Bridging the financing gap to triple renewable energy capacity
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Key Findings
Meeting the goal of tripling renewable energy capacity by 2030 faces an investment gap of up to US$400 billion annually between 2024-30. Banks, which channelled a whopping US$967 billion to the fossil fuel sector, can bridge the gap by reorienting capital to the renewable energy sector.
While banks need to integrate climate change risks in their lending decision to reduce their exposure to fossil fuels, they also require credit enhancement support to accelerate fund flows to renewable energy projects that are not commercially viable. Governments, Multilateral Development Banks (MDBs), and bilateral financial institutions can provide risky and concessional capital for credit enhancement support.
Since climate change is already recognised as a material risk to the financial system, central banks and regulatory bodies are issuing guidelines and formulating regulations to nudge commercial banks to integrate climate change risks into lending and risk management practices.
Executive Summary
The global renewable energy investment continues to surge, demonstrating the sector’s attractiveness to investors. Under various estimates, the annual renewable energy investment reached between US$570 billion and US$735 billion in 2023. However, to meet the goal of tripling renewable energy capacity by 2030, as set out at the 28th Conference of the Parties (COP28), the global annual renewable energy investment should increase between US$377 billion and US$930 billion per annum, under various estimates, and remain consistent from 2024 to 2030.
The International Energy Agency’s (IEA) assessment shows that the world will likely face an average annual investment shortfall of US$400 billion in this sector during 2024-2030, a key barrier to triple the renewable energy capacity. Despite the growing demand for cutting lending for the fossil fuel sector, banks still provided a whopping US$967 billion to the fossil fuel sector in 2022. On the flip side, low-carbon development projects, including renewable energy, received US$708 billion in the same year. This note identifies that if banks reduce their exposure to fossil fuels and reorient this capital towards renewable energy, they can help bridge the funding gap.
All stakeholders have a part to play in bringing about such a shift in banking practices. Banks should adopt stringent credit policies to address climate risks and limit their exposure to fossil fuels. Parallelly, they also need credit enhancement support from governments, Multilateral Development Banks (MDBs), and bilateral institutions to accelerate credit flows to the renewable energy sector. In addition, financial regulators can use monetary and regulatory policy instruments and make it mandatory for banks to disclose financed emissions, reinforcing them to reduce their exposure to the fossil fuel sector and propelling credit growth to the renewable energy sector. Interoperability of green taxonomies and prioritising renewable energy lending in developing countries can also boost bank financing to the sector.
Besides, governments and other institutions should take initiatives to improve their grids to accommodate the growing share of renewable energy. They should work on reducing delays in allowing grid integration permits for renewable energy projects and making them ready for investment. Additionally, policy and regulatory certainty in the renewable energy sector and countries’ future energy will send a positive signal to banks.
COP29, the biggest stage for the negotiation to stave off the worst impacts of climate change, could deliver concrete recommendations on financing renewable energy and garner support from policymakers, regulators, banks, and MDBs in accelerating lending to low-carbon-emitting sectors, paving the way for the desired energy transition in the foreseeable future.
