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Financing the Clean Energy Transition and Sustainability Initiatives Toolkit
Practical Law Toolkit w-042-0006 (Approx. 6 pages)
Financing the Clean Energy Transition and Sustainability Initiatives Toolkit
by Practical Law Finance
| Maintained • USA (National/Federal) |
A Toolkit containing resources that borrowers, issuers, financial institutions, and their counsel can use to understand the private and public sources available to finance sustainability and energy transition initiatives. This Toolkit also includes resources describing how these entities can deal with stakeholder, regulatory, and political criticisms and backlash to these initiatives.
A recent report by the World Economic Forum, the Global Risks Report 2024, has identified the main environmental risks facing the world over the next ten years. They include:
- Natural resource shortages. Supply shortages of food or water (or both) for human, industry, or ecosystem use, including food and water insecurity as a result of human overexploitation and mismanagement of critical natural resources, climate change (for example, drought, desertification, and ocean acidification), or the lack of suitable infrastructure.
- Biodiversity loss and ecosystem collapse. Severe consequences for the environment, humankind, and economic activity due to the destruction of natural capital as a result of terrestrial and marine species extinction or reduction.
- Extreme weather events. Events that may result in loss of human life, damage to ecosystems, destruction of property, or financial loss due to extreme weather events, including wildfires, floods, and heat waves.
Key decarbonization solutions proposed to address these risks or to mitigate their impact include large-scale clean energy development, the deployment of energy storage technologies, the electrification of industrial processes, energy efficiency improvements, the development and commercialization of carbon capture, clean hydrogen, and other technologies to reduce greenhouse gas (GHG) emissions from hard-to-abate sectors. These solutions require significant investment from the private and public sectors and a regulatory environment that incentivizes and promotes them. Significant capital is also needed to strengthen and develop the supply chains to secure the minerals, components, and other inputs needed to build clean energy projects and infrastructure.
Many governments and companies across all sectors have made commitments to address and mitigate these risks, but funding remains below the amount needed to meet these commitments. These entities are also facing pressure to take steps to ensure their policies, investments, and decisions:
- Protect and consider the rights inherent to all human beings, regardless of individual status.
- Eliminate (or at the very least do not contribute to) persistent barriers to the realization of economic potential and security, including income and wealth inequality and unequal access to educational, technological, and economic opportunities.
- Ensure the clean energy transition is fair and just and does not ignore industries, workers, and communities dependent on fossil fuels.
The size of the investment needed to address these environmental and societal risks and change the way governments, companies, and financial institutions do business requires the involvement of a wide range of participants including government agencies, capital market investors, and private lenders. But providing the necessary capital faces several obstacles, including:
- Inflation and high interest rates that have increased development and borrowing costs.
- Supply chain disruptions that have delayed project development and increased construction and operating costs.
- Backlash from regulators and politicians that have caused some companies and investors to retreat from environmental, social, and governance (ESG) and sustainability commitments and/or sustainability initiatives.
- Fear of litigation and stakeholder criticisms that they are not doing enough or are misleading stakeholders (greenwashing and social washing), leading to many companies downplaying their participation in and commitment to these initiatives (greenhushing).
Despite these issues, many companies and financial institutions remain committed to investing in and extending financing to projects and initiatives to achieve ESG and sustainability initiatives (see Practice Note, Environmental, Social, and Governance (ESG): Overview).
Practical Law has published several resources these entities and their counsel can use in understanding the financing sources specific to these initiatives that are available and issues they must consider when entering into and structuring financing instruments to achieve their ESG and sustainability objectives. These resources include information on:
- Capital markets and loan market financing products. While companies, financial institutions, and investors can use standard loan and capital market products to finance their initiatives (see Syndicated Loan Agreement Toolkit and Debt Covenants Toolkit) many prefer to enter into financing instruments specifically targeted for these initiatives (thematic instruments with use of proceeds restrictions such as green bonds or blue loans) or instruments that aim to modify borrower or issuer behavior through margin increases and other financial term adjustments.
- Federal government incentives, including income tax credits and grant programs.
- Managing the backlash to these initiatives.