As more countries and businesses report their net zero liabilities, they ask an immediate and practical question: Is capital flowing in the right direction to help meet their commitments?
As investments in green assets and technologies have increased, their popularity offers only part of the solution and raises complex new issues. At the same time, while transforming âbrownâ businesses into green businesses is intuitively beneficial, funding such a transition is far from straightforward.
The growing demand for minerals such as lithium, for example, is indicative of a cleaner automotive industry, as the material is an integral part of the batteries that power electric cars. But it is also a source of concern because of the environmental impact of its mining operation.
Extracting lithium from the ground involves the displacement of large amounts of groundwater and the risk of contributing to desertification. By 2050, the World Bank estimates that demand for ore will have reached nearly five times the production levels seen in 2018.
Other critical raw materials for electric vehicles and renewable energy technology pose further dilemmas. Cobalt, for example, is mainly produced in the DRC under hazardous conditions involving child labor, as campaign organizations have long warned. And this is something that investors are well aware of as well.
“If you have ever seen a lithium mine or a cobalt mine, they are not the most ecological, not to mention the social aspects that surround them,” notes Robert Furdak, director of investments for the environment, social and governance (ESG). at Man Group. âThe ESG aspects are often very nuanced, and it is enough to understand the complications of some of these problems. “
As technology improves – automaker Tesla is working on cobalt-free batteries – assessing the overall impact of the investments is tricky. In addition, there are other factors that can make directing capital toward climate goals even more difficult.
While funding for green assets is plentiful, funding the green transformation of large emitters is a bit more difficult. Arguably this is more evident in a jurisdiction such as the EU, which has created a green taxonomy setting clear boundaries between the ‘colors’ of different companies but not guided on what is allowed, or even encouraged, in the transition from brown to green.
This tension is illustrated by the still hesitant market in bridging bonds, intended to finance the process. âWhenever a client wants to issue a bridging bond, he fears that [this will attract] a reputational risk â, explains Hacina Py, head of impact financing solutions at SociÃ©tÃ© GÃ©nÃ©rale. “What is brown, according to the EU, is what will never turn green, but in the middle there is not enough space.”
European Commission Director General for Climate Action Mauro Petriccione admits the EU could do ‘a little better’ by clarifying its position and expectations regarding the energy sources needed for the transition to a greener economy . He says natural gas is essential in the short term, but that by 2050 it should be completely phased out of the system.
Speaking at a recent Financial Times conference, Petriccione added that âthere are financial institutions that have taken the bull by the horns and moved forward [with transition financing] and I don’t think they suffered [as a consequence]. “
While the numbers remain low – $ 4.5 billion this year, according to data provider Refinitiv – there are signs that bridging bonds are set to rise. In February, the London Stock Exchange created a bridging bond segment on its site, expecting activity to increase.
Italian energy infrastructure company Snam has already appealed to the market four times in 2020 and 2021, for a total of 2.35 billion euros to help finance its net zero targets in 2040. And the Green bond supply is still relatively low relative to demand, leaving ESG investors wanting more – the EU’s first green bond, to raise the breakthrough sum of â¬ 12 billion, has been subscribed 11 times.
Outside the EU, Dean Alborough, ESG manager at Old Mutual Alternatives, wants regulators to encourage transition funding so that companies, as well as multilateral banks, can feel inspired to tap into the market. âIf there are regulations that allow this transition, development finance and private sector finance will be reputational,â he says.
Some estimate that low-carbon technologies will require more than $ 90 billion in investment over the next 15 years. At the same time, the financing of fossil fuel production is increasingly controversial. Many argue that green technologies and infrastructure do not yet allow the abandonment of this industry.
âThere is still a lot of land [cover to] define exactly what transition is and how to apply it in different sectors â, explains Demetrio Salorio, UK head of the world bank and consultancy at SociÃ©tÃ© GÃ©nÃ©rale. But he adds: “We cannot abandon the financing of oil and gas today, it would be impossible.”