Making finance and investments sustainable is essential to achieving a net-zero emissions world by 2050. And energy efficiency has the single biggest role to play, writes Peter Sweatman.
Peter Sweatman is the founder and CEO of Climate Strategy, a consulting firm. Peter has held senior positions at JPMorgan, and Climate Change Capital managing Iberian and Latin American business units. Currently, Peter is the task group lead for G20 on energy efficiency finance and the rapporteur for the Energy Efficiency Financial Institutions Group (EEFIG).
Energy efficiency is the largest single player in delivering a carbon neutral economy in Europe by 2050, and the Paris Agreement, where energy efficiency actions account for a 44% share of the greenhouse gas reductions required.
The good news is that global energy efficiency investments have solid returns, and grew 3% in 2017 to US$ 236 billion, according to the International Energy Agency’s latest findings. To give context to this figure, this is 13% of the world’s total energy investments (US$ 1.8 trillion); 80% of what is being invested in renewables generation (US$ 298 billion); but, disappointingly, 20% less than global fossil-fuel consumption subsidies of over US$ 300 billion.
And despite the fact that energy efficiency pays back its up-front investment on average three times in lifetime energy savings (and this is before including non-energy benefits), global investment rates are not growing fast enough to meet our increasingly urgent climate targets.
So why is progress so slow?
It’s hold-ups in the delivery and distribution of our product: energy savings and the benefits of renewal. To invest US$ 236 billion in energy efficient buildings, businesses and vehicles requires tens if not hundreds of millions of unique decisions. This compares to tens of thousands of decisions to invest US$ 298 billion in renewables, or just hundreds to deploy fossil-fuel subsidies.
Energy efficiency’s delivery and distribution system needs to be as competitive, easy to understand and as risk-free as other decisions that compete for our limited bandwidth.
While profitable, with such small project sizes, the risks of “getting it wrong” often loom larger than the small and longer-term upside for many decision-makers. Even the cost of “checking if we did it right” at a few tens of US$ – multiplied by hundreds of millions of decisions – makes billions spent in largely unproductive monitoring, reporting and verification.
So how do we double investment rates, and then double them again in 2025?
- Energy efficiency has to become a standard, not an optional or luxury add-on requiring an extra decision. It is a seat-belt, not a GPS system. This requires mandatory policies working in the interests of public safety and using the precautionary principle. As we have seen across multiple industries, when a component becomes a standard, it enters the mainstream and its cost is reduced dramatically through economies of scale and markets and supply chains adjust accordingly. As a standard component in the taxonomy of financial products, energy efficiency will no longer struggle to attract financing. Instead, mainstream financiers will proactively seek it out.
- Make energy performance visible. Most financiers don’t know (or care enough?) about the relative energy performance of their assets or their clients’ assets. However, evidence is emerging that building energy performance and financial performance are positively correlated. Investors that hold energy efficient collateral will not only have an easier time at sale, but also may have stumbled onto clients that are less likely to default. Clearly, paying less for energy provides more for interest payments. The energy performance of funded assets is also a proxy for those assets’ resilience in a carbon neutral economy, as energy inefficient assets have an invisible upgrade cashflow requirement between now and 2050. This is not news to banks like ING, BBVA, BNP Paribas, Société Générale and Standard Chartered, who at December’s climate change talks in Katowice, pledged to align their loan portfolios with global climate goals. Together, these banks have a combined loan book of €2.4 trillion.
- And finally, we have to improve delivery and distribution quality. There is a reason why retail brands command “trust”. Apple phones work, Amazon delivers, utilities connect and banks make the mortgage process easy. Energy efficient homes, offices, industries and vehicles must be a financier’s preference and become a standard component of a mortgage, commercial loan or car finance contract, ensuring consumer visibility and bringing the energy dimension into the retail domain. To make hundreds of millions of easy decisions, energy efficiency needs to be productised by entities which deal with hundreds of millions of clients – by choice and through prudential regulation.
Some of these entities are represented in the Energy Efficiency Financial Institutions Group (EEFIG), bringing together policymakers and organisations which deliver finance. Since its inception in 2013, EEFIG’s activities have included launching Europe’s largest energy efficiency project database, working with the Sustainable Energy Investment Forums to engage with stakeholders across most EU countries, and developing standardised processes for financial institutions and ESCOs.
Building upon EEFIG’s work, the High-Level Expert Group on Sustainable Finance also emphasised the need to enhance the visibility of the data on energy efficiency investments, and recommended that the Commission further examine how energy efficiency impacts asset values and how energy savings impact clients’ ability to pay.
Entering its third phase, in 2019, EEFIG will be recruiting for more financial institutions to work together to explore how energy efficiency intersects with green finance. We hope to uncover the patterns and correlations between energy and financial performance and improve and develop more insights and tools to help address the €130 billion annual energy efficiency investment gap in Europe.
This year, we will work with banks and policymakers to deliver the business models and financial products which will define millions of smart buildings and transform today’s built environment, manufacturing and transport infrastructure into the one that is fit for a “well-below 2 degree compliant” world.
Accelerating sustainable energy investment, and finance for climate change action, will bring forwards the invaluable and shared benefits of a net-zero emissions Europe for all.