SUSTAINABILITY & CLIMATE CHANGE

How to Finance a $1 Trillion Climate Crisis

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3 years ago

October 11, 2021

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The United Nations describes the climate crisis as a $1 trillion challenge. We must shift toward a more sustainable future, and to do that we need the financial solutions that will support that transition. It is a need that is not being met – in part, because addressing the crisis has not become the priority it needs to be.

But the climate crisis is not the only challenge ahead. The Covid-19 pandemic has exposed wider sustainability issues that demand urgent attention, leaving governments and companies scrambling to find solutions for everything from optimising water usage and reducing carbon emissions to supply chain management and worker rights.

To tackle such a momentous challenge, we first have to realise that we need to do more, and the Covid-19 pandemic has been a catalyst for that. “The good aspect of the pandemic has been the moment of reflection,” says Dr Roland Mees, director of Sustainable Finance at ING. “We have been forced to reflect on our situation.”

Next, we need to make a coordinated effort to find tangible solutions. Over the course of the pandemic, for example, the public and private sectors worked together to produce and roll out vaccines in record times. This showed that when a problem is prioritised, it can be addressed at speed.

When it comes to the wider climate and sustainability issues, it is this kind of coordinated effort, along with tangible solutions such as finance going to companies and projects that can demonstrate a positive impact on the environment and society, that will accelerate the transition to a sustainable future. “There is really an immense drive now towards sustainability” Leonie Schreve, global head of Sustainable Finance at ING

Sustainable business is better busines

At a business level, there is a clear imperative to urgently pursue sustainability targets. Research published by ING in April, based on a survey of 100 institutional investors and 450 companies, found that 72% of investors are setting themselves increasingly ambitious targets on environmental, social and governance outcomes in their portfolios. They want to show that they are responsive to their stakeholders’ concerns.

For investors, investment success in sustainability means having access to a more transparent set of tools for assessing whether the sustainability ambitions of companies they seek to lend to are realistic. For those companies, success means being able to access sustainable finance solutions that are relevant to their goals, while being transparent about their performance as they pursue those goals.

Leonie Schreve, global head of Sustainable Finance at ING, says that one of the principal drivers for borrowers looking to access funds from the sustainable finance market is the growing belief that “sustainable business is better business”. Sustainability is increasingly proving to offer a competitive advantage: analysis by the Boston Consulting Group, for instance, finds that sustainable business model innovation helps companies to create “environmental and societal surpluses” that drive “business advantage and value creation”.

There is intense demand from stakeholders too for companies to address environmental, social and governance (ESG) issues. Last year, for instance, Legal and General Investment Management issued a warning to companies to do more to meet climate change targets or face consequences. For these companies, adopting a sustainable business model now can help to future-proof themselves.

In part, this is why despite the disruptions brought on by the Covid-19 pandemic in 2020, a 13% rise in green bond issuance to $305.3 billion from the previous year was accompanied by a surge in the sustainable debt market more broadly. Issuance climbed to $732.1 billion for the year, up 29% from 2019. Global sustainable debt issuance is on track to surpass $1 trillion this year, allowing it to make up a greater share of the overall debt market.

“We’ve already seen an uptake of sustainable finance in the past couple of years, but I think last year started a rethink about ‘How should we do things differently?’,” says Schreve. “There is really an immense drive now towards sustainability.”

The market: A look at sustainable finance solutions

What both lenders and corporates need is a clear blueprint to work from. Among the solutions that have gained traction in recent years are sustainability improvement loans, also known as sustainability-linked loans.

Mees, who was the architect and initiator of the loan, which first launched in 2017, says that with these arrangements businesses are offered a meaningful incentive to meet their targets – this typically works as a “nudge” for them. These loans offer businesses lower interest rates if they meet ambitious targets. If they fail to meet those targets, the interest rates will go up.

There is an awareness that these variable-rate loans can be used for “greenwashing” by companies that want to appear to be doing the right thing – unless the lender sets clear criteria. One way for lenders to avoid this is to assess the company’s sustainability rating based on a score given by an external agency.

These agencies typically assess businesses on their impact on a range of areas, such as biodiversity, energy efficiency, water management and social supplier standards. Investors also have other ways to assess companies, such as the work of the Sustainability Accounting Standards Board. This applies industry-specific measures of success to individual companies, while accounting for both financial and non-financial data.

