Electric utilities are today a major user of green finance markets to fund their operations and capex. If we take the green bond market as a guide, electric utilities are in fact the biggest corporate sector, after banks, with about $220bn worth of issued securities.
Over the last 10 years, the sector has benefited from several enablers to the definition of its decarbonisation path, namely:
Are we at the early stages of a similar development in chemicals, cement, pulp and paper and steel sectors? The challenge appears much bigger for those sectors compared to utilities 10 years ago. However, one can observe similarities in this early stage of decarbonisation.
Beyond regulation we see three themes that will increasingly drive treasurers and CFOs to look for green finance:
New decarbonisation technologies are making headway to the extent that some of these are now appearing in the list of projects that hard-to-abate companies are investing in to decarbonise their own operations. Such is the case, for example, of carbon capture, utilisation and storage or the use of hydrogen as a heating fuel. These are vital decarbonisation technologies for hard-to-abate sectors.
Although these are not deployed at scale yet, projects are being developed at increasing pace. For example, according to Cembureau, the European cement association, “there has been considerable progress on CCUS development in the cement sector in recent years, with over 30 projects looking at the technology across Europe. Many projects are now foreseen to be operational before 2030, allowing to permanently store up to 12 million tonnes of CO2 yearly by then”.
Given its transparency in terms of the use of funds, the green bond market is a good source of public information to attest of the emergence and investments of these new technologies. Here we look at three recent use-of-proceeds of three green bonds from three leading issuers in chemicals and cement sectors. The use-of-proceeds do include technologies like carbon capture or hydrogen.
Renewables technologies benefitted from significant subsidies before becoming a profitable (see here for background reading). For example, in the UK, subsidies included schemes like Feed-in Tariff or Contracts for Difference.
Moving from a phase subsidy to a market-based financing is complicated and non-linear. Several events and circumstances come into play be it technological development, public policies, geopolitical events, changing market demand for different types of products and new ways of operating (for example decentralised energy systems).
Although subsidies would need to be more large-scale for an effective system-wide decarbonisation (specific to Europe see Antwerp declaration with request to create a clean tech deployment fund) several schemes are already available to companies depending on their geographical location and business. These include for example, the well-known Inflation Reduction Act in the US but as well the EU Innovation fund in Europe or the contract-for difference scheme being put in place in Germany.
(Source: Global Status of CCS report update)
1. Biggest impact for GHG reduction
First, positive impact minded investors are moving away from a vision of green investments that is confined to renewables. We see both on the public and private side the emergence of new investment funds dedicated to the decarbonisation of the industrial sectors. There is an understanding that high-emitting sectors have the potential for deeper rates of decarbonisation including thanks to some of the new technologies we discussed above.
If we take the US as a case study, Rhodium Group, an independent research house, calculates that, by 2030, the industrial sector will be the largest emitter (direct emissions) ahead of transport and power as these are benefitting from the large-scale deployment of clean energy technology like solar and electric vehicles.
2. Investment diversification and returns
Second, investors need to be able to tap into a well-diversified investment universe with attractive risk-returns. If we take the green bond market as a guide, utilities dominate the corporate investable universe with about 35% of market share. This is compared to around 8% in the broad global corporate universe. This is a challenge for investors and at the same time an opportunity for issuers in the industrial segments willing to tap into the green and sustainable bond and loan markets.
It is no coincidence that leading companies and their treasurers in hard-to-abate sectors are increasingly tapping into green finance. Like electric utilities 10 years ago, here we have strived to explain that a confluence of factors is making this happen.
Putting in place green finance frameworks requires a company-wide green strategy, so the first challenge is strategy, even before trying to look for funding. This is both a challenge and opportunity for treasurers and CFOs keen to influence their company’s strategy and enhance their companies access to capital markets.
Heidelberg Materials
Issue date: 19 June 2024
Issue amount: €700m
Project examples:
(Source: Green bond framework and Reuters)
Cemex SAB DE CV
Issue date: 14 March 2023
Issue amount: $1bn
Project examples:
(Source: Green bond framework and Reuters)
Dow
Issue date: 9 February 2024
Issue amount: $1.2bn (two bonds)
Project examples:
(Source: Green bond framework and Reuters)
Fabrizio Palmucci is the founder of Impactivise and senior adviser to Climate Bonds Initiative