The thin green line: sustaining sustainability

SEAN Kidney is taking stock of climate action, and it's safe to say, he's not pleased with the progress. Speaking to participants at a recent green finance conference in Singapore, the CEO of non-governmental organisation (NGO) Climate Bonds Initiative puts it bluntly: "We are failing totally."

He's referring to the Paris Accord - the 2015 landmark agreement inked by nearly 200 countries around the world to cut carbon emissions, with the goal set at limiting the increase in global warming to "well below" two degrees celsius by the end of this century. But in this part of the world, there is an uncomfortable tension between poverty alleviation and environmental care, made more urgent by current uncertainty that renewable energy is ready for the long haul.

A damning United Nations 2017 report on the Emissions Gap showed an "alarmingly high" gap between the reductions needed and the national pledges made in Paris. "It is clear that if the emissions gap is not closed by 2030, it is extremely unlikely that the goal of holding global warming to well below two degrees celsius can still be reached. Given currently available carbon budget estimates, the available global carbon budget for 1.5 degrees celsius will already be well depleted by 2030," the report says.

This has renewed calls for governments and businesses to shift their attention on green solutions. And with coal-based power generation singled out by the UN as "the single-most important cause of carbon lock-in", NGOs have given special attention to the financing of existing coal-fired power plants by banks, calling for lenders to be responsible financiers in this race against time for global warming.

Yet the UN also acknowledges the predicament that developing countries such as India find themselves in. "The country, in line with many others, faces a dilemma in addressing its developmental goals," the report says. "It needs to respond to demands in poverty reduction, energy access and urbanisation, while reconstructing its development pathway towards a cleaner energy system that has been coupled historically with fossil fuel use."

That means a country with just over 20 per cent of its people living below the national poverty line, and where the coal mining industry is the second-largest employer after railroads - which is heavily reliant on coal transportation as a business - has to grapple with providing clean energy and preventing further pollution for its next generation, while ensuring that 240 million people now living without electricity get access to power sooner than later.

Closer to home, Indonesia is not just among the world's largest coal producers, but it is also expecting a huge surge in electricity demand domestically with rising incomes. In the next decade, the amount of additional capacity needed for electricity will mean a tripling of coal use by 2025, says the UN.

Bad guys?

Roger Charles, an old hand in the oil-and-gas industry, remembers the time when he was in Uganda, working for an oil driller that did work at a natural reserve there eight years ago. Working with the World Wildlife Fund, Mr Charles was able to guide the team in protecting the wildlife of lions and giraffes, while also getting the job done. "The development was not our decision. It was the government's decision. They want to get it over (the line) from developing to developed. You need energy. You need infrastructure. You need schools."

Mr Charles now works for Standard Chartered Bank as director of environmental and social risk management, where he screens and monitors projects so they meet the bank's environmental, social, and governance (ESG) standards. This was a role that he himself did not think he would ever take on.

"Leaving that, and moving into the bank - I didn't know banks had an equivalent of me. I always thought the banks were the bad guys," he tells The Business Times.

Mr Charles and other bankers confront the ESG trade-offs that are appearing in sharp relief against activists' concerns. Take palm oil, roundly condemned for causing deforestation and animal habitat destruction, but is an efficient cash crop that feeds millions of households. The alternatives, such as soy or corn, may require at least three times more land, Mr Charles says.

To address the undesirable outcomes, banks are issuing sustainability-linked club loans to agribusiness groups Wilmar International and Olam International, that offer a progressively lowered interest rate if the companies meet ESG standards. Herry Cho, head of sustainable finance, Asia Pacific, ING, says such loans can be applied to various sectors, and are aimed at energy transitions and ESG improvements.

Or take ideas to redesign existing coal-fired plants that are less efficient, and therefore more pollutive. Yet, as coal power plants are designed for the coal that is fed into them, upgrading these plants may require too much capital, and even then, such efforts may not lead to optimal use, says Mr Charles. And so banks declare limits in carbon emissions that they will tolerate from coal-related projects, with the most of the standards lower for projects in developing markets.

NGOs watch carefully how financiers play out their responsibilities in managing ESG risks. The flooding caused by the collapse of the hydroelectric dam in Laos this July will renew questions about how ESG considerations were taken by the banks, including several Thai lenders, that had financed the project.

Singapore banks have also come under more pressure to justify their coal lending policies in the region. DBS, OCBC and UOB have said publicly that they will stop the financing of new coal-fired power plants in this region that are inefficient. These plants are typically ranked subcritical, and have a carbon emissions intensity of more than 850 grams of carbon emissions for each kilowatt hour (850g CO2/kWh) of electricity generated. By comparison, supercritical coal-fired plants have a typical emissions intensity of 750g-850g CO2/kWh, while ultra-supercritical coal plants have a typical emissions intensity of under 750g CO2/kWh.

Yet, in the same breath, the banks here have signalled that energy transition in Asean will not happen overnight, and that coal demands will continue, with the International Energy Agency saying that coal will by 2040 still account for 40 per cent of the energy mix.

Smoke gets in your eyes

There is meanwhile cautious promise behind the use of renewable energy, and banks - including those in Singapore - are watching this space. International banks, in particular, have made public commitments to invest or fund billions in such projects. With better technology, costs of renewable energy such as solar have indeed fallen dramatically. Estimates by the International Renewable Energy Agency (IRENA) notes that the average cost of utility-scale solar photovoltaic (PV) cells has plunged by 73 per cent since 2010, and by 23 per cent for wind-generated energy.

But what continues to dog the bankability of renewable energy projects in Asian markets such as China, the Philippines, and Vietnam, is that the cost of production is still higher than the grid price, leading to a significant dependence on subsidies, says Surya Bagchi, global head, project and export finance, StanChart.

