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How big finance can scale up sustainability

Posted on June 1, 2022 by dishanth

Addressing the ever-worsening climate crisis will require the largest sustained movement of capital in history. At least $100 trillion must be invested over the next 20-30 years to shift to a low-carbon economy, and $3-4 trillion of additional annual investment is needed to achieve the Sustainable Development Goals by 2030 and stabilise the world’s oceans.

Mobilising these huge sums and investing them efficiently is well within the capacity of the global economy and existing financial markets, but it will require fundamental changes to how these markets work. In particular, traditional financial institutions will need help in sourcing the right projects, simplifying the design and negotiation of transactions, and raising the capital to fund them.

Many sustainability ideas are small-scale, which partly reflects the nature of innovation, whereby ideas are developed, tested, and, if successful, eventually copied. But the disconnect between those developing sustainability projects and the world of traditional finance means that scaling such initiatives is not straightforward.

At the risk of oversimplifying, sustainability advocates may be suspicious of “Big Finance” and its history of funding unsustainable industries. Investors, on the other hand, may be wary of idealistic approaches that ignore bottom-line realities, and might not be interested in small-scale transactions.

Given this disconnect, how do we scale up sustainable projects from small investments to the $100 million-plus range that begins to attract Big Finance and thus the trillions of dollars needed to make a global difference?

The disconnect between those developing sustainability projects and the world of traditional finance means that scaling such initiatives is not straightforward.

Three steps, in particular, are necessary. First, securitisation techniques should be employed to aggregate many smaller projects into one that has enough critical mass to be relevant. Securitisation got a bad name in 2007-08 for its role in fueling the subprime mortgage crisis that brought the developed world to the brink of financial ruin.

But when properly managed, joint financing of many projects reduces risk, because the likelihood that all will have similar financial and operational issues simultaneously is low. For the resulting whole to interest investors, however, the numerous smaller projects need to have common characteristics so that they can be aggregated. This cannot be done after the fact.

For example, we need to develop common terms and conditions for pools of similar assets, as is already happening in the US residential solar market. Then, we need to explain the fundamentals of securitisation to more potential grassroots innovators through regional conferences that bring together financiers and sustainable-project developers.

Second, we must reduce the complexity of key transaction terms and make it easier to design and negotiate the specifics of instruments used to invest in sustainable projects. In established financial markets, replicating significant parts of previous successful deals is much easier than starting from scratch for each transaction. This approach works because many of the terms and conditions for subsequent deals have already been accepted by key financial players.

Making successful innovations more visible to investors is therefore crucial. To that end, we should establish a high-profile, open-source clearinghouse of previous sustainable projects, including those that have been successfully funded and those that failed. This would be similar to many existing financial-sector databases but freely available, with reputable third-party oversight to ensure accuracy.

Third, the range of funding sources for sustainable projects needs to be expanded and made more transparent. Because sustainability investments may offer lower returns according to historic financial-market metrics, traditional asset-allocation practices, against the backdrop of “efficient markets,” would imply reduced attractiveness.

But historic benchmarks do not sufficiently factor in the exploding field of impact investing, which embraces different return and time thresholds and now accounts for about $2.5 trillion of assets. Securitising tranches of different kinds of impact investing could prove to be a game changer for sustainability financing.

It would thus make sense to create an open-source database of investor appetite – similar to the project database mentioned above – that is searchable by innovators and designers of new sustainable projects. This would make it easier to identify investors – equity, credit, or some hybrid – who might commit funding. The database could be housed in an organization such as the International Finance Corporation, the United Nations, or the Global Impact Investing Network.

There are encouraging precedents. The green bond market started just over a decade ago, and total issuance already could reach $1 trillion this year. And a critical mass of the financial world attended the UN Climate Change Conference (COP26) in Glasgow last November. Under the leadership of UN Special Envoy Mark Carney, the Glasgow Financial Alliance for Net Zero (GFANZ) has made $130 trillion in climate-finance commitments.

In 1983, Muhammad Yunus founded Grameen Bank in order to provide banking services, and especially loans, to individuals (primarily women) previously considered to be “un-bankable.” By the time Yunus won the Nobel Peace Prize in 2006, “micro-lending” had become a global phenomenon, with traditional financial institutions involved in securitizing these loans.

The financial revolution that Yunus started transformed retail lending, streamlined how such transactions are structured, and tapped a new source of scaled investment capital. To help address today’s existential sustainability challenges, capital markets and their major players need to be more innovative still and open the door to non-traditional, even disruptive, voices and ideas.

J. David Stewart, a former managing director at JPMorgan, is a sustainable-finance consultant. Henry P. Huntington is an Arctic researcher and conservationist.
© Project Syndicate 1995–2022

Source Eco-Business

Renewable energy is fueling a forgotten conflict in Africa’s last colony

Posted on November 30, 2021 by dishanth

Morocco has positioned itself as a global leader in the fight against climate change, with one of the highest-rated national action plans. But though the north African country intends to generate half its electricity from renewables by 2030, its plans show that much of this energy will come from wind and solar farms in occupied land in neighbouring Western Sahara. Indeed, in my research I have looked at how Morocco has exploited renewable energy developments to entrench the occupation.

