CFI Newsletter #11: A Consumers' Guide to Climate Finance

+ Transitioning from coal, PE's return expectations on ESG, Raw material shocks for cleantech, and extinctions and disappearances

The Climate Finance Initiative Newsletter offers quick digests and insights around what is happening in climate finance. While the Climate Finance Initiative’s current focus of work is India-centric, we will capture a global perspective of climate finance in this newsletter on a fortnightly basis.


This week, I finally got hold of a copy of a book I’ve been wanting to read for a long time. Written in 1991 by Douglas Adams (he of the Hitchhiker’s fame), Last Chance to See is about his quest to visit some endangered species before they become extinct. It made me wonder about the nature of climate change; we have certainly known that we are doing damage to the planet for decades. The speed of climate change impacts has recently become more intense and reading this book in the middle of unseasonal rains, hurricanes and blizzards got me thinking, “if Adams was alive today, this book will be much longer.” Not only are there more animal species nearing extinction, the coming decade could also be our last chance to see many glaciers, coastal cities and maybe even the whole continent of Antarctica. Kinda puts our work on championing more climate action in perspective.

On that note, we spend some time in this newsletter talking to you as consumers of clean technology products. We tell you where to find funding for your green purchases and hopefully encourage you to do your bit in saving the planet. But first, there’s a whole lot of news from the world of institutions and governments dealing with climate finance.


Climate Finance by the Numbers

$2 billion

The amount committed by the G7 Countries to the Climate Investment Fund’s Accelerating Coal Transition

Moving away from coal ranks high in the pantheon of climate action we must take, but in large parts of the world, there has been little action to follow through with this knowledge. A new program, which has just got significant funding pledged to it, might create the incentives that get coal-dominant countries to move past the inertia of transitioning.

In the recent G7 summit held in Britain, countries pledged to commit USD 2 billion towards The Climate Investments Fund’s Accelerating Coal Transitions (ACT) program. It looks at accelerating renewable energy adoption in coal-dependent emerging economies - India, Indonesia, and South Africa, in particular, are in the spotlight - to a “tipping point at which it’s cheaper to build a new renewable energy power plant than maintain an existing fossil fuel plant”.

On paper, this should not be hard. Globally, by 2025 78% of coal plants will be more expensive to operate as compared to building new renewable energy plants with storage. And yet, we have not seen enough commitments on phasing out coal plants. A sunk-cost outlook, the inertia to change, and the question of how and what to reskill workers who will be affected in a transition, makes divesting from existing built infrastructure and investing in new renewable energy systems a lot more than an economics problem.

This is what the USD 2 billion targets. It is intended to de-risk private sector capital and lower investment costs to repurpose coal assets, strengthen countries’ institutional capacity to manage the transition, and create alternative job opportunities and social protection schemes for communities dependent on coal for their livelihoods. The expectation is that this USD 2 billion is expected to mobilize up to USD 10 billion into transitioning from coal, mainly from the private sector.

This is the sort of initiative we at CFI HQ really like, where public finance catalyses more private capital to enter a climate action sector, but there definitely is quite a way to go. 

In 2020 the net cost of completing a global transition away from coal plants to clean renewable energy would have been $128 billion, but such an investment would have led to a net financial savings of more than $107bn by 2025 through reduced costs of operation.


9 in 10

The number of private equity investors globally who think that adopting a strong ESG policy would not lead to a reduction in returns

The concern about reduced returns has probably been the main sticking point that investors have used in not accounting for Environment, Social, and Governance (ESG) parameters in their investment decisions. So when about 99 out of 111 global private equity investors, as per Coller Capital’s Global Private Equity Barometer, say that adopting ESG principles will not lead to a reduction in returns, we have to sit up and take notice.

The Barometer brought out a few more interesting insights on the attitude towards ESG from Limited Partners (LPs) that should warm the heart:

  • 47% of LPs believe that adopting a robust ESG policy will improve an LP’s long-term private equity returns

  • Over half of LPs based in Europe and the Asia-Pacific region believe that remuneration should be linked to ESG performance and goals in some way

  • 30% of LPs think PE’s model can deliver more real-world change than public markets

But does the walk follow the talk?

According to Bloomberg, a third of the global assets under management are ESG assets, and from net-zero commitments to investments in climate modelling companies, we are seeing private equity starting to adopt, and even embrace, the need to align to make investment decisions with ESG requirements. 