"This will change in the long term, as it has in India where intense competition for government auctions has driven down tariffs. (But) till that happens, the main bankability issue will remain."

Cashflow is another concern. A 2012 study by the National Renewable Energy Laboratory, the national laboratory of the US Department of Energy, also noted that a higher degradation rate of a solar PV module translates directly into less power produced and, therefore, reduces future cash flows. Banks rely on calculating expected cashflows against projects.

In another example, battery-storage technology has been described by bankers as a "Holy Grail" development, which could raise the overall efficiency of solar energy. IRENA estimated that the cost will fall by as much as 60 per cent in the coming decade. Yet, it remains unclear how far battery storage can be sustained, as the impact of degradation of the battery cells over the next five years is being watched.

For StanChart's Mr Charles, the conundrum is no small one. "We all accept it's the right thing to do. But would you put your money on it?" Notably with coal-fired plants, government are still hedging with coal because they've got domestic coal supply, he adds. "How do you finance something for about 20 years, when you have no proof that it can last about 20 years? The plants will last - it's a sure thing in the governments' master plan, and the master plan is for 50 years," he says.

"With battery storage, there's been a lot of advancement in the technology, but as a commercial option, it's still got some way to go."

To make more green projects bankable, liquidity must improve, says Climate Bonds' CEO Mr Kidney. Making the point at a discussion organised by the Asia Securities Industry & Financial Markets Association earlier this year, he points out that green bonds make up about 5 per cent of financing today. Green projects need to be re-packaged as securitised assets for sale, and the business models of development banks need to be reviewed, he notes. "There are many things we can do around the fundamental agenda, which is to get rich countries to bring down the cost of capital for poor countries, crudely speaking."

To be sure, investments and innovations in sustainability are flowing through. On the pure financing front, ING's Ms Cho says that in the past two years, the bank has seen a number of green hybrid bonds with a perpetual maturity in Europe, providing a longer tenor for such long-term projects.

On the national level, Taiwan is now an emerging offshore wind market in Asia, with the government planning to invest US$23 billion in both onshore and offshore wind projects by 2025. India plans to install 175 gigawatts (GW) of renewable power by 2030, which includes 100 GW of solar photovoltaic power, the UN report said.

Among corporates, Sembcorp Industries also appears to be in the thick of the renewable-energy action. It is among the top renewable energy players in India, with some 1,200 megawatts of wind and solar power capacity in operation and under development.

Its investments have gathered pace this year. It recently scored a 50-megawatt solar project from HDB and EDB in Singapore. In May, it bought UK Power Reserve, the UK's largest flexible distributed energy generator, for about S$385 million, tapping into battery technology that specifically addresses the intermittency of renewables and the supply gaps that creates for national grids. A few months later, Sembcorp also invested A$5 million (S$5 million) for an estimated 77 per cent stake in Australia's Vellocet Clean Energy, which targets the market for corporate power purchase agreements through the use of solar microgrids.

Startups here are getting in on the action too, with SolarHome offering households in Myanmar small-scale electricity generators powered by solar energy through a pay-as-you-go model. SolarHome, launched in late 2016, does business by renting out "electricification-in-a-box". The basic units hold a small solar panel with a battery that soaks up enough sunlight to power a single household's electricity needs - including phone charging - for about six hours every night.

What has led to a tide of scrutiny on banks and corporates in their energy investments is the rising demand from private investors for ESG risks to be considered before money is put on the table.

As HSBC's managing director of project and export finance and capital financing Jonathan Drew says, corporates selling green bonds are mainly signalling to the market that they are gearing up for change.

"Green labelling is about the use of proceeds," Mr Drew tells BT. "What issuers are actually doing is telling a story about the investments they are making, that they are thinking long-term and positioning for this huge transition from high-carbon to low-carbon."

This also means being transparent about the way the funds are being used to further green good, and not as a means of greenwashing. Money raised for a windfarm should not go towards digging for oil. There are examples: in 2014, green bonds raised by French energy firm Engie was criticised for being used to fund a hydropower dam that hurt parts of the Amazon forest.

StanChart's Mr Bagchi adds: "As the market develops to include private sector issuers, there is need for uniform market standards, certification processes and external monitoring to ensure that green bonds are indeed used for the purpose intended. As the market matures, a strong governance framework is also emerging along these lines."

Bankers will make clear that right now, there is no outright pricing benefit to issuing green bonds, with the yields at the same point as that for comparative corporate bonds. There are for now signals that green bonds tend to be bought by buy-and-hold investors, and thus, are slightly more sticky, Mr Drew says.

In time, it is hoped that the issuers who are shown to be dealing with sustainability risks can boast of lower costs to capital, for the reason that green issuers are less likely to get hit with fines for ESG failures, and are less likely to have stranded assets rendered irrelevant in the low-carbon economy, he adds.

At this point, all these investments and innovations are smaller compared to the trillion-dollar industry that is the fossil fuel sector. The UN report further noted that the implicit global subsidy for coal alone stands at about US$3 trillion, reflecting the current lack of accounting for climate impact and tax breaks behind current carbon emissions.

The greater push for carbon taxes may change the game in the years to come, says StanChart's Mr Charles. Indeed, the repricing of these negative externalities may lead to coal-fire plants being stranded as they become more costly to operate. But carbon taxes will need to feed into political sensitivity, the UN has noted, as the negative impacts of a coal phase-out on poor and middle-class energy users, notably through increased electricity prices, can also challenge the political feasibility of reforms.

These complexities suggest that for a clean new world to come to pass, governments, businesses and individuals need to first confront the dark spots in the dirty old world - of gaps in income, technology, and financing - to make the future of sustainable investing, sustainable.