Photo Vital Pinnick. Janus by Bertil Vallien

Sweet and Sour ’16

23/12/2016 is brand new but that doesn’t mean we don’t do tradition. So, with the help of our esteemed network of advisers, bringing perspectives from around the world and from different parts of the climate finance industry, we offer a round-up of themes that emerged in 2016 and a look forward to what might be on the agenda for 2017.

Notes: All our advisers act in a personal capacity and views expressed do not necessarily reflect those of the organisation they work for

Technical terms are marked with a * and explained in the Glossary.

We asked our advisers to take as read the year’s high being the ratification of the Paris Agreement, but let’s not forget it as a striking manifestation of what world leaders can do when minded to.  As we noted in our Marrakech blog, there was something almost magical about promenading up and down the avenue in the Blue Zone and knowing that, with very few exceptions, every nation on earth was gathered there to make climate action work.

We also asked our group to assume the low being the election of Donald Trump, but it’s a topic that can’t be avoided so let’s start with comments from the USA. Despite grave concerns about Trump’s team we think there’s a definite – and positive – trend emerging in North America.

Constitutional Biodiversity
Mindy Lubber

One of the most interesting interventions we heard in Marrakech was Lord Nicholas Stern reminding everyone that when a previous Canadian government was hostile on climate issues, a number of Provinces responded by using the federal nature of the constitution to take action themselves.

For Ceres CEO Mindy Lubber, the year’s high was the decision of the Michigan legislature to raise its clean energy targets, and put energy efficiency at the heart of its energy plan.  This was in direct response to a call from large companies operating in Michigan and as CERES points out “by strengthening these vital clean energy policies, the state has provided additional policy certainty for companies and investors interested in investing in Michigan.”  It’s the (sustainable) economy, stupid.

“We’ll launch our own damn satellite”

Darius Nassiry

It probably won’t take other states long to figure this out, and in a similar vein  Darius Nassiry of the Climate Bonds Initiative highlighted California Governor Jerry Brown’s response to a Trump team suggestion that they might shut down the NASA climate data collection programme: “We’ll launch our own damn satellite.”   Darius notes that “Brown’s response matters not just because it provides a high profile example of moral leadership on climate change since the U.S. presidential election, but because it is also credible – California has unparalleled worldwide cred in technology and climate leadership.  It shows that leadership, enabled by advances in technology, can come from sub-national and non-state actors. As Governor Brown says, ‘California is the future.’”  Will other States really risk heading back to the oil-driven dirty past when it’s clear that more and more businesses and investors are moving in the other direction?

As well as boldness from Governors, we’ve also seen examples of an abiding belief in the Constitution and the rule of law, and everyday bravery in standing up for them. The Trump transition team tried to force the Department of Energy to give the names of scientists and civil servants who have attended climate change conferences, including the COPs.  The Department refused to comply, politely pointing out that such requests would be “an abuse of authority”.  The little fellow stood up, the transition team bullies backed down.  There will need to be thousands of these battles, but let’s be optimistic that in the end, right will trump might.

Accidentally or not, there is an inbuilt biodiversity that comes from the bottom-up nature of the Paris accord which gives it protection against even a big actor shouting loudly and threatening to undermine progress.  In the end, will the USA really want to play that role?  To do so is to let China become the dominant player in a field where there is a lot of money to be made.

Which brings us to the next theme …

This Climate Business
Ichiro Sato

Ichiro Sato, of the Japan International Co-operation Agency,  said that “2016 was the year we witnessed a growing momentum for climate actions in the private sector, perhaps due not only to the sense of responsibility for the future of the earth but also to the recognition of a vast business opportunity in the era of Paris Agreement,” the new billion-dollar Breakthrough Energy Ventures fund led by Bill Gates is the most recent example of investor appetite for the next generation of energy technologies.

“Growing corporate leadership will be the driver, and it is coming from the executive suite.”