This looks all good, but there is, however, the very real question of what constitutes an ESG asset which might dampen how forward private equity is towards ESG. Does it follow a stringent line where all fossil-fuel industries cannot be accounted for as ESG metrics, or can an oil & gas company that invests in renewables still be included? It seems to veer more to the latter which frankly is not suitable for the shifts we need, but even that it is not clear as ESG is just not well defined. 

It is more than just an argument around definitions. According to a survey by Pitchbook, this lack of standardization in defining ESG and how impacts are measured is identified as the biggest challenge faced by investors in adopting ESG more wholeheartedly.

2X

The amount by which lithium demand may outweigh supply in the latter half of the 2020s

Batteries are a game-changer for climate action. They are a crucial component in electric vehicles and renewables grid systems that help to tackle the almost 60% of global GHG emissions that come from transport and electricity.

And its potential for adoption has been increasing steadily. Battery costs have declined by 83% since 2012, mainly as a result of improvements in design and process and due to economies of scale; as a case in point, raw materials now represent 50-70% of battery costs, up from 40-50% five years ago.

But these could very easily be reversed as a potential supply shortage of raw materials threatens to halt the growing adoption of key climate action solutions. Lithium’s significant demand is just representative of this. A shortfall will lead to a price increase, well they actually already have: the price of lithium has more than doubled in the past year. Copper prices are up by about 70%. 

There are 2 main reasons for the resource crunches in raw materials like cobalt, lithium and nickel, neodymium and other rare-earth elements, that are essential for a low-carbon economy.

The first is the geographic concentration of these materials which when you look at the list of countries where these dominate - predominantly China, Russia, United States - does not leave much to the imagination on the possible issues that can arise for materials to freely flow between them.

The second issue is in the underinvestment in extracting and processing these materials. Investment in new projects for lithium, nickel and copper were rising before the pandemic, but even the figure in 2019, around $25bn is about 5% of the amount invested on upstream oil and gas in the same year. Some mines can take up to a decade to get up and running, much longer than the demand planning cycles of companies ready to effect a low-carbon or net-zero path. 

But even the long-term opportunity that renewables and EVs offer are not enough at a time to get all investors to come in at this relatively early stage. Some issues go beyond price and get into more murky areas around the ethical sourcing of materials, which can overshadow the otherwise sustainable credentials of the products they power. Lithium mining in Chile has led to fights with communities in the Atacama desert region over water availability. More than 70% of cobalt is mined in the Democratic Republic of Congo, which has a history of corruption and a mining sector with a history of poor labour practices, to say the least.

We certainly need a lot more focus in how we scale these building blocks for a net-zero world.


THE BIG READ

A Consumer Guide to Climate Finance

We have spent all of our past newsletters talking about strategic gaps in climate finance and the world of institutional funding. This has left some of our readers wondering that while all this big talk is well and good, how are they to use it for funding that cool electric bike they have their eyes on but cannot afford. For all of you looking to set up solar systems on your roofs and wanting your next car to be expensively electric, we present a guide to funding all these clean technology purchases.

It essentially boils down to three options:

1. Ask your bank for a loan

This works best for products and technologies that have been around for a while and are now considered mainstream. Two examples come to mind, likely because these are the only two major ones that currently fit the lending norms of Indian banks.

If you are looking to install a rooftop solar plant to save energy costs, most banks would fund that. Every bank that offers a home loan, also offers a solar loan, or a home improvement loan, that you can use to cover the cost of a solar system purchase. In case you have an ongoing home loan on your property, this is a very simple process where the bank will sanction an add-on loan and extend the mortgage they have on their home to this new loan as well.

If you do not currently have a home loan, you can either offer your bank a mortgage to get a loan that will be at an extremely low price. If you don’t fancy mortgaging your apartment worth crores for an INR 2-5 lakh solar system, you could take a personal loan. Pretty much all banks and NBFCs offer these. Personal loans also require very little documentation (usually just your identification and address proof, salary slips and income tax returns). Lenders also look at your credit score to assure themselves that you have not defaulted on any loans or credit cards in the past, and will make for a good payer. It is often a digital, seamless process and it takes less than a week for the loan to get credited to your account.

Banks also offer loans for buying electric cars and bikes. While most consider electric cars the same as internal combustion engine (ICE) cars for vehicle financing, some banks have started to offer slightly lower interest rates for going the electric vehicle route. What’s more, you also get a tax break upto INR 150,000 on interest paid on a loan taken to buy an electric vehicle.

