Improved financing terms could save US$50trn as the world decarbonises, according to Deloitte research.
Green projects in Ireland and throughout the world currently suffer underinvestment and higher required return rates because of a perception that green technologies are higher risk, said Stephen Prendiville, Deloitte Ireland Partner and Sustainable Infrastructure Lead who was attending COP28 in Dubai this week.
Prendiville said that improving financing structures and implementation could help drive down the cost of transition to net-zero in 2050 by 25% or US$50 trillion (trn).
“Beyond typical renewables such as wind and solar, a lot of the technologies and techniques underpinning necessary sustainable developments are new and emerging, and as such they are perceived by investors as higher risk”
Prendiville said that Ireland is leading the way in many areas on the climate initiative front, through a solid legislative foundation in the Climate Action and Low Carbon Development Act 2021, carbon budgets, and annual climate action plans, but that “we still need a step change in ambition:”
“Our global analysis shows that much more is necessary to accelerate and guide finance flows to the sustainable infrastructure we need,” Prendiville explained.
“Whether it is biomethane production and distribution, sustainable aviation fuels, green hydrogen, deep retrofit programmes, heavy vehicle refuelling and charging infrastructure or others, governments must support private enterprise to access competitive finance terms. This can be achieved through a strong and clear policy and regulatory position, public private partnerships for pilot and ‘first of scale’ undertakings, or first loss lending.”
Savings on sustainable projects
The analysis published by Deloitte last week outlines the potential cost saving of up to 25% for sustainable projects if they had access to what is termed ‘concessional finance’.” This is a loan made on more favourable terms than the borrower could obtain in the market, and comprises a range of below market rate products used to accelerate a climate or development objective.
Prendiville concluded: “Beyond typical renewables such as wind and solar, a lot of the technologies and techniques underpinning necessary sustainable developments are new and emerging, and as such they are perceived by investors as higher risk. Many projects are currently pre-FEED (front end engineering and design), requiring significant resources and capital to get them to final investment decision and then into construction and operation.
“The Deloitte report outlines practical steps that can be taken to reduce the risks, increase supply and ultimately make climate targets more achievable. I know from the initial conversations I have had here in Dubai and over the past weeks, that there is considerable interest in the report and the practical proposals it puts forward.”
Financing the Green Energy Transition
The Financing the Green Energy Transition report was published last week (28 November 2023) in New York. The report goes beyond finance to provide a holistic overview, employing analysis and modelling to consider the technology landscape, policy environment, and a matrixed vision of financing challenges.
“Just as we are continually developing solutions and technology to rapidly decarbonise, we must take definitive steps to remove financial barriers in order to accelerate a just energy transition, especially in developing economies,” said Jennifer Steinmann, Deloitte Global Sustainability and Climate practice leader.
“Decisive and coordinated policy support and hand-in-hand action across the global finance ecosystem are critical to guiding investments toward green projects and supporting the growth of sustainable economies.”
Failure to close the financing gap could be costly for the world economy – especially the Global South – and make the transition to net-zero inefficient.
To win the race to net-zero, the world must invest wisely and identify areas for cost reduction. For instance, less than half of green investments are currently made in developing economies mostly due to greater risks and stricter public budget constraints for energy transition projects. However, to reach net-zero, nearly three quarters of green investments (70%) would need to be made in developing economies by 2030 as these nations look to new, sustainable infrastructures and technologies.
“To further lighten the financial burden on the Global South, governments, financial institutions and international organisations must implement concessional finance – a loan made on more favourable terms than the borrower could obtain in the market – through innovative financing structures that mobilise private capital for climate action,” added Hans-Juergen Walter, Global Financial Services Industry Sustainability and Climate leader.
“Major financial institutions, such as development banks and multilateral funds, play a pivotal role in this context.”
While the cost to facilitate the transition appears steep, it is far preferable to the alternative. Deloitte’s 2022 Global Turning Point Report found the current policy pathway, coinciding with an increase of 3°C in global warming above preindustrial levels, could result in the loss of US$178trn worldwide by 2070 (almost 8% of global GDP).
By contrast, the global economy could gain US$43trn over the next five decades by rapidly accelerating the transition to net-zero through greater investment in clean energy systems and coordinated policymaking, Deloitte says.