Bonds: Renewable energy sector performing well despite setbacks

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 11, 2018 - June 17, 2018.
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The green bond segment is expected to continue seeing growth this year despite the challenges faced in the first quarter. Sean Kidney, CEO and co-founder of the Climate Bond Initiative (CBI), says it has been a bumpy year so far due to a slowdown in issuances in countries such as China.

CBI is projecting a total of US$250 billion to be raised via green bonds this year, but only US$51.1 billion had been raised as at the end of last month. “I am getting a bit nervous for this year. Growth may only get to 50% [of the targeted amount] rather than the 60% to 80% we expected,” says Kidney.

“However, there is growing regulatory and investor expectation on the banking sector and the largest global [carbon dioxide] emitters to disclose their climate risks and hence reflect the ‘brown to green’ transition in their balance sheets. This means over time, there will be more capital flows towards green finance as these parties respond.”

One of the key reasons for the slowdown is China. He says the country is focusing on its deleveraging efforts to reduce the high debt levels of Chinese banks. So, it seems that it is not focusing as much on green bonds this year.

“In fact, there has been no issuance from China so far. But we expect it to pick up again as the country’s deleveraging winds down,” says Kidney, who heads the international organisation that promotes investment in green projects.

He adds that the Japanese market saw a pick-up in green bond issuances last year. However, it is less active this year.

However, Kidney remains positive that CBI’s target of US$250 billion can be achieved. “The first half of the year is usually slower. The trend is that things tend to pick up very fast in the second half. We are also trying very hard to push for it,” he says.

From a US point of view, there have been setbacks in the development of renewable energy. There have been market concerns that US President Donald Trump, who is seen as less environmentally friendly than his predecessor Barack Obama, would hinder the progress of green financing and renewable energy going forward.

According to The Washington Post, the Trump administration is seeking to slash funding for the Department of Energy’s Office of Energy Efficiency and Renewable Energy by 72% in the 2019 budget. This is also the second straight year that Trump has targeted a cut in clean energy spending, despite being rejected by Congress.

Trump has also rolled back several environmental policies, such as ending the National Aeronautics and Space Administration’s carbon monitoring system, which is used to monitor global carbon emissions.

Kidney, however, does not think Trump’s actions will have a significant impact on the global renewable energy sector. Even in the US, several states have continued to pump in more efforts in their cities to prepare for the future.

“California and New York are two good examples. Despite what Trump intends to do, both states are way ahead of their renewable energy targets. They have even bumped them up recently to prepare their cities for the future. Clean energy is popular and getting cheaper in much of the US. The market is ahead of the politics,” says Kidney.

“The green financing and renewable energy sector will grow going forward. It is just a matter of how fast.”

Crude oil prices could go below US$50 per barrel again by 2025 as the trend of green financing and renewable energy continues to grow, he says. “I am not giving any financial advice. But from an individual investor point of view, I would probably want to hedge my positions in renewable energy if I have invested heavily in oil and gas companies.”

As the trend of renewable energy continues to spread across the world, oil prices will fall again like how diesel prices have dropped in China in recent years. “We have already seen diesel prices drop in China as so many electrical buses have been brought in [to tackle its pollution and climate problems],” says Kidney.

 

Healthy growth so far

The green bond market has seen continuous growth for the past few years. Kidney says the total amount of capital raised by governments and corporates via these bonds had increased rapidly from 2013 to 2017. These green bonds have mostly funded energy projects such as solar parks and hydropower plants.

“The amount raised last year was about 80% higher than the previous year. And it has grown tremendously since 2013,” he says.

According to CBI’s official website, the amount of funds raised via green bonds last year totalled US$160.2 billion. “The total green bond issuance last year was 1.5% of the total global bond issuance. There is still a lot of room for growth,” says Kidney.

“With our projections [based on the implementation of the Paris Agreement], we expect that there will be no more new fossil fuel energy plants built by 2030.”

China, the second largest economy in the world, has been instrumental in propelling the renewable energy sector forward. The country was one of the largest green bond issuers last year, says Kidney.

It is also the world’s largest producer of solar energy. Chinese automakers, such as BYD Auto, are also investing heavily in electric vehicles.

“With China moving so aggresively on the development of electronic vehicles, we expect the uptake of both passenger and freight electronic vehicles in 2020 to be way advanced against most forecasts. All these initiatives have driven down the manufacturing cost of solar panels and electric vehicles, which will hasten the renewable energy trend already happening now,” he says.

Kidney, who is on the European Union High-Level Expert Group on Sustainable Finance, says emerging markets such as India are also building more renewable energy infrastructure such as hydropower plants, which are said to be cheaper than those running on fossil fuels, such as petroleum, natural gas or coal, to generate power.  

“In fact, renewable energy companies in India are more profitable than fossil fuel ones. And some parties in the country are suggesting that the government tax renewable energy companies to fund fossil fuel ones as the latter are losing money,” he says.

“Most recently, we have seen countries such as Indonesia, Pakistan and Nigeria issue green bonds to fund green projects in their respective countries.”