly projects, technologies, and initiatives. This form of financing is becoming increasingly popular as businesses, governments, and consumers recognise the urgent need to transition to a low carbon economy.
With the global green finance market expected to reach US$2.5 trillion by 2025 (Source: Markets and Markets, 2021), green asset financing is quickly becoming a vital component of sustainable economic growth.
Key components of green asset financing.
- 1. Renewable energy projects. Green asset financing is particularly prominent in the renewable energy sector, where it helps fund the development and deployment of solar, wind, hydro, and other clean energy technologies. By providing the necessary capital for these projects, green asset financing enables businesses to transition away from fossil fuels and reduce their carbon footprint.
- 2. Energy efficiency improvements. Another area where green asset financing plays a crucial role is in promoting energy efficiency improvements. This includes financing for retrofitting buildings with energy-efficient systems, upgrading industrial equipment, and investing in smart grid technologies that optimise energy consumption.
- 3. Sustainable transportation. Green asset financing also supports investments in sustainable transportation solutions, such as electric vehicles (EVs), hydrogen fuel cell vehicles, and public transit infrastructure. By facilitating the adoption of cleaner transportation options, green asset financing helps reduce greenhouse gas emissions and improve air quality.
- 4. Green infrastructure. Green infrastructure projects, such as green roofs, urban parks, and natural stormwater management systems, can also benefit from green asset financing. These investments contribute to more resilient and sustainable urban environments, mitigating the impacts of climate change and enhancing overall quality of life.
The benefits of green asset financing.
- The most significant benefit of green asset financing is its direct contribution to environmental sustainability. By supporting eco-friendly projects and initiatives, green asset financing helps businesses reduce their carbon footprint, preserve natural resources, and minimise waste.
- Green asset financing enables businesses to proactively address environmental risks and regulatory challenges, ensuring compliance with evolving climate-related regulations and reducing the likelihood of costly penalties or reputational damage.
- Investments in energy-efficient technologies and renewable energy sources can lead to significant cost savings for businesses in the long run. Green asset financing can help businesses unlock these savings by providing the necessary capital for upfront investments.
- By demonstrating a commitment to sustainability and responsible business practices, companies that engage in green asset financing can enhance their brand image and reputation, attracting environmentally conscious consumers and investors.
Challenges faced by pioneers of green asset financing.
While green asset financing has gained significant traction in recent years, pioneers in this field have faced several challenges in their quest to promote sustainable investments and business practices.
Some of the key hurdles include:
Lack of standardisation and clear definitions. One of the primary challenges faced by green asset financiers is the absence of universally accepted standards and definitions for what
constitutes a “green” asset/investment. This lack of clarity can make it difficult to assess the environmental impact of financed projects/assets and to ensure that funds are allocated to genuinely sustainable initiatives.
High initial costs. Sustainable projects and technologies often require significant upfront investments, which can be a deterrent for businesses and financial institutions that are new to green asset financing. Overcoming this barrier requires a long-term perspective and a focus on the potential cost savings and return on investment associated with environmentally friendly initiatives.
Perception of increased risk. Some investors and financial institutions may perceive green asset financing as inherently riskier than traditional financing, given the novelty of certain technologies and the possibility of regulatory changes. This perception can limit the availability of funding for sustainable projects and make it more challenging for green asset financiers to secure capital.
Limited expertise and experience. Green asset financing is a relatively new field, and many financial institutions lack the specialised knowledge and experience required to effectively evaluate and manage green investments. Building internal expertise and developing partnerships with industry experts is essential for pioneers in green asset financing to overcome this challenge.
Insufficient market demand. While awareness of environmental issues and the importance of sustainable business practices is growing, market demand for green investments and projects is still limited in some sectors and regions. Pioneers in green asset financing must work to educate potential clients and stakeholders on the benefits of sustainable investments to drive demand and foster a supportive market environment.
How must a lender adapt their credit policies?
Financial institutions seeking to enter or expand in the green asset financing space must adapt their credit policies to ensure sustainable investments’ success. Establishing clear criteria and definitions for green investments, aligned with recognised global standards, ensures consistency and transparency.
Integrating Environmental, Social, and Governance (ESG) factors into the credit risk assessment process leads to informed decision-making and better risk management. It’s also important to implement robust due diligence processes, potentially collaborating with external experts to ensure projects meet sustainability criteria and environmental regulations.
Fostering collaboration and knowledge sharing within the organisation is crucial for developing green asset financing expertise and building internal capacity. Monitoring and evaluating green investments are essential, with systems in place to track performance and environmental impact, ensuring alignment with sustainability goals and informing future policy adjustments.
Transparent communication and reporting on green finance activities should be a priority, disclosing the green financing portfolio, progress towards sustainability goals, and environmental impact through annual or sustainability reports. By adapting credit
policies for green asset financing, financial institutions can promote sustainable growth and contribute to the global transition to a low-carbon, environmentally responsible economy.
Championing green financing.
In terms of the private sector, businesses are increasingly leveraging eco-conscious technology to replace legacy asset and equipment financing systems. By doing that, they improve agility and become more streamlined, meaning capital can flow swifter and more efficiently.
For example, Sopra Banking Software’s cloud-native and fully scalable asset financing platform enables clients to build an entire lending ecosystem or assimilate components into existing infrastructure.
In conclusion, green asset financing has the potential to not only drive sustainable growth in a carbon-conscious world but also to shape the legacy we leave for future generations. By supporting eco-friendly investments and promoting sustainable business practices, green asset financiers are playing a crucial role in the global transition to a low-carbon, environmentally responsible economy.
As pioneers in this field continue to overcome challenges and create innovative solutions, we can build a greener, more sustainable future for ourselves and the generations to come. Let’s seize this moment to create a lasting, positive impact on our planet.
Ravi Naicker, Commercial Director Specialised Finance
Sopra Banking Software