The advantage of going to a bank for a loan, whether to buy a solar system or an electric vehicle, is that the interest rate charged is lower than all other options we will talk about. So if the product fits, this is the finance option you should pick first.

2. Ask the cleantech company you are buying from for options

The more esoteric the product you want to buy, the more difficult it is for you to get a bank to finance it. It is also possible that you want something that banks fund (say, a solar power system) but you do not qualify with their lending norms. Your next best alternative, then, is to ask the person or company you are buying from if they have any finance tie-ups.

Almost all startups creating and selling products that use cutting edge technologies converge on a realisation that they can sell more if their customers can also get loans and pay for their product over time. But lenders are often wary of funding such new technologies since there is no resale market for these. So their usual process of taking the asset back if you default and selling it as a second-hand product to recover their loan is not an effective strategy. Instead, they enter into agreements with the cleantech equipment suppliers where the startup will buy the seized assets back from them if there is a default.

With fintech platforms becoming more prolific, startups selling everything from energy efficiency solutions to home hydroponic kits are able to create programs to offer financing solutions to their customers. While this is a more expensive loan than what a bank offers, for certain products it is often the only available option. You ultimately should evaluate whether it still creates positive value for you. For example, if you are able to buy an energy-efficient air conditioner, it is possible that the lower electricity bill more than makes up for the higher interest that you pay.

3. Rent, do not buy:

An option to avoid the upfront capital cost is to rent the product, but this is dependent on the cleantech equipment company offering such a provision. This ranges from a standard rental of weekly or monthly rental or subscription plans to use a product, as is the case with several e-bikes companies, to what happens in rooftop solar; where you can be offered a Power Purchasing Agreement (PPA) where you pay a per unit rate for the energy that your rooftop plant generates, similar to how you will pay your monthly electricity bill.

We especially recommend this option for untested technologies. In addition to sparing you the upfront cost, this also creates an incentive for the cleantech equipment supplier to sell you a product that actually performs as promised on a continued basis. After all, if the claims of energy savings prove to be not true or the equipment malfunctions, you can simply stop paying the rent and give it back.


What Else Do You Need to Know About Getting Green Finance

Whichever option you choose from the three above, there are plenty of lenders out there looking to fund your transition to a greener lifestyle. But before you sign on the dotted line, we would add some practical pointers to help you get the best deal there is:

  • Check for incentives:
    Several state governments provide subsidies for setting up rooftop solar plants. Likewise, there are tax rebates available for a switch to electric vehicles. These subsidies vary across states and the rules often change frequently, so you will need to check and track what the latest incentives are. It is also worth checking whether you are going to get these incentives directly, or if it gets actioned by going through the seller or your bank.

  • Compare prices:
    Lenders have different ways of quoting what you are going to pay for the loan. Comparison sites like Bank Bazaar do give you an indicative interest rate. But instead of comparing just the interest rate, you will need to check for the pluses that amount to the total you will pay over the loan term: processings fee, charges and other “hidden” charges banks may add. It is possible that the offer with the lowest interest rate is not the cheapest after totalling up all other charges.

  • Get your documents in order:
    There is a standard set of criteria all lenders look at when giving a loan. You need documents to show your address, your PAN card, proof of income and in case you are going for a home improvement loan, property papers to show you are the owner. Lenders also check your credit score from credit bureaus like CIBIL and like with any loan, they will say no if you cannot show that you have the means and income to repay the loan, or if you have defaulted on any loans or credit cards in the past.

In many ways, a loan or a lease of a climate positive asset is no different from any another consumer loan, perhaps expect that a lot of such products are new, and you may have to find ways beyond the traditional route of going to your bank. But more and more lenders are now creating products specifically to fund your transition to green energy. Even with interest cost added, products like rooftop solar and energy-efficient electronics pay for themselves in electricity cost savings. You may not have the capital saved upfront but with all the financing options, there is now an easier way to make the move to a climate positive lifestyle.


Engaging with CFI

As always, if you are keen to engage or talk to us on our work plans (check out the deck here) or if you have something of your own to collaborate on, reach out to us below!

Work with CFI!


That’s it for Edition #11 of our newsletter.

As always, send all feedback, compliments and brickbats our way. And of course, we do appreciate you spreading the word about this newsletter.

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Best,

Simmi Sareen and Shravan Shankar