With the widening sustainability issues facing companies, other specific financial instruments have seen a boom in popularity. In 2020, so-called social bonds proved to be a highlight in the sustainable debt market, because companies used them to tackle the pandemic’s human problems: $147.7 billion of social bonds were issued in the 12-month period – a staggering 720% increase on the previous year. In the first half of 2020, for example, regular issuers in the green bond market such as the Korean Development Bank and the African Development Bank focused their attention on social bond financing to mitigate the Covid-19 pandemic.

“We see a lot of interest in solutions where we can really accelerate specific social investments,” says Schreve. “During the first months of the pandemic we also issued the first social Covid-19 bond to support investments in healthcare, social housing and employment.” Here, banks can play a proactive role in developing new solutions to support sustainable transformation. Financing the transition will be accelerated when lenders actively develop financial solutions that support clients with sector specific needs.

Profit and purpose

The explosive growth in the sustainable finance market has had clear benefits. ING’s April research found that 73% of companies which say they have issued sustainable finance instruments have improved their ability to implement robust metrics for performance. Accountability is now less an abstract ideal and more a measurable part of strategy. “Traditionally, companies have mostly thought about how to make a profit, but this forces a different way of thinking.”

But to maintain momentum, corporates will need to realise that this accountability is not just a box-ticking exercise but something that can support them financially: profit can come from purpose. For Marieke Blom, Chief Economist at ING Netherlands, in the next five to 10 years companies have to “really understand their relationship with society and the planet”.

“It will force everyone making strategic decisions within a company to ask ‘How exactly do I relate to something?’,” she says. “Traditionally, companies have mostly thought about how to make a profit, but this forces a different way of thinking.”

The widening of the sustainable finance market will support executives in achieving their purpose while making a profit. Two-thirds of companies surveyed by ING say that the greater variety of products now available alongside green bonds has made the sustainable finance market more relevant to them and their goals.

On the ground: How sustainable finance is put to use

According to Schreve, sustainable finance is something you now “see everywhere”, but there are some sectors where an urgency for change is driving a growing number of requests from executives keen to see what is on offer.

One company that has been able to tap into sustainability-linked loans to support its sustainability goals is Aligned Energy, a US data-centre company.

As the pandemic accelerates trends such as remote working and cloud computing, data centres have become increasingly important parts of global infrastructure, which puts their electricity usage and renewability under the spotlight. The energy consumption of data centres is significant: some of the world’s largest use the same amount as 80,000 homes.

It is why Aligned Energy has taken a proactive step to secure a $1 billion loan made up of a $250 million revolving credit facility, a financial tool that allows the company to repay the loan in a flexible manner, as well as a $650 million term loan and a $100 million delayed-draw term loan. To ensure accountability, the loan to Aligned Energy is structured with sustainability KPIs based on principles set by the Global ESG Benchmark for Real Assets. This is supporting the company’s mission to match 100% of its annual energy consumption to zero-carbon renewable energy by 2024.

According to Anubhav Raj, Aligned Energy’s Chief Financial Officer, the loan will also help it to set a “best-in-class example for the data-centre industry with respect to environmentally and socially sustainable growth“.

Sustainable finance is also being used in the implementation of the circular economy – a system based on the principles of “designing out waste and pollution, keeping products and materials in use, and regenerating natural systems” by decoupling economic activity from the consumption of finite resources, all while redefining growth to focus on positive society-wide benefits.

“The circular economy is a means to an end,” says Blom. “The end of the circular economy is to limit the harm, for example, to biodiversity or the climate or to reduce pollution. From a planet perspective it’s necessary to begin working in a different way.”

One company that has recognised this need is multinational drinks and brewing company AB InBev, which has signed a $10.1 billion sustainability-linked revolving credit facility – the largest deal of its kind – with a consortium of 26 global financial institutions.

The deal’s initial five-year term is aimed at supporting a number of the company’s goals, including its mission to increase the amount of recycled content used for its packaging. It incorporates a pricing mechanism designed to incentivise the company to reach its 2025 goals of 100% of products being in packaging that is “returnable or made from majority recycled content“.

The sustainable finance market is relatively young, but Leonie Schreve sees these emerging deals as clear motivators for Aligned Energy and AB InBev’s peers to follow suit. They will need to, because financing the transition to a sustainable future will separate those set to thrive from the rest.

“If you’re leading on sustainability, then you make yourself resilient for the future,” says Schreve. “If you don’t take any action, you will be out of business.”

