Carbon Capital: The Role of Banking in Financing the Low-Carbon Economy

The banking sector will be pivotal to financing Europe’s €2.9 trillion low carbon transition through 2020, according to a joint report by Accenture and Barclays. Long-term public policy combined with this increased capital markets financing is needed to bridge carbon capital chasm across Europe.

This report takes a unique approach to quantifying the capital needed for the low carbon economy. Past models have been supply driven, estimating low carbon technologies capital requirements “top down” based on emission targets. By contrast, our model calculates the capital needed to finance the asset development and commercialization (“development capital”) and the amount needed to finance the asset procurement (“procurement capital”). This is derived from a demand-driven model based on realistic adoption rates for a range of low carbon technologies.

A joint Accenture-Barclays study estimates that Europe requires €2.9 trillion in capital for low carbon infrastructure between 2011 and 2020. This report covers 15 commercially viable technologies across the transport, buildings, electricity generation and distribution sectors. Eighty percent of the capital required would be used to finance procurement and implementation, with the rest required for research, development and production.

If implemented, these technologies could potentially save 2.2 gigatonnes (Gt) of carbon dioxide equivalent (CO2e), enough to bring the European Union’s 2020 emissions to 83 percent of their 1990 levels. And with contributions from other sectors such as manufacturing and nuclear power generation, it will put the European Union on track to meet its 20 percent reduction target.

Smart building technologies require the greatest share of investment, while large scale wind power would generate the highest return in emissions savings. Intelligent transport systems, smart grids, biofuels and electric vehicles all make contributions to emissions abatement.

Thus far, the path to a low-carbon Europe has largely depended on government initiatives, but now, high public sector debt and maturing technologies mean that private sector capital, primarily intermediated by banks, can and must be provided to accelerate the investment required.

Of the €2.3 trillion of procurement capital identified, seventy-three percent, €1.6 trillion will need to be funded externally, creating unprecedented demand for private capital and associated bank products and services. The largest share will be debt to finance the development of low carbon technology assets. Asset leasing will be required to support consumer adoption of micro-generation and energy efficient equipment by spreading the upfront cost over its lifespan and using the energy savings to cover lease payments.

The report explores new funding models that can be used to accelerate capital flows to the sector, particularly access to deep and liquid low carbon technology asset-back securities secondary markets. This will require effective partnerships between banks, investors, project sponsors, rating agencies and public sector actors to increase asset back securities market financing. Sharing risks through secondary market access will help will help stimulate inflow of capital to this sector. Asset backed securities markets could provide as much as €1.4 trillion of the capital required, creating opportunities to offer new products for individuals and institutional investors.

The study makes a number of key recommendations for banks and policy makers to accelerate the deployment of financing schemes supporting the uptake of low-carbon technologies:

Policy makers should

• Provide a long-term and stable commitment to incentives that support the commercialization of LCT
  
  
• Leverage public funding to stimulate private sector investments
  
  
• Develop standards for asset-backed securities funding low carbon technology assets and “green bonds”.
  
  

Corporate banks, investment banks and asset managers should

• Develop the capabilities to provide LCT asset-backed securities
  
  
• Set up dedicated investment funds to give investors strategic exposure to the LCT sector
  
  
• Increase primary equity and debt contributions in LCT assets and developers
  
  
• Provide debt financing for energy-efficient and micro-generation asset leases
  
  

Develop technical, regulatory, financial and commercial expertise to support the risk assessment of LCT assets and developers Low carbon technologies are on the brink of the wide scale rollout Europe needs to reach its 2020 targets. But unless we bridge the carbon capital chasm, Europe will likely fall short in its task.