“A transition to net zero will affect how risk is measured and managed, and how assets are valued. This transition is creating the greatest commercial opportunity of our age.”
– Mark Carney, former Bank of England Governor
This report validates Mark Carney’s statement by highlighting the recent momentum building in favour of investment in climate-friendly energy transition sectors.
Low carbon energy transition assets are creating investment opportunities
Low carbon energy transition assets are creating investment opportunities, and they have also demonstrated significant resilience, consistently attracting capital despite the COVID-19-induced global economic crisis.
In financial year (FY) 2020, the clean energy sector received record investment commitments totalling US$501 billion – 9% more than the previous year. The renewable energy segment led with US$303bn in 2020, which is 60% of total investment committed into the overall low carbon energy transition sector. In addition to the inherent advantages of investment in the clean energy sector such as relatively higher risk-adjusted returns and stable project cashflows, the COVID-19 stimulus packages of some governments, especially in Europe and South Korea, put green investment at the forefront of recovery plans, driving further clean energy investment.
Investors have been pressuring fossil fuel companies via divestment or engagement
The net zero emissions by 2050 financial alliance pledges of 2021 have created a strategic shift in dialogue, building on the Paris Agreement of 2015 to now emphasise the role global finance can play in working to limit global average temperature increases to 1.5 °C above pre-industrial levels. The Paris Agreement stipulates finance will be critical on two fronts – divestment away from carbon intensive assets and mobilising capital towards low carbon energy transition assets. Investors have been pressuring fossil fuel companies via divestment or engagement and in recent years, investor-led momentum for stronger climate action has been building, as tracked by IEEFA. However, as Carney pointed out, fossil fuel divestment is just one part of the story; shifting from avoiding the financial risks associated with climate change to embracing the investment opportunities offered by the energy transition is equally important.
In this report, IEEFA focuses on the investment opportunities of decarbonisation, i.e., global capital flowing into the development of low carbon infrastructure assets, especially asset level investment into renewables infrastructure.
We highlight global commercial investors that are actively investing in renewable energy infrastructure across the world. We showcase recent renewable energy investment activities of the top 10 global commercial banks as per Bloomberg New Energy Finance’s (BNEF) Clean Energy League Table of 2020. We cover renewable energy investment activities of a diverse set of 10 world-leading equity investors. Finally, we examine 10 major energy transition sector deals across diverse technologies installed across geographies. Our report primarily focuses on the recent renewable energy investment activities of these financial institutions since 2020.
The top commercial banks in our list provided a cumulative debt of US$30bn to renewable energy infrastructure in FY2020. Tellingly, no U.S. banks appear in this list; rather, it is dominated by large European banks along with 3 Japanese banks.
Large U.S. banks have only recently started joining the global movement of investment into climate-focused sectors
Large U.S. banks have only recently started joining the global movement of investment into climate-focused sectors. In 2021, JPMorgan Chase and Bank of America, two of the largest fossil fuel financiers over the past five years, set a target of US$2.5 trillion and US$1.5 trillion respectively of sustainable climate-friendly deals over the next 10 years. Similarly, Citigroup Inc. and Morgan Stanley have announced they will mobilise US$1 trillion each. However, these U.S. banks with trillions in asset ownership have yet to demonstrate progress towards fulfilling these commitments amid the building global momentum.
The equity investors in our list are from a diverse range of financial services (pension funds, asset managers, infrastructure funds, diversified financial groups and private equity investment firms). We selected these entities based on their proven track record in renewable energy investment and due to their top management backing the role of finance in solving the climate challenge.
In the final section of the report, we highlight 10 globally significant renewable energy infrastructure projects which are either in an advanced stage of construction or recently operational. These projects cover diverse technologies and illustrate the growing opportunities in energy transition industries of the future.