Industries in Transition - Magazine edition 4: Strategies in sustainable finance
A collection of key insights and trends in sustainable finance across a broad range of industries and topics from subject matter experts.
Industries in Transition
Magazine edition 4: Strategies in sustainable finance
A pivotal time for the financial sector in the transition to net zero
As the effects of climate change are growing ever more threatening, they are also challenging us to innovate, unlock new routes to net zero and foster the acceleration of sustainable development; all of which creates a significant opportunity for the financial sector to respond.
Mobilising capital at scale is one of the key ways our industry can help manage climate risk. Achieving this at pace is vitally important, not only to aid the transition to net zero of traditional industry, but also to support disruptive innovation and build adaptive resilient infrastructure.
In so many ways, the financial sector is experiencing the early insight into the growing risk, as we calculate and seek to quantify the impact our changing climate is likely to have on our investment portfolios, on our lending exposures and even on our physical assets.
At the same time, these challenges create tremendous opportunities for us to partner with our clients in lock step as we both seek to find the most efficient pathways to transition towards net zero without materially impeding economic development and stability1.
Both the challenge and the opportunity are particularly acute for us, as our footprint covers many of the areas most physically vulnerable to climate change2 and where livelihoods are dependent upon industry sectors that are severely under threat. This is why it is such an important moment for me to join the bank as Chief Sustainability Officer.
I believe there is a real chance to make a meaningful societal difference with the exceptional foundation and extraordinary commitment from the most senior levels of the organisation to drive positive impact.
Working together for change
Given the bank’s extensive roots in the developing markets and long history supporting governments and the private sector in the shared quest for economic prosperity, we are uniquely positioned to play a leading role in working across traditional lines to tackle the climate challenge while ensuring we focus on a just transition.
By drawing on our deep expertise in collaborating with policy-makers, regulators, civil society organisations and other stakeholders, we can support global partnerships that prioritise problem solving and are solutions focused.
Providing capacity building, engaging in whole-systems thinking, sharing best practice, encouraging more robust disclosure, fostering transparent liquid carbon markets, supporting blended finance structures and driving toward improved climate-risk management are all parts of the equation that can attract investment capital to finance the transition and adaptation that is so needed in our markets.
Coming together with a broad group of stakeholders is something we are striving to do more of.
And our efforts are set against the backdrop of our own wider commitment to sustainability3 – public net-zero targets, leadership in voluntary carbon markets and support for innovation in green finance.
The track record of human capacity to meet great challenge coupled with the power of market forces and efficiencies give us a reason to be optimistic. If we partner effectively to ensure we support the right enabling conditions, I am confident that we can harness the power of the financial sector to deliver the sustainable future we wish to see.
I look forward to partnering with you on our sustainability journey.
Welcome to edition 4 of the Industries in Transition e-magazine. We’ve curated a compilation of the most popular insights from the Industries in Transition series where we unearth fresh and interesting trends in the sustainable finance space. In these incisive pieces, we highlight business opportunities and demonstrate the active role that Standard Chartered is playing in supporting our clients on their net zero transition journey.
*Accelerating to net zero* Incentivising change with sustainability-linked loans
Incentivising change with sustainability-linked loans
Sustainability-linked loans are now the second-largest asset class within sustainable debt after green bonds. What’s driving their popularity?
As environmental and social concerns strengthen their grip on finance, companies around the world are gravitating toward sustainability-linked loans – a behaviour-based debt instrument that incentivises borrowers to make good on their ESG targets.
Sustainable debt annual insurance
Sustainability-linked loans (SLLs) have gained considerable interest from borrowers and investors since their 2017 market debut. Issuance grew 244% last year1, pushing the SLL market to USD747 billion and making it the second-largest asset class within sustainable debt after green bonds.
The rapid embrace of SLLs is due in large part to the additional flexibility they offer borrowers to allocate funds. Unlike many other forms of sustainable debt, borrowers are not restricted to invest in green or social projects only. In turn, SLLs appeal to a broader range of borrowers.
