Who is Investing in the Technology Transition to a Low Carbon Economy, and Where?

June 2019: A clear upward trend in the global market of green and sustainable bonds is underway. These bonds help mobilize private capital for climate and sustainability friendly projects and activities. The Inter-American Development Bank (IDB) notes annual issuances have increased from USD 13 billion in 2013 to more than USD 150 billion in 2018. The Climate Bonds Initiative saw green bond issuance reaching USD 47.9 billion in the first quarter of 2019 alone, surpassing Q1 2018 volume of USD 33.8 billion by 42%. This update informs on developments seen over the last month in green, climate sustainability and social bonds, as well as corporate reporting on climate risks and opportunities and climate technology deployment initiatives.

Transitioning to Low-Emission Models Shows Business Acumen

The world’s 215 largest companies reported their financial impact from climate-related risks at USD 1 trillion. For almost all industry sectors it is cheaper to manage these physical and transitional risks upfront. Power companies represent an exception. These and other findings are reported in the “Global Climate Change Analysis 2018” by CDP, which runs the global disclosure system for environmental information. CDP reports that calculated climate business opportunities, valued at USD 2.1 trillion, are almost 7 times the cost of realizing them. These opportunities include increased revenue through demand for low emissions products and services (such as electric vehicles), shifting consumer preferences and increased capital availability as financial institutions increasingly favor low-emissions producers. [CDP Report] [UNFCCC News]

Deploying Climate Technologies in Developing Countries

Many countries express the need for climate technologies to leap frog their development efforts into a post-fossil age. They often find themselves at the downstream end of the resource chain and strangled by the high cost of fuel and resources imported from abroad. A reversal to shorter supply chains for resources and energy and for the conversion technology involved makes for a good case. But how likely can this be achieved within a centralized global market structure?

For market-driven technology transfer and diffusion to work, markets for climate technologies must be in place. But many countries and localities lack effective demand for capital products of climate technologies. Because that demand is in turn reliant on anticipated effective demands from consumers for the climate-technological products that would be made with the capital investment.

To look at this and technology needs assessment work, UNEP DTU Partnership is piloting the Technology, Markets and Investment for Low Carbon and Climate Resilient Development (TEMARIN) project in Kenya and Uganda. It assumes both supply-push and demand pull actions are required involving leadership from governments in the form of clear policies, legal frameworks, incentives and regulations. In addition, an ‘enabling framework’ for investment requires targeted support from development partners. This, according to UNEP DTU, involves financial and technical assistance, and actively connecting private business leaders with government-led and donor-backed forums, to communicate and help “de-risk” new commercial opportunities.

The TEMARIN project aims at:

strengthening national Technology Action Plans for climate change;
spurring new technology transfer and diffusion partnerships;
supporting local access to and upgrading in clean energy value chains; and
making recommendations for market creation.

A 2018 report by OECD titled, ‘Financing Climate Futures – Rethinking Infrastructure,’ noted that the extent and effectiveness of technology diffusion are determined not only by markets, but also by the absorptive capacity of recipient countries. The higher the level of domestic human capital, the higher the level of technology transfer as well as local spill overs from trade and FDI. Investing in education, technical extension services, public technology diffusion programmes and demonstrators is therefore important to enhance the ability of the public and private sectors to adopt, adapt and employ the most appropriate technologies. It can also help to facilitate the transition of economies and workers dependent on energy-intensive industries.

Some of these issues will be addressed later this month during the G20 Summit hosted by the Japanese Presidency in Osaka, Japan. An event titled, ‘G20 Global Summit on Financing Energy Efficiency, Innovation and Clean Technology,’ will take stock of global investments in low-carbon technologies to support the energy transition. [UNEP DTU Press Release][OECD: Financing Climate Futures][SDG Knowledge Hub Event announcement]

Green, Climate, Sustainability and Social Bonds Remain on Upward Trend

The Climate Bonds Initiative’s quarterly Green Bonds Market Summary reveals Europe remains the largest source of green bonds at 49%. The summary report notes North American green bonds accounted for 31% of the quarterly volumes, up from 21% in Q1 2018, while Asia-Pacific issuance remained about the same in absolute terms of USD 7.5 billion.

Certified climate bonds accounted for 14% of quarterly volumes, shows the summary report, up from 6% in Q1 2018. At USD 2.9 billion, certified issuance was highest from French issuers, followed by Australian bonds (USD 1.1 billion). Société du Grand Paris continued to issue under its multi-billion programme to upgrade rail and metro links in the French capital, contributing the equivalent of USD 2.4 billion to Q1 2019 green bond volumes. In terms of use of proceeds, the report reveals 81% of Q1 2019 green bond volumes were split between energy, buildings and transport.

The top three sustainability and social bond markets for Q1 2019 were Germany (USD 2.5 billion), followed by South Korea (USD 1.2 billion) and France (USD 1.1 billion). All bonds received an external review, showing a growing commitment to transparency. Local governments accounted for 35% of market volumes, government-backed entities 16% and development banks 15%. The rest was split between non-financial and financial corporations.

In other related May news:

The Asian Infrastructure Investment Bank (AIIB) priced its first global bond. The five-year bond raised USD 2.5 billion for investments in sustainable infrastructure, cross-border connectivity, and promoting Environmental, Social and Governance (ESG) in Emerging Asia.

The IDB, in collaboration with the Climate Bonds Initiative, is supporting Chile in developing a sovereign green bond. Chile seeks to encourage the development of a green asset class that can help attract foreign investment to support the country’s sustainable infrastructure needs.

The International Finance Corporation (IFC) announced its investment of USD 90 million in green bonds issued by Germany’s ProCredit Holding via a private placement. The proceeds of the ProCredit bonds will be used for financing investments by the bank’s small and medium enterprise (SME) clients in renewable energy, energy efficiency, and other areas that reduce greenhouse gas emissions in the South Eastern and Eastern Europe region. [IDB Press Release] [AIIB Press Release][IFC Press Release][Climate Bonds Initiative Report]

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The SDG Knowledge Hub publishes monthly climate finance updates, which largely focus on multilateral financing and cover, inter alia, mitigation and adaptation project financing news and lessons, institutional events and news, and latest developments in carbon markets and pricing. Past IISD climate finance updates can be found under the tags: Finance Update: Climate Change; and Finance Update: Sustainable Energy.