How Сan the Financial Sector Accelerate the Switch to Renewable Energy?

Renewable energy has made significant strides in the past decade, with companies increasingly integrating it into their energy mix to showcase their commitment to sustainability, according to an article by Alex Clere for Fintech Magazine. However, the renewable sector still faces challenges that hinder its widespread adoption. In an interview with Mike Penrose, Co-Founder and Partner at FuturePlus, he explains that emerging technologies often experience slow growth initially but become more affordable as they scale, leading to broader adoption.

One of the challenges of renewable energy is its intermittency compared to conventional energy sources. Kevin Chin, Founder and CEO of investment group Arowana, highlights that wind and solar power generation is affected by factors like weather conditions. Additionally, heavy industrial applications such as steelmaking and cement production require high-temperature heat, which is difficult to generate solely with renewables. Another obstacle is the initial investment costs involved in building dedicated renewable infrastructure, including power generation and energy storage systems.

The adoption of renewables varies across different economic conditions, especially in emerging markets. Marc Deschamps, Chairman for Climate at boutique investment bank DAI Magister, emphasizes the need for international organizations and governments to invest in reducing the risk associated with investing in emerging markets. This would provide security for private sector firms interested in renewable technology, aligning the risk and returns with those of developed markets.

Energy security has also garnered renewed attention, particularly in European countries grappling with energy insecurity resulting from conflicts such as the war in Ukraine. The German government, for example, has taken steps to diversify its energy mix, with a focus on local production, including renewables. While the transition to green energy is vital in the long run, Mike Penrose warns of the short-term social consequences of rising fossil fuel prices and the costs associated with reducing dependency on them. He emphasizes the need for a balance between energy transition goals and the welfare of global citizens, urging investors and financial institutions to prioritize an affordable and sustainable journey towards net-zero.

Financed emissions, or Scope-3 emissions, significantly contribute to a bank or financial institution’s carbon footprint. Many financial entities already consider sustainability criteria before providing financing, as evident from major banks no longer supporting coal-based power plants. Penrose suggests that businesses demonstrating a strong commitment to sustainability through verified third-party assessments can negotiate reduced fees on loans. He believes that increasing pressure from private equity firms and pension funds will prompt broader adoption of sustainable financing practices by banks and lenders.

The article also offers tips for smaller companies to make a positive impact, including conserving energy, exploring renewable opportunities with landlords, and choosing energy suppliers with higher percentages of renewable power generation.

The question of whether renewable energy should be a source of philanthropy is debated. Penrose suggests that banks and financial institutions should offer more favorable loan terms and equity products to renewable projects but stops short of considering the sector purely philanthropic. Deschamps argues that financing for renewable energy should generate higher profitability to attract lenders, emphasizing the profitability of climate-positive lending and the need for expertise in assessing risk in smaller-scale projects.

As the world strives for a transition to renewable energy, finance plays a crucial role in accelerating this shift. By addressing challenges, providing favorable financing terms, and prioritizing sustainability, financial institutions can support the growth and adoption of renewable energy, contributing to a more sustainable and greener future.