Overview of sustainable debt market
A single SLL deal structure can integrate several Sustainability Performance Targets. For instance, a borrower can set targets to reduce their greenhouse gas emissions by 4% per year over the duration of financing, improve its water efficiency by 5% and increase the number of women on its board. Every year, the company would need to show lenders how it performed against those targets.
If a borrower fails to meet their targets, it triggers a step-up in the interest rate. Meeting or exceeding those targets results in a step-down. This creates an effective reward-punishment mechanism, but only if the shift in interest repayment is substantial.
Reducing greenhouse gas emissions has proven the most popular Sustainability Performance Target for SLLs to date. In the first half of 2021, around USD96.5 billion worth of SLLs were tied to a borrower reducing emissions2. Renewable energy, waste and water were also common focus areas. Broadly, environmental concerns accounted for nearly USD140 billion of SLL volume in the first half of 2021, social accounted for USD44.3 billion and governance made up USD20.5 billion.
Given their broad appeal, the sectoral distribution of SLL borrowers is more evenly spread compared with green loans3, showcasing their potential to reach hard-to-abate sectors.
Real estate companies lead the SLL market with USD97 billion worth of issuance as of May 2022, followed by utilities with USD84 billion4. Yet other sectors including transportation and logistics, metals and mining, and chemicals are not far behind and account for a much greater share of total issuance than they do in the green loan market.
Ten largest sectors in sustainability-linked loan issuance
Beyond decarbonisation, versatility makes SLLs an ideal choice for borrowers who are keen to make a positive social impact. Such was the case with the West Kowloon Cultural District Authority (WKCDA) – the startup developing 40-hectares of cultural facilities in Hong Kong. As this project shifted from construction to operations, WKCDA needed a loan to meet its cashflow needs.
With guidance from Standard Chartered, WKCDA issued a HKD4 billion SLL. Under the arrangement, the WKCDA will receive a tiered discount rate on the interest margin throughout the loan tenure if it achieves pre-agreed Sustainability Performance Targets5. The targets include achieving green building certification, offering accessibility services to persons with disability and underprivileged groups, and providing arts and cultural learning programmes to the youth.
An investor’s perspective
Another deal structured by Standard Chartered shows the potential for SLLs to make a positive impact on a diverse group of portfolio companies. In October 2021, the bank helped Baring Private Equity Asia (BPEA) establish an SLL worth up to USD3.2 billion, where the margin is tied to both an incentive and penalty requiring the purchase of carbon credits6. The first of its kind for a private equity firm in the region, the SLL is subject to Sustainability Performance Targets around gender diversity and climate change that could reduce the interest rate of the loan if achieved.
On gender diversity, BPEA will require its portfolio companies to build a stronger and more supportive environment for female talent to thrive. To tackle climate change, they will need to improve greenhouse gas emissions reporting, set climate targets, and ultimately drive emissions reduction. And at the firm level, BPEA plans to create a long-term climate strategy to guide both its corporate activities and engagement with portfolio companies.
“One innovative thing we did with this loan is establish progressive Sustainability Performance Targets,” Tang adds. “On climate change, for instance, if a company has not reported its emissions yet and does so for the first time this year, that meets the target. Once they establish a baseline, they must work towards reducing emissions in subsequent years.”
While SLL issuance of USD94.4 billion for the first four months of 2022 pales compared with USD142.1 billion for the same period last year7, this flexible, innovative debt instrument appears on course to become a mainstay of sustainable finance.
Sustainability-linked loan issuance
As companies around the world strive to put ESG at the heart of their operations, SLLs may prove one of the best financial vehicles to drive changes that matter.
*Accelerating to net zero* Convergence and
the path to a
net zero future
Convergence and the path to a net zero future
Ample liquidity, decarbonisation strategies and new business models are driving industry convergence around clean power. How can we support this convergence to realise a net zero future?
A confluence of ample liquidity, attractive new revenue streams and decarbonisation strategies is accelerating cross-industry convergence around clean power – a trend that could prove vital in the global drive to net zero carbon emissions.
