The Potential of Green Guarantees to secure a clean energy future
Published 17 February 2022
By Sarah Casey, Managing Director
At the end of 2020, companies and governments from across the globe had committed to approximately USD 1 trillion worth of new renewable energy capacity through 2030, but this is just a third of what is required to keep the rise in global temperatures below 2 degrees.
In their landmark Net Zero by 2050 report published in May 2021, the International Energy Agency announced that to reach net zero emissions by 2050, annual global clean energy transition-related investment would need to accelerate from current levels to around USD 4 trillion annually by 2030. This was reiterated in the agency’s 2021 World Energy Outlook, in which it also noted that whilst in recent years, economy-wide financing costs have tended to come down globally, capital remains up to seven-times more expensive in emerging market and developing economies than in advanced economies.
In order for the world to reach Net Zero targets and the Paris Agreement targets, it is imperative that large amounts of capital are mobilised towards sustainable activities and clean energy and given that emerging markets will account for the majority of demand growth and emissions going forwards, it is critical that investment is funneled into these countries.
Currently emerging markets are disproportionately affected by the current green finance wave. In 2019, BNEF surveyed 104 emerging markets and found that, on average, less than one-third recorded more than USD 100m in clean energy investment in nearly every year over the decade through 2018—roughly the amount required to fund one major solar or wind project (at the time the survey was published).
In addition to the fact that in 2019, 770 million people still did not have access to electricity, it is clear that capital needs to be mobilised quickly to emerging economies, where many people are still living in energy poverty.
This is where innovative financial solutions come in; if developed and used correctly, they could cover the massive shortfall in clean-energy investment.
Guarantees as an innovative solution
Guarantees are a blended finance (the use of capital from public or philanthropic sources to catalyse private sector investment) tool, which have the potential to promote more investment particularly in emerging markets.
According to the OECD, total climate finance provided and mobilised by developed countries for developing countries reached USD 78.9 billion in 2018 (an 11% increase from 2017). However, this is a slower growth rate than the 22% rise from 2016 to 2017. Private climate finance mobilised via guarantees and syndicated loans however grew in absolute and relative terms over the three years from 2016-2018 to reach 31% (USD 4.5 billion) and 19% (USD 2.8 billion) respectively of the USD 14.6 billion total in 2018.
The combined global market for green, social and sustainability bonds and loans grew exponentially over the past 5 years to over USD 300 billion of issuance annually in 2021. This indicates a clear increased appetite from investors for responsible investment opportunities.
However, the developing world is not experiencing this trend in the same way nor reaping the same benefits as developed countries. In the green bond market, for example, African issuance has been only approximately 2% of the total cumulative issuance, since 2012 from developing markets, while in South Asia, only India has issued green bonds to date.
Reasons for this range from transparency issues, supply constraints, a lack of awareness and know-how and stability and liquidity issues
This is where Green Guarantees come in
As a blended finance tool, green guarantees could guarantee green bonds and loans which enable developing countries to meet their climate adaptation and mitigation targets.
Since green bonds and loans are well known to global investors and have established markets in hard currency, these guarantees act as a strong de-risking mechanism, which can catalyse the influx of private capital into developing country markets for climate change mitigation and adaptation projects.
Green guarantees therefore have the potential to create a sea change in global investment in clean energy in emerging economies and resultantly the trajectory of developing countries into a sustainable future.
A view from the industry
Herry Cho, Managing Director, Head of Sustainability & Sustainable Finance, Singapore Exchange (SGX):
‘Blended finance solutions including green guarantees are essential to financing climate transition and the key challenge has been scaling these instruments. But the tide is now turning as we’re seeing more momentum than ever before to change to a green and sustainable economy. This is a real time of change as the private sector is also on board and setting goals themselves, not only thinking about targets but also practical implementation’
‘Green guarantees hold particular importance in a credit setting as many international investors have ambitions to diversify portfolios, both in terms of sustainability & geographically, but some may not have the mandate to invest in local currencies. By guaranteeing hard currencies in emerging markets, this opens up access for new investors in the ecosystem’
‘The shift to a green economy is not about one institution having a great idea but about how efficiently we can collaborate with others to scale’
‘The need for blended finance is ever more present in emerging markets so the focus needs to be on how to bring these realities to global (net zero) pathways that are being set’
George Duncan, Head of Group Funding, SSE :
‘SSE is the UK’s largest corporate issuer of green bonds, with £2bn outstanding over four tranches, all of which have been issued in the Sterling and Euro bond markets without the need of any guarantee SSE has looked to be at the vanguard of innovation around green finance by publishing green and sustainability bond frameworks that give investors the confidence their investments are sustainable, therefore allowing SSE to attract capital into projects that will drive progress towards net zero carbon.”