Western Sahara, a sparsely-populated desert territory bordering the Atlantic Ocean, is Africa’s last colony. In 1975, its coloniser Spain sold it to Morocco and Mauritania in exchange for continued access to Western Sahara’s rich fisheries and a share of the profits from a lucrative phosphates mine.

According to Morocco, Western Sahara formed part of the Moroccan sultanate before Spanish colonisation in the 1880s. However, that year the International Court of Justice disagreed, and urged a self-determination referendum on independence for the indigenous Saharawis. Nevertheless, Morocco invaded and used napalm against fleeing Saharawi refugees.

Western Sahara is about the size of the UK with 1% the population. All the territory east of the red line is controlled by the Polisario, everything west of the line is controlled by Morocco. The government-in-exile is in Tindouf, southwest Algeria. kmusser / wiki, CC BY-SA

Tens of thousands of Saharawis fled to neighbouring Algeria, where the Saharawi liberation front, the Polisario, established a state-in-exile, the Saharawi Arab Democratic Republic (SADR). Other Saharawis remained under Moroccan occupation.

Today a sandy wall, or berm, runs the length of the country and everything to the east of the berm remains under the control of the Polisario. Numerous landmines deter a large-scale return of refugees, though some Saharawi nomads do live there.

Morocco and Polisario were at war until 1991, when the UN brokered a ceasefire on the promise of a referendum on independence for Saharawis. This referendum has been continuously blocked by Morocco, which considers Western Sahara part of its “southern provinces”.

Since the 1940s the UN and its special committee on decolonisation has maintained a list of non-self governing territories. As territories gained independence, they have gradually been ticked off the list, and those that remain are almost all small Pacific or Caribbean island nations.

In each case, an “administering power” (usually the UK) is officially noted. Western Sahara is the only African territory remaining on the list. It’s also the only territory where the administering power column is left blank – a footnote explains the UN considers it a “question of decolonisation which remained to be completed by the people of Western Sahara”. Morocco however doesn’t see itself as the occupying power or even as the administering power but says that Western Sahara is simply part of its country.

In November 2020, armed war resumed between the two parties. In a recent journal article, my colleagues Mahmoud Lemaadel, Hamza Lakhal and I argue that the exploitation of natural resources, including renewable energy, played no small role in provoking this renewed war.

Renewable energy from occupied land

Western Sahara is very sunny and surprisingly windy – a natural renewable energy powerhouse. Morocco has exploited these resources by building three large wind farms (five more are planned) and two solar farms (another is planned).

Map of wind power resource across Africa. Red and purple = more wind. The purple area in the north-west covers Western Sahara and Mauritania. Global Wind Atlas / DTU, CC BY-SA

But these developments have made Morocco partly dependent on Western Sahara for its energy supply. Morocco already gets 18% of its installed wind capacity and 15% of its solar from the occupied territory, and by 2030 that could increase to almost half of its wind and up to a third of its solar. That’s according to a new report Greenwashing the Occupation by Western Sahara Resource Watch, a Brussels-based organisation I am affiliated with.

In its nationally determined contribution (NDC) to the Paris climate agreement, Morocco reports on developments in occupied Western Sahara – which it calls its provinces sud (southern provinces) – as if they were in Morocco. This energy dependence entrenches the occupation and undermines the UN peace process.

According to Saharawi researchers, several Saharawi families have been forcibly evicted from their homes to make way for some of these solar farms. My colleagues have also documented forced eviction associated with the development of the wider energy system in Western Sahara.

Wind farm under construction near Laayoune, the largest city in Western Sahara. jbdodane / flickr, CC BY-NC-SA

Saharawi refugees have used solar panels for domestic energy since the late 1980s. The SADR-in-exile would now like to roll out small-scale wind and solar installations in the part of Western Sahara that it controls, in order to power the communal wells, pharmacies and other services there that are used by nomads.

I was recently part of a team that assisted the SADR in developing an indicative nationally determined contribution (iNDC) – essentially an unofficial version of the climate action plans each country was required to submit ahead of the recent UN COP26 climate summit in Glasgow.

The Saharawi Republic launched their iNDC at the COP26 People’s Summit, 8 November 2021. Joanna Allan

SADR hopes this may help to attract climate finance. The iNDC can also be interpreted as a challenge to climate injustice. While having negligible responsibility for the climate emergency, the Saharawis nevertheless face some of its worst impacts: ongoing sand storms, flash flooding, and summer temperatures of over 50°C.

The formal NDC process excludes occupied and displaced populations such as Saharawis from global conversations on how to tackle the climate emergency. The iNDC is an assertive step to demand that Saharawis are heard.

Source The Conversation