Three keys to unlocking climate finance
OCBC sees proper risk allocation and regulatory actions as levers in successful climate financing
SCALING up climate finance is more urgent than ever. According to the United Nations Environment Programme's Emissions Gap Report 2023, the world is heading towards a temperature rise of 2.9 degrees Celsius by the end of this century. The report calls for all nations to “accelerate economy-wide, low-carbon development transformations”.
Developing countries alone require an investment of some US$1.1 trillion annually to meet mitigation and adaptation needs, according to an International Monetary Fund report. But they are only getting US$333 billion.
This presents a complex challenge for policymakers and businesses alike. “A key challenge before us is to rapidly scale up currently available solutions, even as we work on the commercial viability of new technologies,” says OCBC’S group chief sustainability officer, Mike Ng. He notes that according to the International Energy Agency, for net zero in 2050, technologies not yet available on the market would be required to deliver a significant portion of the emissions reduction.
“Newer solutions that would accelerate our climate transition – ranging from green hydrogen, to sustainable aviation fuel and carbon capture, utilisation and storage (CCUS) – are still in early stages of development, making the bankability of such projects a key issue,” he says.
Looking ahead, “out-of-the-box” thinking from all quarters – be it policymakers, financial institutions or businesses – will be crucial to tackling such issues in the climate crisis, says Ng. In his view, three areas are critical to unlocking and accelerating climate finance: risk allocation, enabling policies and what he calls “scaling scalability”.
No such thing as an ‘unbankable’ project
What exactly is bankability? There is no concrete definition; one bank may find a transaction bankable, while another may not, explains Ng. Yet for new technologies to be implemented, they need to be financed. And Ng takes the view that there is no such thing as an “unbankable project”. The key is to find a sufficient pool of liquidity to fund the project, given the risk parameters involved.
Ng highlights the example of CCUS to demonstrate the importance of risk allocation. Enabling the capture of carbon dioxide emissions from source or removing carbon dioxide directly from the atmosphere is promising in theory.
“But in the event that the technology fails, such as if there is a leakage of carbon from its storage site, the project’s revenue or cash flows would be impacted,” he says. He further explains that banks do not want to take technology risks, especially if the likelihood of the risk materialising is high. Yet such deals can become “bankable” – provided the risk allocation is right.
“If a credit-worthy sponsor or technology provider comes in to provide credit backstop against that particular risk, for example, guaranteeing to top up the shortfall in revenue or pay for additional costs in the specific event that the technology is an issue, then banks are more likely to fund the project,” he says.
Hence, technology risk can be ‘covered’. In much the same way, political risk can be mitigated by blended finance with multilateral development banks, and demand risk can be mitigated through private public partnership (PPP) structures. Ng stresses that what is critical to ensuring bankability is the allocation of risks to each party according to its ability to manage and mitigate them. This is critical to ensuring bankability.
At the end of the day, it is all about the cost curves, he adds, saying: “If we can get the projects off the ground, prove the technology and scale up, then cost curves can come down, ensuring commercial viability and wider adoption of the technology.
Once the cost curves come down, the conversations around climate efforts will become so much easier, such as with solar power, where costs have come down by 90 per cent in just the past decade.”
Enabling government policies is key
Besides bankability, nascent green technologies face another hurdle – they are costly to implement, Ng says. “The demand is not there due to cost. Take green hydrogen as an example. If the cost is multiple times that of fossil fuel, there is simply no incentive for companies to buy it.”
To lower per-unit costs, demand has to increase, which is where government regulations could come into play. Ng cites the example of Singapore mandating the inclusion of sustainable aviation fuel for all outbound flights’ fuel mix by 2026.
“By creating demand, supply will follow,” says Ng. “When supply follows and gets scaled up, costs come down and the technology becomes more commercially competitive. It’s a virtuous cycle.”
Financial regulators could also offer a ‘carrot’ to financial institutions that invest in green assets and technologies, such as preferential capital treatment in risk weighted assets. By clearly setting out the direction, regulators can help accelerate green investments exponentially, says Ng.
Focus on scalability
‘We see these challenges as an opportunity for growth and for achieving OCBC’S ambition to be Asia’s leading financial services partner for a sustainable future.’ Mike Ng, OCBC group chief sustainability officer
Finally, scale matters. One impediment to scaling up projects, especially in Asia, is the propensity to haggle over contracts which take time. To scale up, standardisation and alignment in approaches is required.
In Asean for example, energy regulations vary across markets, often leading to power purchase agreement delays. With the target of importing up to four gigawatts of low-carbon electricity by 2035, Singapore has received imports of renewable energy from Laos, and intends to import renewable energy from Indonesia, Vietnam and Cambodia.
“Such agreements are an excellent opportunity to try to standardise contractual arrangements as far as possible. This could even become an enabler in the formation of a regional grid so that we can, as a region, punch above our weight,” says Ng.
As a lender and connector of capital with businesses in banking, wealth management, insurance and asset management, OCBC is uniquely placed to make a difference.
“We see these challenges as an opportunity for growth and for achieving OCBC’S ambition to be Asia’s leading financial services partner for a sustainable future,” says Ng, noting that the bank’s sustainable financing commitments stand at S$60.5 billion, having surpassed its targets ahead of schedule time after time.
Ng concludes that “there is strong momentum” as clients across the region want to make the transition to a net-zero future, he says.
“By enabling them through strategic advisory and innovative financial solutions, OCBC can meaningfully contribute to a sustainable future.”