Courtesy: Environmental Finance

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SUSTAINABILITY & CLIMATE CHANGE

EARTH DAY 2024: Packaging Is the Biggest Driver of Global Plastics Use

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3 weeks ago

April 23, 2024

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By Felix Richter,

The theme of this year’s Earth Day is “Planet vs. Plastics” – a theme chosen to raise awareness of the damage done by plastic to humans, animals and the planet and to promote policies aiming to reduce global plastic production by 60 percent by 2040.

As our chart shows, global plastics use has increased rapidly over the past few decades, growing 250 percent since 1990 to reach 460 million tonnes in 2019, according to the OECD’s Global Plastics Outlook, which projects another 67-percent increase in global plastics use by 2040 and for the world’s annual plastic use to exceed one billion tonnes by 2052. As our chart shows, packaging is the largest driver of global plastics use, which is why a rapid phasing out of all single use plastics by 2030 is one of the policy measures proposed under EARTHDAY.ORG’s 60X40 framework.

Other major applications of plastics include building and construction, transportation as well as textiles, with the fast fashion industry particularly guilty of adding to the world’s plastic footprint. “The fast fashion industry annually produces over 100 billion garments,” the Earth Day organizers write. “Overproduction and overconsumption have transformed the industry, leading to the disposability of fashion. People now buy 60 percent more clothing than 15 years ago, but each item is kept for only half as long.” Most importantly, the organization points out that 85 percent of disposed garments end up in landfills or incinerators, while just 1 percent are being recycled.

Felix Richter is a Data Journalist

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SUSTAINABILITY & CLIMATE CHANGE

The Sahara Desert used to be a Green Savannah – New Research Explains Why

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5 months ago

December 24, 2023

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By Edward Armstrong

Algeria’s Tassili N’Ajjer plateau is Africa’s largest national park. Among its vast sandstone formations is perhaps the world’s largest art museum. Over 15,000 etchings and paintings are exhibited there, some as much as 11,000 years old according to scientific dating techniques, representing a unique ethnological and climatological record of the region.

Curiously, however, these images do not depict the arid, barren landscape that is present in the Tassili N’Ajjer today. Instead, they portray a vibrant savannah inhabited by elephants, giraffes, rhinos and hippos. This rock art is an important record of the past environmental conditions that prevailed in the Sahara, the world’s largest hot desert.

These images depict a period approximately 6,000-11,000 years ago called the Green Sahara or North African Humid Period. There is widespread climatological evidence that during this period the Sahara supported wooded savannah ecosystems and numerous rivers and lakes in what are now Libya, Niger, Chad and Mali.

This greening of the Sahara didn’t happen once. Using marine and lake sediments, scientists have identified over 230 of these greenings occurring about every 21,000 years over the past eight million years. These greening events provided vegetated corridors which influenced species’ distribution and evolution, including the out-of-Africa migrations of ancient humans.

These dramatic greenings would have required a large-scale reorganisation of the atmospheric system to bring rains to this hyper arid region. But most climate models haven’t been able to simulate how dramatic these events were.

As a team of climate modellers and anthropologists, we have overcome this obstacle. We developed a climate model that more accurately simulates atmospheric circulation over the Sahara and the impacts of vegetation on rainfall.

We identified why north Africa greened approximately every 21,000 years over the past eight million years. It was caused by changes in the Earth’s orbital precession – the slight wobbling of the planet while rotating. This moves the Northern Hemisphere closer to the sun during the summer months.

This caused warmer summers in the Northern Hemisphere, and warmer air is able to hold more moisture. This intensified the strength of the West African Monsoon system and shifted the African rainbelt northwards. This increased Saharan rainfall, resulting in the spread of savannah and wooded grassland across the desert from the tropics to the Mediterranean, providing a vast habitat for plants and animals.

Our results demonstrate the sensitivity of the Sahara Desert to changes in past climate. They explain how this sensitivity affects rainfall across north Africa. This is important for understanding the implications of present-day climate change (driven by human activities). Warmer temperatures in the future may also enhance monsoon strength, with both local and global impacts.

Earth’s changing orbit

The fact that the wetter periods in north Africa have recurred every 21,000 years or so is a big clue about what causes them: variations in Earth’s orbit. Due to gravitational influences from the moon and other planets in our solar system, the orbit of the Earth around the sun is not constant. It has cyclic variations on multi-thousand year timescales. These orbital cycles are termed Milankovitch cycles; they influence the amount of energy the Earth receives from the sun.

On 100,000-year cycles, the shape of Earth’s orbit (or eccentricity) shifts between circular and oval, and on 41,000 year cycles the tilt of Earth’s axis varies (termed obliquity). Eccentricity and obliquity cycles are responsible for driving the ice ages of the past 2.4 million years.

