Financing a Just Energy Transition

Sunil Kaushal

The energy transition is expected to move up a gear later this year as the global climate change meeting, COP27, is hosted in Africa this year. The UN Climate Change Conference, to be held in Egypt’s Red Sea meetings hub, Sharm el-Sheikh, will build on the momentum of the COP26 event held in Glasgow last year and advocate harder for the implementation of commitments made to tackle global warming. The urgency is even more acute whereby since COP26, the global energy market has been subject to significant levels of price disruptions that have been driven by a mix of policy, market conditions and geopolitical tensions. In the first quarter of this year, we have already experienced a 25%+ increase in LNG prices. This is a wake-up call to drive energy source diversification including accelerating the rollout of renewable energy sources. However, as we accelerate the transition, we need to be mindful that there will be significant increases in key sustainability enabling commodities such as lithium, nickel and palladium.

Standard Chartered set new targets for reducing its funding to carbon-intensive sectors by 2030 at COP26 as part of a broader goal to reach net-zero emissions for itself and its clients by 2050. The Bank has an added advantage for the Egypt meeting as it is poised to open a fully-fledged banking operation in Egypt to replace its current representative office in Cairo.

The choice of Egypt as the host has raised hopes that the specific challenges of Africa in particular and emerging markets, in general, may get more attention than in the past. Standard Chartered, which already has a presence in 15 African countries and is active in another [36], is well placed to assist with what will be a tough transition on a continent still largely reliant on fossil fuels Specifically, I anticipate a greater focus on enabling a ‘just’ energy transition that drives sustainable economic development. The challenges are likely to be compounded by the retreat of global banks from funding coal and other segments of polluting energy. African companies that form part of the supply chain of multinational companies face the added challenge of trying to meet the emissions targets set by their international clients or losing their place in this lucrative system. 

Banks have an important role to play in financing a just energy transition through their lending practices and investments, but these need to be aligned to global trends and their own sustainability objectives. This is reflected in their participation in various global initiatives to ensure responsible lending.  At COP26, Standard Chartered, along with nearly 450 of the world’s banks, committed to the Glasgow Financial Alliance for Net Zero, which aims to push banks to decarbonise their investments. Participating banks have pledged to report annually on the emissions linked to the projects they lend to.  This follows the 2019 initiative – the Principles of Responsible Banking. This was created as a partnership between founding banks and the UN to align bank lending to the vision contained in the Sustainable Development Goals and the Paris Climate Agreement.

Standard Chartered’s approach to the transition reflects its view that climate change is one of the greatest challenges facing the world today, the impact of which will be felt most in the markets in which the group operates, including those in Africa. The Bank has announced its ambition to reach net-zero carbon emissions from its financed activity by 2050, and in 2021, it announced interim 2030 targets for the most carbon-intensive sectors. We have done so in the context of rising hydrocarbon usage across key economies including India and China.

It will no longer finance new or expanding coal-fired plants and aims to reduce absolute financed thermal coal-mining emissions by 85% by 2030 and only provide financial services to clients who are less than 5% dependent on revenue from thermal coal. It also expects all clients in the power generation, mining and metals, and oil and gas sectors, to have a strategy to align their business with the Paris Agreement goals by the end of 2022. Africa may also feel the impact of the need for multinational companies to push their own emissions commitments through their supply chains globally. Standard Chartered Carbon Dated study, released last year, found that supply chain emissions account for an average of 73% of MNCs’ total emissions.

More than two-thirds of companies surveyed said they would tackle this problem in their supply chain before focusing on their own carbon output. About 64% believe emerging market suppliers, including those in Africa, will struggle more than developed market suppliers to meet their emission reduction targets. A majority was prepared to replace those suppliers with companies from developed markets in order to aid their own transition. This is a concern for Africa-based companies, who are still largely dependent on grid energy generated by fossil fuels even as regulation can preclude any rapid scaling up to renewable alternatives.  But if they can master this challenge, suppliers in 12 key emerging and fast-growing markets can share in $1.6 trillion worth of business.

Of the group’s 59 footprint markets, about half do not currently have a commitment to reach net-zero by 2050. Many of them are reliant on carbon-intensive industries for economic growth. Achieving a just transition – one where climate objectives are met without depriving developing countries of their opportunity to grow and prosper – will require capital and specialised support, an area where Standard Chartered has significant expertise and capacity.

The Bank is well-placed to direct capital to markets that have both the greatest opportunity to adopt low-carbon technology and face some of the toughest transition financing and climate challenges.

Sustainable finance is a key priority for the Bank, as shown by its $35 billion commitment to financing for clean tech/renewables and $40 billion for sustainable infrastructure. The bank is

structuring the majority of its energy and infrastructure transactions as green and social loans. It has pledged to mobilise $300bn in finance to low-carbon industries and to projects further the transition in hard-to-abate sectors by 2030. It has published a new Transition Finance Framework to assist with this. Transitional finance addresses a number of issues. For example, the markets and sectors that require the most financing to transition to low carbon business models are often left out of green finance. In emerging markets, they also tend to be the sectors that are essential for livelihoods and economic growth.

The same regions can be the most vulnerable and least prepared for the increasing frequency and severity of weather events from climate change. Standard Chartered leverages its global networks and partnerships to address areas of greatest need in its network and this includes assisting emerging markets with the energy transition.

Its actions include the following:

•          Transition technologies: building expertise, appetite and credentials for key cross-sector transition levers such as electrification, hydrogen, carbon capture utilisation and storage as well as nature-based solutions

•          Value chain collaboration: Using data and analytics across its network to identify opportunities to reduce emissions for clients and along the value chain.

•          Partnerships: Working with clients, peers and policymakers to create partnership opportunities and thought leadership in the transition.

•          In Asia, Africa, Middle East: Continuing to support clients in their transition to net zero by providing advice and capital to reduce emissions quickly without slowing economic development.

•          In Europe and the Americas:  Connecting transition capital and technologies to geographies that are the most vulnerable to climate change, including those in Africa.

Sunil Kaushal, Chief Executive Officer, Africa and Middle East (AME), Standard Chartered Bank