THE CLIMATE change conference in Paris will be a defining event for the world’s markets, writes Shaun Kingsbury
For the first time ever, the outcome of the UN conference on climate change, currently convened in Paris, is likely to be a defining event for global financial markets.
More than 150 countries have already agreed their paths to a low-carbon future, marrying the intent to act on climate change with detailed plans for how it will be done.
Fortunately, other circumstances are combining to help deliver that change quickly. The renewable technologies underpinning green infrastructure projects are increasing in efficiency and falling in cost. Financial markets are also waking up to the opportunities of a new investment class, while better understanding the risks associated with fossil fuels.
Globally, renewables already account for more investment in electricity generation capacity than fossil fuels, and overall renewables investment has grown from £84 billion in 2006 to £188bn last year, with many green energy technologies now competing with fossil fuels on price.Then there is the quiet progress which may prove the most effective of all – reduced carbon intensity through improving energy efficiency.
Just as we are reaching agreement on a global network of action plans, we have a series of low-carbon technologies that are up to the delivery challenge.The question is now this: how do we finance the $90 trillion of investment in the infrastructure required over the next 15 years? And how do we ensure it is low carbon?
Prime Minister David Cameron has spoken about “the market getting to work on climate change”. The market may not be perfect but time and again it has proved the most effective route to transformational economic and social change. Regardless, governments simply cannot afford to finance all the actions needed. The Chancellor spoke recently about the link between infrastructure and productivity and the need to find new ways to fund British regional infrastructure, placing a specific focus on pension funds.
Mark Carney, governor of the Bank of England, recently told insurance firms that “financing the decarbonisation of our economy is a major opportunity for insurers as long-term investors”.
But to work, the market needs investible opportunities, and experts ready and willing to build products to suit investors’ needs.
Pension funds and life assurance funds are vital pieces of the jigsaw. They demand precisely the kind of long-dated, predictable returns offered by infrastructure projects, and yet the relationship is weak. Listed equity and debt have been the focus of institutional investors for decades and, while some parts of the infrastructure market are well understood and well served, the area of low-carbon investment is not.
There remains a market failure: knowledge and experience. This is typical in new, fast-growing markets trading on what are – to many investors – novel technologies. It remains a niche field, with investors tending to have a narrow focus on specific technologies or financing solutions.
Very few investors working in green infrastructure have the flexibility to structure a financial package around the needs of a project developer. Which is where we come in.
The UK Green Investment Bank (GIB) was created three years ago to be a new centre of expertise in this nascent market. Since then, we have mobilised more than £10bn of investment in UK green infrastructure.
We played a leading role in the creation of the first listed renewable energy yield co. This new asset class has raised £2.4bn in Europe and $8.3bn in the US. We also raised the UK’s largest renewable investment fund, giving pension funds, insurance firms and sovereign wealth funds access to the predictable yields they crave. The UK government plans to sell a majority of its shares in GIB, which will give us the capital we need to grow our business both in scale and by widening the range of green infrastructure we can finance. It will also provide the ultimate demonstration of the commercial opportunity in financing the transition to low-carbon infrastructure.
GIB is one of the market experts needed to bridge the gap between investible green infrastructure projects and the deep pools of institutional capital required to finance them. This is the market getting to work on climate change, and we must harness its transformative potential to deliver solutions that carry us beyond what gets agreed between governments in Paris.
• Shaun Kingsbury, chief executive of the UK Green Investment Bank