Growing interest in renewables is rapidly changing how energy projects are financed in America and around the world.
One of the biggest shifts has been an influx in outside money into the industry in the form of “green financing” — bonds, loans and other assets earmarked for renewable energy projects around the world.
The rise of the green financing market shows how investors are starting to take renewables more seriously — and it could signal a major transformation of the renewable energy market over the next few years.
Green Financing May Accelerate Renewable Energy Projects
Green financing is a catch-all term for investment in financial vehicles related to renewables and other green industries. Assets, bonds and funds related to renewable energy and other green investments make up the green financing market. In recent years, a robust green financing market has become widely viewed as essential to accelerating the development of new renewable energy technology projects.
Green finance is growing fast. In 2012, the sustainable debt market — including “green” and sustainable bonds and loans — was worth only around $10 billion, according to data from BloombergNEF. In 2018, just six years later, the market was worth nearly $250 billion.
Most of these gains came in the form of new green bonds (sometimes also called “climate bonds”), which are fixed-income investments designed to raise money for new renewable energy projects.
The growth of green financing represents a slow but noticeable divestment away from fossil fuels.
The pivot may also represent a change in how businesses are structured. The growing popularity of bonds as an investment vehicle may enable community co-ops rather than corporations to become a more viable business model for renewable energy providers. For example, the Westmill Solar Cooperative in the United Kingdom has raised more than £6 million ($7.94 million) through bonds offered to investors.
While coil, oil and natural gas are likely to remain a good investment in the short-term, the strength of the green financing market does seem like a signal that, over the next 10 to 20 years, non-renewables will become less and less tempting for investors compared to renewable and sustainable investments.
How Green Financing May Change Energy Around the World?
As the green finance market grows, regulators are beginning to codify what counts as a green investment.
In the EU, for example, regulators recently debated whether plastics manufactured from entirely recycled materials could count as a “sustainable” investment under European finance laws.
These new definitions and regulations may determine which industries receive major funding and which are left out of the green financing boom.
Nuclear energy, for example, is generally not regarded as renewable energy, but is sometimes considered sustainable. Nuclear power plants generate waste, but they also produce zero emissions, unlike fossil fuel-fired power plants.
Natural gas is also not considered renewable or sustainable, as it is a fossil fuel and produces significant carbon emissions when burned for power. However, some proponents of the energy source argue that it should be considered sustainable, as it produces significantly less carbon dioxide than similar fossil fuels.
In 2019, EU regulators reached a deadlock over whether or not nuclear and natural gas power plants should count as sustainable investments. In a final compromise, EU lawmakers ruled that both nuclear and natural gas projects were neither included nor excluded in the definition of sustainable by default. Instead, projects would need to prove that they “do no harm” on a case-by-case basis.
Similar rulings and legal challenges could shape the future of energy as governments around the world grapple with the challenge of shifting away from fossil fuels.
A Coming Sustainable Energy Revolution
The rise of the green finance market may change what alternative energy looks like around the world. Legal debates over what should count as “renewable” or “sustainable” may affect which projects receive funding, while bonds and loans may make community cooperatives that provide renewable energy more practical.
As fossil fuels become less attractive to investors and the renewable energy market grows, green financing is likely to have major impacts on the future of renewables.