Once unthinkable partnerships are unlocking opportunities against that backdrop. Oil and gas companies are partnering with new energy companies on green hydrogen projects. Shipping companies are building wind turbine installation vessels to facilitate the offshore wind industry. And mining companies are investing in and even building renewable power generation.
The growing consensus that industries must eliminate their greenhouse gas emissions continues to spur new projects and possibilities. As the urgency to act grows, a broad range of investors continues to accelerate investment into cleantech.
Striving toward decarbonisation
At the heart of convergence lies an urgent need to decarbonise. The latest Intergovernmental Panel on Climate Change report indicates that global efforts to battle climate change fall short of what is needed1.
Today, the industrial sector accounts for over a quarter of global CO2 emissions2. The sector’s fossil-fuel-heavy energy mix has remained little changed over the past decade. And the process of extracting oil and gas from the ground and getting it to end users accounts for 15% of global energy-related greenhouse gas emissions3. In turn, industry players face increasing pressure from investors to change their ways.
Summary of how companies respond to investor pressure on sustainability
Other companies are changing from within. Oil giant Equinor – formerly Statoil – serves the point. It's building an 88MW floating wind farm called Hywind Tampen in the Norwegian North Sea that will be both the world’s largest and the first to power offshore oil and gas platforms. The project promises to offset an estimated 200,000 tonnes of CO2 emissions per year4, benefitting Equinor and a group of oil and gas partners including OMV Norge, Petoro, Idemitsu Petroleum Norge, DEA Norge and Var Energi5.
The recent commodity price boom provides another accelerant. Oil, copper, aluminium, natural gas and several other commodities soared last year as major economies reopened amid fading concerns about Covid-19, heightened geopolitical tensions and the ongoing war in Ukraine. That left many industry players with excess capital to redirect toward the energy transition.
Oil and gas companies stand out. According to a recent report, BloombergNEF expects them to bid in all subsidy and seabed lease auctions that take place throughout 2022 and to engage in more joint venture and acquisition activity in the offshore wind market. The report adds that deep pockets could see them come out on top in auctions where project sites are large and commitments to upgrading supply chains are highly valued6.
New revenue streams and unlocking value
Awash with capital and committed to decarbonisation, companies in sunset industries are pivoting their business models to attract resources and create new revenue streams while reducing emissions.
French oil giant TotalEnergies is doing exactly that. It aims to install 100GW of wind and solar power generation capacity by 2030 as part of its plan to become one of the top five players in renewables7. Recent investments, including a $60 billion plan to produce biofuel and biogas in Nigeria along with the installation of electric vehicle charging stations, reflect the company’s ambitions8.
Business model transition options for a selection of climate action 100 industries
Oil and gas companies are not alone. Last year, shipping giant Maersk invested in Prometheus Fuels, a start-up with direct air capture technology to enable cheaper, carbon-neutral fuels9. United and Honeywell invested millions in Alder Fuels – a company that produces sustainable aviation fuel using biowaste10. And a syndicate of banks including Standard Chartered executed a green trade facility for Polestar, helping the electric vehicle maker mitigate its environmental impact from vehicle concept all the way through production11.
*Accelerating to net zero* Innovation in green finance
Innovation in green finance
Channelling sustainable finance where it’s needed most will maximise real-world impact.
Climate change is a global challenge. Either we all transition to net zero or none of us will. Yet Standard Chartered research shows that emerging markets currently have a USD94.8 trillion financing gap1. If these countries are left to finance this shortfall themselves, it will leave emerging market households around USD2 trillion poorer each year between now and 2060.
Sustainable finance can play an essential role in supporting a just and inclusive transition. To do so, innovation is sorely needed. Sustainable finance needs to democratise its access and impact, standardise to raise quality and catalyse much more capital. A record USD1.6 trillion in sustainable debt instruments were issued in 20212 and momentum remained strong in 2022 until the recent market turbulence. Most of this finance, however, is raised in developed countries by established companies with access. Emerging markets in Africa and Asia that are among the most vulnerable to climate change face large funding shortfalls.