The third Milankovitch cycle is precession. This concerns Earth’s wobble on its axis, which varies on a 21,000 year timescale. The similarity between the precession cycle and the timing of the humid periods indicates that precession is their dominant driver. Precession influences seasonal contrasts, increasing them in one hemisphere and reducing them in another. During warmer Northern Hemisphere summers, a consequent increase in north African summer rainfall would have initiated a humid phase, resulting in the spread of vegetation across the region.

Eccentricity and the ice sheets

In our study we also identified that the humid periods did not occur during the ice ages, when large glacial ice sheets covered much of the polar regions. This is because these vast ice sheets cooled the atmosphere. The cooling countered the influence of precession and suppressed the expansion of the African monsoon system.

The ice ages are driven by the eccentricity cycle, which determines how circular Earth’s orbit is around the sun. So our findings show that eccentricity indirectly influences the magnitude of the humid periods via its influence on the ice sheets. This highlights, for the first time, a major connection between these distant high latitude and tropical regions.

The Sahara acts as a gate. It controls the dispersal of species between north and sub-Saharan Africa, and in and out of the continent. The gate was open when the Sahara was green and closed when deserts prevailed. Our results reveal the sensitivity of this gate to Earth’s orbit around the sun. They also show that high latitude ice sheets may have restricted the dispersal of species during the glacial periods of the last 800,000 years.

Trucks driving through the desert. — The Sahara desert. Getty Images

Our ability to model the African humid periods helps us understand the alternation of humid and arid phases. This had major consequences for the dispersal and evolution of species, including humans, within and out of Africa. Furthermore, it provides a tool for understanding future greening in response to climate change and its environmental impact.

Refined models may, in the future, be able to identify how climate warming will influence rainfall and vegetation in the Sahara region, and the wider implications for society.

Edward Armstrong is a postdoctoral research fellow, University of Helsinki

Courtesy: The Conversation

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SUSTAINABILITY & CLIMATE CHANGE

COP28: New Draft Text on Climate Deal Published; Calls for Transitioning away from Fossil Fuels

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5 months ago

December 14, 2023

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By Imogen Lillywhite,

A new draft text on global stocktake has been published at the UN climate summit, COP28 UAE, on Wednesday morning. While the draft text does not contain the words “phase out”, it includes reference to transitioning away from all fossil fuels to enable the world to reach net zero by 2050.

The text published by the UN’s climate body calls on parties to accelerate and substantially reduce non-carbon dioxide emissions worldwide with a focus on reducing methane emissions by 2030. “We all want to get the most ambitious outcome possible,” Majid Al Suwaidi, COP28 Director-General, said on Tuesday.

The text, published early Wednesday, does not specifically refer to oil, but mentions the need to ‘phase-down’ coal. It says that it recognises the need for ‘deep, rapid and sustained reductions in greenhouse gas emissions in line with 1.5C pathways and calls on Parties to contribute to global efforts.

Among those efforts it recognises the need to triple renewable energy capacity by 2030 and doubling the annual rate of energy efficiency improvements by the same date. It also recognises the need to accelerate the phase-down of coal and accelerate towards net zero energy systems, utilising zero or low carbon fuels by mid century.

While the document does not mention oil or combustion engines, it does recognises the need for accelerating the reduction of emissions from road transport on a range of pathways, including through development of infrastructure and rapid deployment of zero and low-emission vehicles. It also recognises the need to phase out inefficient fossil fuel subsidies that do not address energy poverty or just transitions, as soon as possible.

Finance specifics

On the subject of finance, the document said developed countries should continue to take the lead in mobilising climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds, through a variety of actions, including supporting country-driven strategies, and taking into account the needs and priorities of developing countries.

Such mobilisation of climate finance should represent a progression beyond previous efforts, the text said. It may provide small comfort to campaigners from developing countries who implored Parties to begin the phase out of fossil fuels and provide vastly improved access to funding for renewables.

The document highlights the persistent gap and challenges in technology development and transfer and the uneven pace of adoption of climate technologies around the world.

It further urges Parties to address these barriers and strengthen cooperative action, including with non-Party stakeholders, particularly with the private sector, to rapidly scale up the deployment of existing technologies, the fostering of innovation and the development and transfer of new technologies.

It also emphasizes the ongoing challenges faced by many developing country Parties in accessing climate finance and encourages further efforts, including by the operating entities of the Financial Mechanism, to simplify access to such finance, in particular for those developing country Parties that have significant capacity constraints, such as the least developed countries and small island developing States.

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