‘SSE has made use of financial support in the form of guaranteed facilities from Export Credit Agencies, which have helped to secure bank project financing for our offshore wind farm projects, such as Dogger Bank, the world’s largest offshore wind farm, currently under construction
‘In the future, we will continue to look for innovative green financing solutions to help SSE’s commitment to driving faster decarbonisation of the energy system and net zero carbon targets’
Vito Dellerba, Director, Sovereign Debt, CDPQ :
“At CDPQ, we believe that capital is most valuable when it delivers positive change and provides meaningful impact. There is a need for a significant paradigm shift in the allocation of financial resources to developing economies and, with this realization, it is more important than ever to work collaboratively – public and private sectors together – to build fair and sustainable communities.
The use of blended finance tools can significantly contribute to bridging the gap of capital needed to finance sustainable projects that governments are prioritizing as part of their nationally determined contributions (NDCs), which are at the heart of the Paris Agreement. Instruments like those created by the Green Guarantee Company are a key de-risking tool in the blended finance tool kit for institutional investors in emerging markets – and it will help open the door for other investors to enter these emerging markets and developing economies, and drive private sector mobilization for high-impact climate-resilient projects at the same time.”
From Lasitha Perera, Managing Partner and Co-Founder, The Development Guarantee Group
In the 1960s municipal infrastructure in the United States was not viewed as an attractive investment by investors who did not understand how to evaluate the risks associated with the asset class. This led to the creation of the monoline insurers in the 1970s – effectively investment grade guarantee companies with the mandate to credit enhance municipal infrastructure bonds and make them attractive for investors.
The success of this innovation can be judged today by the fact that in developed markets municipal infrastructure is now a highly liquid asset class and of the several monoline insurers created only one is left as demand for guarantees in developed markets has fallen in line with growing investor confidence.
This is the kind of market transformation that the Green Guarantee Company, which is being developed by The Development Guarantee Group, hopes to emulate by providing guarantees to global investors to help them support climate adaptation and mitigation projects in developing and emerging markets. The true power of the guarantee is not in the financing that it mobilises on a transactional basis but rather the capacity it creates amongst investors to learn about an asset class and build their confidence to invest without guarantees in the future.
This kind of market transformation is going to be essential to address the scale of the climate finance gap discussed earlier and so positions the Green Guarantee Company as a globally scalable and transformative climate finance solution.
About Singapore Exchange
Singapore Exchange (SGX) is Asia’s leading and trusted securities and derivatives market infrastructure, operating equity, fixed income, currency and commodity markets to the highest regulatory standards. It also operates a multi-asset sustainability platform, SGX FIRST or Future in Reshaping Sustainability Together (sgx.com/first).
SGX is committed to facilitating economic growth in a sustainable manner leveraging its roles as a key player in the ecosystem, a business, regulator and listed company. With climate action as a key priority, SGX aims to be a leading sustainable and transition financing and trading hub offering trusted, quality, end-to-end products and solutions.
As Asia’s most international, multi-asset exchange, SGX provides listing, trading, clearing, settlement, depository and data services, with about 40% of listed companies and over 80% of listed bonds originating outside of Singapore. SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN. Headquartered in AAA-rated Singapore, SGX is globally recognised for its risk management and clearing capabilities. For more information, please visit www.sgx.com.
SSE is a leading generator of renewable electricity and one of the largest electricity network companies in the UK. It develops, owns and operates low carbon infrastructure to support the zero-carbon transition. This includes onshore and offshore wind, hydro power, electricity transmission and distribution grids, and efficient gas-fired generation, alongside providing energy products and services for businesses, and it has interests across Great Britain and Northern Ireland, Republic of Ireland, Japan, Spain, Portugal, Denmark and Poland.
CDPQ is a founding member of the Investor Leadership Network, a G7 initiative which aims to accelerate collaboration and lead to concrete actions on climate change, sustainable infrastructure and diversity in investment. Through its Sustainable Finance Initiative, the ILN produces concrete, practical tools designed to help guide investors through the transition with the goal to reduce risk and barriers to investment, create new cross-sector partnerships and increase sustainable investments in emerging and frontier markets. Learn more at investorleadershipnetwork.org
About the Development Guarantee Group
The Development Guarantee Group (“DGG”) was founded by Boo Hock Khoo, Jean-Pierre Sweerts and Lasitha Perera and includes Cardano Development as an institutional shareholder, thereby uniting the collective experience of a global network of experts in setting up and running guarantee companies and programmes focused on addressing development challenges globally. The Development Guarantee Group is the world’s first dedicated guarantee platform with the mission to design, develop and operate guarantee solutions and companies that can effectively mobilise private sector capital towards funding development and sustainability challenges. The first company housed under the Development Guarantee Group is the Green Guarantee Company (“GGC”), which is a specialist guarantor for climate mitigation and adaptation projects in developing countries. It aims to help corporate and sub-national borrowers access long-term hard currency debt capital from the international bond markets with its guarantee.
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