“Where” matters at least as much as “how much”. As Standard Chartered has shown, financing a solar project in India can help avoid more than seven times the CO2 emissions than a similar-sized project in France because of the current sources of power on those countries’ grids. As the world strives to achieve the UN’s Sustainable Development Goals (SDGs) by 2030, the financial sector needs to put a premium on driving finance to where it matters most, not where it is easiest.
A lack of harmonised sustainable finance rules is a significant obstacle to international capital rapidly scaling up renewables and other climate solutions, particularly in developing countries. A lack of common standards also increases the risk of green- and SDG-washing.
It can take decades to negotiate global standards, as we have seen with international tax harmonisation. In their absence, policymakers must focus on the interoperability – the ability to operate together – of different regulatory frameworks. Green and transition taxonomies are primary candidates for the development of global principles. Interoperability could support standardisation by defining key common metrics and allowing for regional and temporal variation within threshold levels.
The development of common standards and definitions will stimulate market growth by promoting transparency and building confidence in sustainable finance. Democratising the market will ensure that capital flows to the countries most at risk from climate change.
Catalysing sustainable finance
Mobilising the trillions of dollars needed each year to address global warming and other climate challenges will require greater innovation to link investors’ interests directly with real-world impact. New products are needed to catalyse financing from the widest possible range of investors.
Standard Chartered last year launched 16 new sustainable finance products such as sustainable trade finance and repurchase agreements linked to environmental, social and governance criteria. The Bank also launched green mortgages, green auto loans and sustainable deposits as part of its commitment to democratise sustainable finance for retail customers. Standard Chartered is committed to expanding the scale and reach of sustainable finance, with plans to mobilise USD300 billion in green and transition finance by the end of this decade.
Yet, while momentum is building in sustainable finance, the hardest work is still to be done. We have a deep market to source financing for renewable energy and other green projects in developed markets, but we now need to tackle the carbon-intensive, hard-to-abate industries that are embedded within the global economy.
We need the momentum behind green bonds to turn into a rainbow of success. In addition to green bonds that support environmental projects, we need more orange bonds that unlock private capital for women’s empowerment and gender finance.
Standard Chartered joined forces with the World Bank in 2018 to launch the world’s first sovereign blue bond, by the Republic of Seychelles, to help raise funds for projects such as ocean preservation and sustainable fishing. We need many more examples like this.
To act on climate change, we need to mobilise more funding into green projects, particularly in developing countries. But we also need to establish transition finance to accelerate companies’ efforts to align their operations and business models with the Paris Agreement goal of limiting global warming to 1.5˚C. At Standard Chartered, we have developed a Transition Finance Framework to govern our activities in this area.
Following the process set out in the Framework, we recently labelled our first transactions internally as “Transition”. These transactions included financing for projects that will kick-start the decarbonisation of a cement plant and contribute towards the elimination of flaring in an African country. Both are central to the decarbonisation strategies of their respective clients and markets.
Leveraging blended finance
Blended finance is another important tool for catalysing investment. This approach, which leverages public-sector development lending to unlock private capital, has mobilised more than USD160 billion for sustainable projects in developing countries3. And the market is expanding steadily.
We have executed USD10 billion of blended finance deals over the past four years. This includes USD186 million in financing that we helped provide for a solar plant in Vietnam. This is the country’s largest renewable energy project, and is expected to reduce CO2 emissions by 123,000 tonnes per year. We teamed up with the Asian Development Bank to deliver financing for the deal, setting a precedent for successful funding of renewable-energy projects in the region.
Democratising the benefits
Finally, we need to direct the benefits of sustainable finance to the regions that are most at risk from climate change and have the biggest opportunity to reduce greenhouse gas emissions through a jump to low-carbon technologies.
