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Returns on green investments are down, but so are costs

July 11, 2018

Photo: GGF
Returns on green investments are down, but so are costs

On the sidelines of the Green for Growth Fund’s (GGF) recently held Sustainable Future Forum and the grand finale of the clim@ pitching competition for startups, Christopher Knowles, who at the time served as chairman of the GGF, spoke to Balkan Green Energy News about the impact of innovative solutions, return on green investments, and civil society organizations’ allegations concerning run-of-the-river hydropower projects.

The clim@ competition organized by the Green for Growth Fund attracted huge interest from startups from the whole world. How do their innovative solutions contribute to the sustainable development agenda?

I thought what was interesting was the range of solutions competitors are offering– from data mining, we saw that with the hotel energy efficiency concept; to resource efficiency, such as the recycling of cooking oils or the use of crop waste; or even the recycling of wind turbine blades.

Then we had some quite innovative takes on old ideas. I would call solar photovoltaic rather older technology these days, but you saw an interesting new method of creating instant energy supply for a community of 4,000 people. And you could use that to bring electrification to populations which have had no electricity, or for disaster relief when electricity has been lost because of storms or other occurrences. I think the sheer number of ideas – there were 260 applications from 80 different countries – is incredible for one competition organized by one fund manager located in Frankfurt.

Do you think that you will continue with similar activities and competitions?

I don’t see why not. We have a lot of different players who I believe would be interested in seeing similar events in the future. There are a number of competitions around these days. But the need to decarbonize and manage resources better is so great, we need every angle and every dimension explored, and I don’t think we should close any doors at the moment. We are a creative people, the human race, and now is when we need all that creativity to come forward and pick up the ideas that can be commercialized, and support them financially and managerially to roll them out to the population at large.

Which areas of green financing do you find most promising in terms of return on investment and the sustainability potential?

I think we have some very interesting developments in the energy field nowadays, taking several different forms.

There were 260 applications from 80 different countries – it’s an incredible proportion for one competition organized by one fund manager located in Frankfurt

On the one hand, we have seen the reduction of unit costs for photovoltaic panels and turbines, and the levelized cost of electricity coming out of these new renewable technologies has declined really dramatically. In the time that I have been working in the field, the costs of these technologies have gone down somewhere between 15% and 20% a year. That’s a fantastic rate of descent. And the technologies have matured –meaning that, whereas 10 years ago in most parts of the world, you needed to subsidize green energy technologies to compete against the incumbent technologies like coal, gas, and so on, now you don’t really have to subsidize them in a lot of places. In other countries where the introduction of renewables is less about meeting growth in energy demand and more about decarbonization, cleaning up air pollution, and reducing greenhouse gas emissions, it’s possible to achieve that through renewables with a minimal use or even no use of subsidies. So that’s a huge difference from ten or even five years ago. This has made it much more attractive from an investor perspective. A lot of investors don’t like to be dependent on the government, relying on subsidies to get their return.

That’s a good thing in a sense, this relief from subsidies.

On the investor end, we have had a difficult period due to the prolonged recession. Globally, we had this very low interest rate regime: We had a lot of money, a lot of liquidity out there looking for someplace to go, but it couldn’t find anywhere to go because the structures weren’t there. The capacity wasn’t there, the legal environment was not there– and for the opportunities that did exist, we had money competing, which has pushed down yields dramatically. Ten years ago, we were looking at a targeted rate of return of 18% or 15%; now we think we are doing quite well if we get somewhere between 5% and 10%.

This has reduced the interest for certain types of investors, but on the other hand, the fact that we no longer depend on subsidies, on governments getting their calculations right, makes it more straightforward for other investors. More investors are being attracted to these areas, and events like this also raise investor and overall awareness. People are beginning to understand they have to change the way they behave.

