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Topic: Banks

[Episode #190] – Financing Utility Scale RE in Developing Countries

Multilateral development banks (MDBs) like the World Bank are increasingly under pressure to invest more in renewable energy projects in emerging markets. The lack of financing for such projects is a problem at the small, distributed scale as we discussed in Episode #189, and it’s also a problem for utility-scale projects as we discuss in this episode.

In this conversation, Brad Handler, a Program Manager and Researcher at the Sustainable Finance Lab of the Payne Institute at the Colorado School of Mines who tracks various such projects and initiatives, walks us through some recent Energy Transition Mechanisms (or ETMs) and Just Energy Transition (or JET) refinancing projects that aim to close coal plants in the developing world long before the end of their expected lifespans, and replace their generation with renewable power. A former Wall Street Equity Research Analyst with 20 years of experience covering the oil sector, Brad has a deep understanding of how finance in the traditional energy sector works, giving him an excellent perspective on how energy transition financing could work. He does a wonderful job of explaining the oftentimes opaque and complex world of sustainable finance so that it’s comprehensible.

Closing coal plants remains the number-one priority globally for reducing carbon emissions. So although these are still very early days for refinancing projects, it’s worthwhile to examine how and where development banks are finally taking some real steps to accelerate the energy transition in emerging economies, derisking the sector and motivating much more conventional private sector capital to participate.

Geek rating: 5


[Episode #189] – Financing the Transition

According to the International Energy Agency (IEA), almost all of the growth in global clean energy spending is happening in advanced economies and China, while the two-thirds of the global population that live in emerging market and developing economies are receiving less than one-fifth of the total. The reason? The high cost of capital.

But why is the cost of capital so much higher in emerging economies than in advanced economies? Why is it still so much harder and more expensive to finance clean energy projects than it is to finance fossil fuel projects in those countries? And what can be done about it?

In this episode, we speak with a solar project developer working in Costa Rica to try to answer these questions. Building on our previous discussion from Episode #21, we try to explain why so little progress has been made, especially by the multilateral development banks (like the World Bank), in reducing the cost of financing for renewable energy projects in emerging economies. We review the different roles that various financial institutions play in financing the energy transition, and we ask what needs to change to unlock the flow of capital into energy transition solutions (especially distributed solar). We also put the risk and reward of investing in those projects in a fresh context, and call upon banks of all kinds to start acting in more creative and ambitious ways to take bolder action and get capital deployed where it is most needed, and where it can do the most good.

Geek rating: 6


[Episode #135] – Internalizing Climate Risk

Climate change poses a host of risks to the global economy. From ‘natural’ disasters causing property damage, to climate mitigation measures rendering fossil fuel assets unburnable, to potential impacts of climate change on agricultural production, energy, food, insurance, real estate, and other sectors, it’s clear that private sector companies and all kinds of investments stand to suffer significant losses as a consequence of climate change.

Yet few regulations exist to require these risks to be recognized on balance sheets, or disclosed to investors, unlike many other everyday risks that are subject to such disclosure and protection. A home built in a floodplain and destroyed in a flood, or at a wildland interface and destroyed by a wildfire, has not seen its cost of insurance go up to reflect the rising risk of another loss due to climate change. Pension funds have not been required to evaluate the risk of their investments in oil, gas, and coal companies losing value due to future restrictions on carbon emissions. And entities like the U.S. Federal Reserve have been free to continue lending to fossil fuel producers even as they warn about the damage that climate change is doing to the global economy.

Clearly, it is long past time to recognize the risk of climate change across all sectors of the economy. We must begin implementing ways of measuring those risks, testing portfolios for their risk tolerance, divesting public money from the fossil fuel sector, and start implementing economy-wide ways of pricing carbon emissions.

To that end, in 2019 the U. S. Commodity Futures Trading Commission (CFTC) formed the Climate-Related Market Risk Subcommittee, and tasked it with producing a report to consider what climate-related risks might be; examine whether adequate information about climate risks is available; identify any impediments to evaluating and managing climate-related financial and market risks; ask whether the market can do a better job of integrating climate-related scenarios and use them to stress-test investments; incorporate disclosures of climate risk into financial and market risk assessments and reporting; identify how risks can be managed and disclosed in order to protect the stability of the financial system; and ensure that information about climate-related financial and market risks are internalized into the market.

On September 9, 2020, that report was released. In this episode, we speak with the chairman of the subcommittee, Bob Litterman, founding partner and Risk Committee Chairman of Kepos Capital. Bob has had a decades-long career in risk management, and has been a champion of recognizing and integrating climate risk for many years. We’ll ask him about what the report says, why it’s important, and how its findings might be used to integrate awareness of climate risk into financial metrics and enterprise governance.

Geek rating: 6