The need for investment in these regions is urgent. Asia is home to 80 per cent of the world’s population that could be flooded if there is a 3˚C rise in global temperatures4. Africa has at least 19 coastal cities with a population of more than one million at risk from climate change.
Yet low- and middle-income countries are receiving less than 60 per cent of the financing they need to achieve the SDGs. In Africa, this number is as low as 10 per cent5. This is why at Standard Chartered we are proud that Africa, Asia and the Middle East account for over 84 per cent of our sustainable-finance assets.
The rapid growth of sustainable finance has helped drive progress on sustainable development and address global warming. With less than a decade to go before the deadline for the UN’s 2030 goals, we need to recognise that impact matters just as much as volume. Now is the time to optimise the impact of sustainable finance by focusing on the regions at greatest risk from climate change, and by tackling the inequalities that must be addressed in society and the economy.
*Accelerating to net zero* High-impact export-finance deals can drive sustainable development in emerging markets
High-impact export-finance deals can drive sustainable development in emerging markets
Export-finance transactions that crowd-in private capital can help drive the sustainable transition.
When Cameroon needed to upgrade the eastern entrance to the port city of Douala, Standard Chartered arranged EUR135.5 million of financing to make it happen.
The project will improve and widen the main road into the city, supporting a major trade route with the country’s landlocked neighbours, Chad and the Central African Republic1.
UK Export Finance (UKEF) provided a comprehensive risk guarantee that helped unlock private capital to fund the project, which will also enhance safety at Douala’s eastern entrance by channelling pedestrian flows and installing adequate lighting. Standard Chartered partnered with UKEF on the deal, acting as lead arranger and lender. UKEF also contributed a direct loan to the government of Cameroon.
Standard Chartered and other commercial lenders work with export credit agencies (ECAs) like UKEF across the globe to deliver vital funding for high-impact sustainable development. The need for this sort of blended public-private financing is pressing: Africa alone requires annual investment of as much as USD170 billion a year to meet its infrastructure needs through 2025, with a financing gap that could exceed USD100 billion, according to the African Development Bank2.
The World Bank and other major development lenders have historically played a vital role in financing infrastructure projects throughout the developing world. The involvement of these experienced and influential institutions can have a helpful ‘halo effect’ that attracts private investors to deals they might otherwise have shied away from.
Yet, the full capacity of these multilateral development lenders for crowding-in private capital hasn’t been fully utilised. With its AAA credit rating and preferred-creditor status, the World Bank, for instance, has enormous potential to use loan guarantees to reduce the risk in these transactions and lure more private capital to invest alongside it.
ECAs are also stepping up. While their core mandate is to promote exports from their home countries, many ECAs are also seeking to tackle climate change and support the broader sustainable finance agenda – often via the construction of critical infrastructure in developing countries. UKEF, for example, increased financing for projects in Africa to more than GBP2.3 billion in 2020–2021, the highest level in two decades3.
As investors increasingly seek out ways to make a real-world impact in addition to attractive returns, ECA-backed deals can offer extensive opportunities. In 2020, export-finance deals totalled USD114 billion, excluding pandemic relief4, and the market is growing steadily.
In addition to UKEF, Standard Chartered partners regularly with the ECAs of other countries. Together with Germany’s Euler Hermes, the bank delivered EUR280.5 million in financing to Ghana last year to develop a section of the country’s strategic Eastern Corridor Road. This was the first time a social loan had been structured in Africa. The project was eligible because its objective was to improve the country’s basic infrastructure network.
While the deal pipeline is in full flow, development banks, ECAs and commercial lenders face a number of challenges as they strive to scale up their contribution to financing the world’s sustainable-development needs.
One is deal size. The median blended-finance transaction is USD64 million5, which is too small to lure some institutional investors. By pursuing bigger deals, banks and ECAs could help attract more of the USD35 trillion sustainable-investment market6 into larger, more effective projects.