Ten years ago, we were looking at a targeted rate of return of 18% or 15%; now we think we are doing quite well if we get somewhere between 5% and 10%

Many banks around Europe these days, and many financial institutions generally – such as pension funds and insurance companies –they are beginning to understand they have to change the way they are doing business. They have to pay attention to where they are investing their money. They have to put pressure on their customers to change their behavior, and they have to in turn disclose information to their investors – to the people contributing to the pensions, to the people making deposits, to people buying insurance policies – because these people want to understand much better what is the climate risk underlying that financial asset.

I think there is no particular magic or surprise here: We will continue to see low but viable yields for renewable energy for another few years. Globally speaking, it is a very positive time in which to roll out projects: the cost of capital is still low, and that helps when you are talking about very capital-intensive businesses like renewable energy. But I think also we need to be conscious about why we are seeing growing volumes of renewables and energy efficiency. In the future, we have to work also on soft green assets, on sustainable land practice, sustainable forestry management… We are talking there about livelihoods, food supplies, really fundamental things.

Civil society organizations are nowadays putting strong pressure on financial institutions and their energy portfolios, especially over financing the hydropower sector. What is the GGF doing to be absolutely sure that the projects it finances fully meet environmental standards?

This is basically about standards. We do not intend to support investments in what might be renewable energy but which might also be doing massive damage to biodiversity. It would be wrong to focus on one aspect of sustainability to the exclusion of others, and we make every effort to ensure our investments do no harm. So how do we avoid this? As I said: by having very clear standards and principles. And not just having them, but enforcing them. A lot of times, governments will put the right kind of policy on their statute books: The E.U., for example, has a very clear set of standards and enforces them. But not all governments have that legislation on their books and not all governments necessarily enforce them as efficiently as they might. There are countries that are not in the E.U., in the Balkan region for example, which would like to join the E.U. one day – most of these are importing EU legislation into their statute books. It can be the case, though, that some of these countries are in a weaker position when it comes to then enforcing that legislation.

In the future, we have to be working on soft green assets, on sustainable land practice, sustainable forestry management…

Provided you have the strong standards, though, and provided you really do respect those standards, then we should be equipped to avoid supporting any project which is overall negative in any important environmental or climate sense. We as investors should be supporting businesses that are biodiversity positive –which are actually encouraging biodiversity e.g. biodiversity. And this is possible, there are methodologies for practicing this.

Now I know that there have been allegations made, I know there has been investigative journalism concerning some run-of-the-river hydro schemes in the Balkan area in particular. I think we have to accept that in society there are different voices: Some of them are more vocal than others. Quite often civic society speaks loudly – they are passionate people, they believe strongly in their message – but they don’t always necessarily have access to good scientific analysis; sometimes they are using information which isn’t entirely accurate. The day my bank or this fund were to receive information showing the standard we thought we were following had not been adhered to, and that biodiversity had been harmed as a consequence, or something else unanticipated and unacceptable had occurred, I can assure you we would react extremely strongly and make very sure that did not happen again.

The guidelines we follow and the very detailed due diligence we run before making any investments, and that especially includes run-of-the-river hydro schemes, are designed to make sure we do not have any negative unintended consequences on the environment

In principle, however, the guidelines we follow and the very detailed due diligence we run before making any investments, and that especially includes run-of-the-river hydro schemes, are designed to make sure we do not have any negative unintended consequences on the environment. This is how we work. We believe we are doing quite well so far. Of course, I don’t want to sound complacent – mistakes can happen, we are all human. But I think we are reasonably well-insulated against those kinds of mistakes.

Once you said that if we want to make a true change in the way we take care of our planet, the multigeneration approach has to be applied. Can you elaborate on this?

The very interesting statistics presented at the panel this morning show the alienation of the younger generations: In certain parts of the world, a high 20% of youth today doesn’t feel anything can be done about the environment. And if they don’t feel anything can be done, then nothing is going to be done. I believe that was a really powerful message this morning – that we have got to find ways of connecting not just all generations but in fact all parts of society. We have to get civil society in the same place as the financial community, in the same place as the corporate world and in the same place as consumers. Consumer behavior is especially key to effecting change.

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