Financing the energy transition

As part of the North American Sustainable Investment Forum, held during Climate Week New York, the Carbon Trust and Climate Action hosted a roundtable discussion on “Financing the energy transition”. 

04 October 2023
Pietro Rocco

The session gathered a broad group of stakeholders from financial institutions, philanthropies and insurance companies, to name a few, to share views, experiences and outlooks regarding the energy transition and how to bridge the financing gap. It also provided the opportunity to build practical connections, kick-start relationships and foster holistic and honest dialogue.   

The key themes discussed were:

  • Sources of transition finance
  • Financing mechanisms for the energy transition
  • The thorny question of how to address coal
     

Key takeaways:

A wide variety of viewpoints were shared on the topic of how to finance the energy transition. Some highlights were:

  • There is enough capital available for the energy transition and we have all the technologies, the question is how to ensure capital flows to where transition efforts can be scaled to achieve maximum impact.
  • Foundational principles, standards and collaboration are not yet sufficiently developed and robust to foster a clear sense of direction. Companies, and indeed whole sectors and economies, do not yet understand their place in the transition – all they see is pressure to hit milestones by 2050 or else.
  • Banks continue to play a critical role in the transition, but how they engage with it and scale up transition financing remains a point of robust debate. Questions arise around the lack of “bankable” projects. Is it the case that what is “bankable” needs to be redefined? Are projects being structured too slowly to be bankable, particularly for mid-sized banks?
  • Financing structures and mechanisms are also not immune from the debate. Debt continues to lead the way but there is also talk of investors putting in more equity to entice lenders. The first-loss conversation is also relevant here, particularly who should be the first-loss barrier in an area or initiative that involves the rapid scaling of new technologies.
  • Still, these structures remain concentrated within the private sector and blended finance mechanisms or PPPs also need rapid deployment, particularly as soft loans and concessional finance is important to provide a front-end or backstop guarantee. Nevertheless, there are some views that blended finance cannot succeed without experts and “boots” on the ground to make sure projects happen.
  • Finally, regulations need to be considered. Asset owners operate across jurisdictions with material differences in capital treatment and regulatory pressures. There is no one-size-fits-all solution and time/resource bandwidth remains a challenge, even where they operate through asset managers.
     

This final point fed nicely into a discussion on coal, which remains a controversial topic for the financial sector but a critical component when considering not only what the energy sector is transitioning to but also what it is transitioning from. The key question remains whether there can be a transition without addressing coal, and whether the absence of the coal transition from taxonomies needs to be revisited:

  • It is apparent there is a critical disconnect in conversations on coal. In developed markets it is just not a good investment proposition. In developing countries, however, it looks like one of the few choices to fulfill growing populations’ energy demands. ASEAN is a good example, where every dollar invested in renewable energy is currently matched by a dollar going to fossil fuels.
  • There are other barriers evident beyond the financing one. Retrofitting remains expensive and the business models emerging are not yet proven. New technologies are immature and higher risk so the investment required at the early stage is not appropriate for larger investors like insurance companies or pension funds.
  • So the question arises how we overcome those barriers? The hard realities of capital markets are that you need investable projects. Utilities are predictable, safe investments in many emerging markets where FIs need to hold enough regulatory capital to operate, regardless of whether those utilities are largely coal-based.
  • Nevertheless, there are options. Adapting existing structures like SLBs to realities on the ground, particularly in emerging markets, would make them more appropriate. Reporting frameworks can also be adapted for the coal transition, so that investors are able to communicate adequately and transparently, the impact and co-benefits of their investments. Finally, the question of more active ownership, and incentivising transition through investment, also comes up. 
     

We hope to continue to foster on-going dialogues, across stakeholder groups, to facilitate the expansion of financial solutions that will enable an orderly and efficient energy transition in a way that works for the economies where it is most needed.