Tom Murley

Other advisers also picked on the climate business opportunity, not least to reduce costs dramatically.  Tom Murley of HgCapital said “I see it in business to business – corporate leadership.  In December Google announced that it now purchases renewable energy equal to 100% of data centre consumption.  Ikea is well on the way in terms of RE for its operations.  Whole Foods is putting solar panels on all of their stores.  Facebook has cut data centre power consumption by over 30%.  This growing corporate leadership will be the driver, and it is coming from the executive suite.”

Darius Nassiry cited Tesla’s June announcement to merge with its sister company SolarCity to create Tesla Energy.  “The vision is to create an integrated solar company whose products will help customers to generate electricity, store it and use it to power both their homes and cars without the use of fossil fuels. This offers the potential to disrupt and replace the traditional utility and central grid electricity distribution model.”

In our recent blog from Amsterdam, we noted the Dutch government’s work on codes of conduct for supply chains, linking these to responsible corporate behaviour on sustainable development.  Mindy Lubber highlighted another supply chain example from California, where food giant General Mills has not only pledged to cut greenhouse gas emissions across its supply chain by close to 30 percent over the next decade, but has also joined with six other major brands in making significant commitments to work with their growers to help them improve their water stewardship through a new collaborative initiative, the AgWater Challenge.

Everything’s getting cheaper…

Several people mentioned the continued falling cost of renewables as an “often unsung” trend that continues to portend well for a low carbon energy future.  Tom Murley picked out a few examples:  “Enel won wind and solar tenders in Mexico at pricing under 3.5 cents per KwH.  Vattenfall announced an offshore wind farm at about 7.5 cents and larger onshore wind turbines are lower, below 5.5 cents.  And costs are still falling.  Renewables are on the verge of being subsidy free, and offer not only the right environmental but economic choice.  This will deflate much of the criticism directed at renewables”.

Darius Nassiry highlighted other examples from the Middle East, including a bid for the Abu Dhabi Water and Electricity Authority’s 350-MW solar tender $24.2/ per MWh by Japan’s Marubeni Corp and China’s JinkoSolar Holding Co Ltd. He noted that in December Bloomberg reported that “solar power, for the first time, is becoming the cheapest form of new electricity. … While solar was bound to fall below wind eventually, given its steeper price declines, few predicted it would happen this soon.”

Meanwhile, the market in Australia is looking favourable for renewables with Utility scale solar facilities targeting energy prices of A$80 a MWH and wind A$70MWH.  The country’s green bank, CEFC expects many projects to go into construction next year.

Capital markets are starting to exhibit some spirit…
Abyd Karmali

Abyd Karmali from Bank of America Merrill Lynch (BofAML) says his 2016 high was closing Meerwind at just under €1bn EUR as the largest ever renewable energy bond in Europe.  It was structured and arranged by BofAML and shows the potential of attracting institutional investors to refinance operational renewable energy assets.  He also cited Vela as a great example of using securitisation techniques to refinance a solar portfolio, again structured and distributed by BofAML.

Tom Murley also saw the mushrooming of renewable energy finance as a 2016 highlight.  “Renewable energy finance has gone mainstream.  There are more investors than ever, with lower costs of capital seeking quality assets globally.  Kenya, South Africa, Chile, Brazil, Viet Nam, Mexico, Nigeria, Egypt, Morocco and countless other countries are receiving institutional investment at record levels.  It has ceased to be a niche asset class.”

…so the challenge is to keep the animal spirits and market irrationality at bay

But Tom also picked out as a lowlight the bankruptcy of the SunEdison corporation, a so-called “yieldco” investor* in renewables. Tom pointed out that the bankruptcy “exposed the hubris that often comes with new markets and financial products, and has harmed the yieldco as an investment vehicle, maybe permanently”. But he said that its failure was caused by poor management and not, “as the anti-renewable, climate change sceptic lobby portrayed it, a renewables failure, a bubble supported by misguided government policy and reliant on expensive subsidies”.