Standard Chartered and UKEF have joined forces to deliver large, impactful projects such as the recent EUR2.4 billion green financing for Türkiye’s Ministry of Treasury and Finance to fund the delivery of the Ankara-İzmir high-speed railway project to improve Türkiye’s transport infrastructure. The new 503.2km electric-powered railway line will connect Ankara, the capital, to İzmir on the West coast, the country’s third largest city and one of its biggest ports. Connecting Türkiye’s major cities will bring economic, social and cultural benefits, encourage a reduction in the number of cars and buses and lower CO2 emissions.
Standard Chartered and other commercial lenders are also working alongside development banks to tackle additional challenges, for example, helping emerging-market governments meet the conditions for transactions to be classified as sustainable.
They are also promoting common standards to replace the current patchwork of requirements that makes arranging these transactions more challenging.
Finally, both development banks and ECAs must be prepared to take risks by investing in the new technologies the world will need to make the transition to a sustainable, inclusive economy. Without a significant commitment from the public sector, there’s a risk the private investment won’t flow.
Previously, ECAs would have waited until a technology was mature and then supported the supply chains.
“That’s completely wrongheaded,” Richard explains. “For us to develop the supply chains in the UK, we have to act as the lightning rod to crowd-in private capital.”
This sort of proactive approach will be essential in developing the technologies needed to mitigate the impact of climate change and economic inequality around the world, especially in developing countries which are among the most vulnerable.
By teaming up on transactions and harnessing the power of private capital, commercial banks like Standard Chartered and their ECA partners can help pave the way to a more sustainable future.
*Cleantech* Five cleantech trends for 2022
Five cleantech trends for 2022
Industry convergence, private market fund flows, hawkish monetary policy, fragmenting supply chains and rising carbon prices – as the race to net zero picks up, we explore the trends that could shape the cleantech space in 2022.
COP 26 sent a resounding message: Governments, businesses and investors must act faster to combat climate change. While we’ve heard this message before, the backdrop has changed. Industry convergence, private market fund flows, hawkish monetary policy, fragmenting supply chains and rising carbon prices are now front of mind for businesses and investors alike.
As the race to net zero picks up, let’s explore how these trends could shape the climate-tech space in 2022.
Trend 1: All roads converge to renewables
Once unthinkable projects and partnerships are unlocking opportunities as multiple industries converge upon renewables. Oil and gas companies are partnering with new energy companies on green hydrogen projects. Shipping companies are building wind turbine installation vessels to facilitate the offshore wind industry. And mining companies are investing in and even building renewable power generation.
Growing focus on hydrogen, for instance, continues to spur collaboration across the industry. In one example, Crosswind – a consortium of Shell and Eneco – will build and operate a 750MW floating wind farm in the Dutch North Sea1. Scheduled to go live in 2023, the project will also weave floating solar, an electrolyzer and energy storage into the mix, using them to produce and store green hydrogen2. In another example, Siemens Energy and Korea Gas Corporation formed an alliance to produce green hydrogen and advance its use in power generation using turbines3.
Meanwhile, ABB won a $330 million order for wind turbine installation vessels last year4 – a trend that’s likely to continue with 80GW of offshore wind capacity needed every year through 2030 to get on track for a net zero 20505. And South Africa Mines plans to invest $2.7 billion to build its own power plants – largely using wind and solar – amid persistent power cuts6.
As the world prioritised the energy transition, all roads will converge to renewables.
Trend 2: The rise of climate tech
Industry convergence could reshape the investment landscape.
In turn, investors should look for companies with skill sets that go beyond a single specialisation like wind or solar. For instance, companies that can combine their power with batteries and are able to set up green hydrogen projects by partnering with off takers, will catalyse the next wave of investment.
Investment trends among oil and gas companies drive the point. Chevron, for instance, agreed last year to acquire equity interest in ACES Delta – a joint venture between Mitsubishi Power Americas and Magnum Development that produces, stores and transports green hydrogen in the U.S7. Broadly, 41 of the world’s largest oil and gas refiners invested a record $21 billion in clean energy last year, up 53% from the year before. Wind and solar made up majority of investment, while hydrogen and storage gained ground.