Investment in renewable energy and efficiency is about to happen around the world. Individuals are becoming more conscious towards their environment, which has led to more companies adopting eco-friendly business practices and transforming them into sustainable green businesses. Going green business has been a wake-up call for many companies and for some companies this was indeed a trend mentioned in the market that was recognized by them very early on.
In the aftermath of the global financial crisis, a more diversified financing market has emerged in many countries. Established investors are helping fill a funding gap missed by the downturn in bank lending in the aftermath of the crisis, particularly in long-term financing for infrastructure projects, and sitting alongside banks to offer a larger pool of capital to developers.
The economic climate that has overcome the financial crisis of increasing regulatory oversight and persistently low interest rates has led pension funds and insurance companies to look for an alternative source of stable, long-term investment.
A large body of evidence shows that renewable energy and energy efficiency are thriving sectors for business. According to one report, 190 of the 500 companies combined have saved about $3.7 billion through collective energy efficiency and renewable energy initiatives.
With the growing streak of this trend worldwide, there is an increase in debt financing in the market from mostly well-established investors for infrastructure project and more traditional renewable energy assets including solar PV, onshore wind and bioenergy. Established investors seeking long-term investment matching, index-linked liabilities, and higher safe returns compared to currently available bonds, are attracted by the type of stable, long-term, and index-linked assets.
A significant amount of investment has been made in operating assets through which investors have taken on an increased capacity for risk. However, similar to banks, there appears to be very little appetite for development risk factors. Established investors are moving faster towards their banking counterparts in being able to offer repayment profiles and withdrawal facilities suitable for this type of financial market.
Investments from non-banking institutions were often made through the purchase of participation in the secondary debt trading or bond markets. However, the debt market facilitates private placement (PP), a small group of seasoned investors that is slowly developing.
The private placement market will completely replace other forms of financing for renewable energy projects. There are already long-established groups in the private placement market in many countries for corporate debt. Since the financial crisis, smaller national markets have also developed. To help encourage the development of the private placement market, the Loan Market Association has published a set of standard documentation for private placements across several countries to provide an appropriate framework. It is hoped that this lawsuit will help increase confidence in the market and encourage investment by reducing the time and costs often associated with existing private placements in some countries.
Some efforts are being made to streamline the process and make it more transparent by moving towards more private placements. Governments in various countries have announced a tax break for private deposits, which will help encourage both borrowers and institutional investors to invest in the capital market.
Many countries are now supporting the growth of the renewable energy sector and helping to encourage greater investment in energy infrastructure, renewable energy and fossil fuels. Attracting cross-border investment and reducing reliance on traditional bank debt will further encourage institutional investment to the primary sector, helping to stimulate growth and aid resilience across economies.
Banks also returned to the market, which showed a significant increase in long-term debt facilities provided by banks for renewable energy projects. In addition, many banking facilities are likely to maintain an important role with established investors by providing them with additional facilities and deposit services. This includes meeting letters of credit and working capital that non-bank investors cannot provide to investors. Likewise, the role of the bank is to provide the trustee and agency with services in the event of mishandling of funds.
Sustained and predictable growth in institutional investment, together with recurring bank debt and other innovative financing structures, is having a deeper impact on the capital market for renewable energy projects. Investors who are looking to invest in green business are finding greater opportunities in future perspective and it is only a matter of time. Clean energy is just the tip of the iceberg. A recent study showed that companies could earn about $12 trillion by 2030 in business revenue and savings by adopting low-carbon and sustainable business models. Investors around the world are taking notice, as green bonds are increasingly seen as smart investments.