Science is a guard against irrationality
Frances Way

Frances Way of CDP says her 2016 high “was the rise of science based targets, with 200 companies (and rising) publicly ‎recognising they have a finite carbon budget and committing to do their fair share to align with the Paris Agreement”.

Her low was the significant number of shareholders who did not vote in favour of the 2 degree stress test resolutions for ExxonMobil and Chevron.  Given more than US$5 trillion of fossil fuel divestment and the larger universe of shareholders engaging with the fossil fuel companies they own, we can expect to see more climate resolutions in 2017 and increasing pressure on companies to respond to shareholder concerns.

Insurers’ show no let up
Butch Bacani

The insurance business is strongly science-based and the UN Environment’s Butch Bacani summarized their year: “In 2016, the triple role of the insurance industry – as risk managers, risk carriers, and investors – in addressing climate change adaptation and mitigation, social and financial inclusion, and other key sustainability issues forged ahead in unprecedented ways.  Insurers are playing a central role in initiatives such as the UNFCCC Clearinghouse for Risk Transfer, the G7 Climate Risk Insurance Initiative, and the Vulnerable Twenty Group of Ministers of Finance (V20)”.

Most striking of the developments Butch summarises are the UN Environment’s Principles for Sustainable Insurance (PSI) Initiative, the largest collaboration between the UN and the insurance industry, and the International Labour Organization’s Impact Insurance Facility, which have joined forces to promote inclusive insurance as a key component of the sustainable insurance agenda.  This is essential bottom of the pyramid financial innovation, to be applauded.  Equally significant the PSI and ICLEI – Local Governments for Sustainability, the global cities network – have joined forces to create the largest collaboration between the insurance industry and cities. It’s a win / win in pulling costs down for climate action in densely populated areas.

Asia feels the heat… and the opportunity
Devin Narang

According to Munich-Re, Asia has suffered half the cost of global natural disasters over last 20years, ~USD53 billion annually, mostly climate related.  Reporting from India, Devin Narang of Sindicatum Sustainable Resources saw 2016 as  “one of the most challenging and exciting years for climate finance. We saw a resurgence in renewable energy projects (solar, wind and bio energy) in India –  $5 billion was invested.”  And he sees the progress continuing:  “2017 looks to be more promising in Asia Pacific – countries have amended laws to give renewables a push and 2017 will see more investments in renewables in the region. The capital markets globally look good and more IPOs are expected in first quarter of 2017”.

“We are seeing global engagement and cross-sector co-operation”

Niven Huang

Niven Huang of KPMG also saw progress in Taiwan, although more gradual.  “Voices on climate finance have been heard now in Taiwan, not loud but emerging. I believe that continued advocacy in 2017 will create even more obvious signals for the Asian financial market that there are opportunities. What we need in Taiwan is getting the policy framework in place, motivating financial institutions to buy in, and building up the capacity and business cases”.

Tracy Cai of consultants Syntao Green Finance in China, saw the focus on green finance during China’s presidency of the G20, and especially the G20 Summit in September, as key to developing “global engagement and cross-sector co-operation”.  Darius Nassiry also picked up on this theme:

Tracy Cai

“The China G20 summit marked the first time that ‘green finance’ – a new concept only a few years ago – was expressly articulated as an important part of the low-carbon transition.  By doing so, the finance sector became a tool for policymakers to use in addressing climate change, thereby setting the stage for other interventions”.  He noted that the follow-up will be key and Germany has already indicated its 2017 plan, to continue where China left off, by focusing on priorities such as sustainability and resilience.

Regulators and Markets – in tandem on climate
Ingrid Holmes

Ingrid Holmes of think-tank E3G saw a similar focus on these themes reflected in other EU actions, for example the European Commission’s September announcement of a new expert group to develop a comprehensive European strategy on sustainable finance, and EU legislation published in November that creates “clear requirements for occupational pension funds to consider ESG issues and disclose how they manage them to members”. The Institutions for Occupational Retirement Provision Directive (IORPs Directive) affects over EUR 3 trillion in EU assets under management*.

