Growing awareness of the threat and impacts of climate change has propelled green finance to centre-stage, creating a dynamic area of finance. In its most recent report, ‘Sizing the climate economy’, HSBC Global Research predict that the annual global spend needed to develop the low-carbon economy will reach US$1.5 trillion by 2020, up from just US$740billion in 2009.
Paul Harris
Treasury risk management
The key facilitator to unlock the capital required to meet aspirations of the low carbon economy is the carbon price. This was introduced by the Kyoto Protocol which delivered the concept of the ‘polluter pays’, conferring a market mechanism on carbon emitters. The Protocol introduced three ‘Flexible Mechanisms’; – two which are project-based and emissions trading. These ascribed a market value to credits which displaced carbon, and a corresponding cost to carbon emitters. The EU Emissions Trading Scheme is the leading emissions trading scheme, involving around 14,000 companies across a number of sectors including power generation, metals and minerals processing. In an Irish context there are about 100 companies included in the Scheme. Participants must match their annual allocation with their actual emissions. If they exceed their allocation they must purchase additional allowances and conversely if they take action to achieve carbon savings they can sell any surplus. This change has therefore created a new type of treasury risk which must be pro-actively managed.
Bank of Ireland Global Markets has been at the forefront of the carbon market developments in Ireland, assisting participants in the Scheme to meet their obligations and pioneering new techniques to achieve this; Bank of Ireland was the first to transact an emissions-related derivative in 2005, and we have successfully designed and delivered carbon investment products to private clients.
Global custody
Indeed the level of interest from private clients and other investors in the carbon and green finance space is reflective of the move towards a global low-carbon economy but also highlights the potential attractive returns embedded in these opportunities. As a key hub for global custody, Bank of Ireland Capital Markets have embraced these trends and tailor their offerings accordingly. Whilst much of the investment in the green finance sector requires little adjustment in terms of securities service offering, some technical appreciation of the intricacies and nuances of the carbon market is essential in order to deliver optimum value. In the coming years as the influx of funds related to areas as diverse as renewable energy, waste, weather and energy efficiency continues it will be those custodian providers that can leverage banking access to carbon markets which will be able to deliver a superior, differentiated service.
Lending
Lending activity is another potential growth from the trend towards green project investment. The move to attract renewable energy and carbon investment funds into the IFSC will present opportunities for indigenous companies to avail of fresh capital; an offering available through domestic banks. The number of market leading green companies for example - Wavebob, Open Hydro, Mainstream Renewables and Gaelectric - point to Ireland having the requisite engineering, technological and industry expertise to offer fresh lucrative investment opportunities. It is incumbent on the Irish financial sector to ensure that we are equipped to offer the requisite breadth of financing options that cater specifically for the needs of ‘green’ companies. The ability to utilise the many and varied green credits associated with many of the renewable sectors, and carbon credits within the lending structure to, inter alia, favourably impact the debt-equity mix.
Furthermore banks, with in-house expertise in the area of ‘green tags’ and carbon credits, are well-placed to devise innovative structures incorporating the value of these assets.
This integrated approach to funding and servicing the move to a low-carbon economy is informative given that it illustrates a strategy to engage different business types in the green space at different stages of development distinct in their requirements but similar in that they may include an element of innovation around the carbon component.
Green finance is a significant growth sector that requires specific specialised financial skills and the most successful institutions will to this end have combined the breadth of their offering across treasury, securities servicing & corporate banking to offer a one-stop shop for companies in this sector.