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Our post of 15th December, with thanks to Joel Kenrick, summarises immediate market reactions to the FSB Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Mindy Lubber said “the guidelines are a big deal … because they were developed by business for business. The task force was created by the G20 with one specific goal: to cut through the confusion in the market around financial reporting on climate risk by providing a single set of concrete, workable guidelines for all industries. The … guidelines will help standardize how climate risks and opportunities are analysed by companies, and generate critical information for investors to help them make better decisions. They are a powerful statement by some of the world’s largest corporations that climate change is a systemic material risk that requires clear and efficient disclosures. With these proposals, business leaders from across our economy are saying that all parts of the capital markets need to be engaged on climate change and that the way to do that is through uniform analysis and disclosures by investors and companies alike”.

Alongside TCFD, Butch Bacani drew attention to the complimentary multi-year work of UN Environment on insurance regulation and supervision, through the PSI Initiative and the Inquiry into the Design of a Sustainable Financial System.  The work culminated earlier this month with the launch of the Sustainable Insurance Forum for Supervisors (SIF), with its 2017 agenda focusing on disclosure, access to insurance, sustainable insurance roadmaps, climate risk, disaster risk reduction, and capacity building for insurance regulators and supervisors.

Red ribbon … Energy Regulation falls behind technology?

Financial regulators may be tuning into green finance but energy and utility regulators have some catching up to do.

“Regulation is falling behind technology”

Tom Murley set the ‘big picture’: “Since 2000, we have used regulation to drive renewable energy technology.  Renewable energy targets and other support have all been implemented to drive down renewable costs, improve technology and make renewables competitive.  And it has worked.  But now, regulation is falling behind technology, and regulators are not equipped to deal with it.  The energy markets we used to know, with big spreads between peak and baseload power prices are gone.  We have more and more embedded generation.  Business, commercial and consumer users have unprecedented choice: Self-generation, private power contracts between energy users and wind and solar farms.  An UBER for electricity is a possibility.

All of this is affecting the utility business model, especially in Europe where the main utilities have lost hundreds of billions in value, and are lobbying regulators hard to enact barriers to further change to protect their stranded investments, which are in many cases stranded because they failed to see the changes taking place around them.

We are at the point where technology will drive regulation, and regulators are already playing catch up, all the time being lobbied to slow changes to protect existing interests.  One only need look at the net metering battles in the US. My concern for 2017 is that we end up with more regulatory decisions that protect the status quo, and slow down the low carbon transition.

On a positive note, we have choice like we have never had before.  There is a virtuous circle of technology improvement, lowering costs, driving more improvement and giving energy users increasing choice in the energy usage, at the same time as low cost of capital is seeking more and more investment in the sector.  I think that the only thing that can retard it is unimaginative regulation and a yearning to keep the status quo and not to embrace the creative destruction that is coming to the energy sector.”

And Investors fall behind disclosure?

Frances Way’s hope for 2017 is that the final recommendations from the FSB’s Task Force for Climate-related Financial Disclosure takes climate change out of the CSR report and SRI fund and into mainstream filings and investing.

Her fear is that the financial markets are too slow to act on the company disclosures TCFD proposes, so investors don’t re-allocate capital fast enough to enable the transition to a low-carbon economy.  This inertia could, by default, lock us in to continuing a fossil fuel economy.

But where’s the public money?
Alexandra Tracy

Several of our advisers still worry about money from the public side.  Alexandra Tracy of Hoi Ping Ventures in Hong Kong [picture], and the Active Private Sector Observer for developed countries at the Green Climate Fund, says that “finance is central to meeting the commitments made by the global community on climate.  And the only way that funding will be made available to support investment in low carbon infrastructure and business at the level necessary to meet Paris’s 2°C (or 1.5°C) target is if the private sector plays the major role.

The GCF has a specific mandate to encourage and facilitate private investment in climate related activities.  This year it approved funding of US$1.3 billion to support projects in emerging markets to improve emissions reduction and climate resilience – over 20% of this will go to projects classified as private sector.  This is excellent progress, but in 2017, the GCF must take more action to reach out to the business and investment communities outside the rarified world of COPs and climate finance.  I look forward to seeing it expanding its private sector networks and working with financial institutions and companies of all types and all sizes.”

The ‘private sector’, she notes “is not just multinationals – agricultural cooperatives, microfinance houses and sub-national banks are essential to funding development in emerging markets.  Mobilising private capital is arguably the GCF’s most important mission, and this has to be led by broader engagement throughout the financial world.”  A good new year’s resolution; and as a by-note, at Paris the GCF said it had a target for 2016 of disbursing $2.5 billion, so it seems to have undershot by nearly 50% on its actual performance.  GCF failing to hit its stretch target was Abyd Karmali’s 2016 low.

Clare Shakya

Clare Shakya of IIED reflected similar concerns, this time over the commitments made by developed countries. “After the huge achievement of the Paris Agreement in 2015, 2016 has felt very up and down. The year was expected to be focusing on delivery – demonstrating how the commitments could be turned into action…

But in fact we made relatively little progress on this front.  To start with, there is a huge credibility gap between those countries who have promised to ensure finance for climate action reaches $100 billion and those hoping to receive it.  Towards the end of the year, donors provided a roadmap to the $100 billion – but it failed to win confidence as it had too little detail on what the finance would be for and how it would flow. The 48 poor countries that make up the Least Developed Countries group noted that the donors would double finance for adaptation by 2020, but that this is still only 24% of total flows – far too little against the need.

IIED analysis in mid-2016 showed that only 8% of climate finance pledged had actually been disbursed and that of the public climate finance committed for energy only 9% was for off grid energy – although this would provide poor households with energy services fastest – and only 5% for the low income countries, despite these countries being the ones with the largest gap in energy access.

So looking forward, we need 2017 to set new precedents on how climate finance flows – with greater transparency and greater debate over the priorities that are supported.  We need to ensure countries that are struggling to attract private investment get more, not less support, from public climate finance to de-risk private investment behind their priorities, like off grid energy.”

Fair Shares?

There was an interesting divergence of views on economic distribution issues arising out of the transition.  As well as Tom Murley’s mention (above) of “an Uber for electricity”, Darius Nassiry saw the potential of Uber, Google and Apple driverless vehicles as “maybe bad for automaker jobs, but probably great for transportation safety, low-carbon transport, densifying cities with fewer parked cars and fantastic for eliminating the need to own a depreciating, polluting asset that sits unused in a parking space for most of its useful life.”

Ichiro Sato, however, saw the other side of the coin. “There is a counter-force against this movement [to low carbon technologies] from industries and employees who feel insecurity of their business and employment in the process of transition toward decarbonised economy. Unless such concerns are adequately addressed, the transition cannot secure political and social support, and may eventually fail. We glimpsed the manifestation of such counter-force in the US presidential election but it exists in many other countries. An encouraging action was the adoption of new guidelines for a ‘just transition’ by ILO in November this year. We will need recognition of this issue among broader stakeholders of climate change in 2017.”

And finally … “Be bold and confident”
James Cameron

We give the last word to James Cameron of consultants Systemiq, who advised the Moroccan presidency at COP22.  His words capture many of the themes our other advisers have raised.

“Here are my thoughts. Renewables will win on cost, whatever the president elect chooses to do for the coal industry; infrastructure investment in energy, water, transport and communications at scale is essential pretty much everywhere; the Paris Agreement endures and the real world fact of climate change won’t change because of an appointee to the US EPA. The case for a transition to a cleaner and more resource efficient economy is powerful: the winning arguments transcend partisan boundaries and they are situated in job creation, real prosperity and public health.

This is no time to be anxiously defensive, be bold and confident.”

Precisely.  This is the right sentiment to enter the New Year.  Happy Festive Season to all our readers.

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