Financing the Green Transition

The energy sector must commit to acting in concrete ways against climate change, structural inequality and social alienation if they hope to be financed through a growing number of ESG funds. This will take some time, a bit of effort and more soul-searching than we are perhaps used to.

To borrow a thought from the Lebanese-American poet Khalil Gibran, the Green Transition is a “responsibility, not an opportunity.” Although we have known since the late 70’s and the early 80’s that cata­strophic climate change is a possible scenario, committed and significant change has been slow to materialize within the energy sector. The reasons are many: the world is developing at varying paces, energy chains are com­plex and interlocking entities and the capital costs of new technology must not outweigh the rate of reasonable return. Even realpolitik dictates that not all alternative means of generation are viable.

Nevertheless, the consequences of human inaction are already starting to show, and we are facing a world of decreasing wellbeing, unrest and urgency that demands we act. The energy sector has a pivotal role to play in this, as the lion’s share of the world’s emissions are produced through its actions. With the European Green Deal, the legal codification of the EU’s climate goals and the sharp devel­opments in the Emissions Trading System, Finland’s energy sector is currently under increasing pressure to reform. Simultaneously, a persistent investment gap has been identified in our industrial sector, which poses the question: how should energy compa­nies finance the Green Transition?

The New Normal

No matter what humankind’s relatively short memory would have us believe, global shocks are the norm rather than the exception. In fact, they are so commonplace that adapting to them often gains the moniker “the new normal”, which refers to the concep­tualization of a time of blissful igno­rance in the before and a time of slow reconstruction in the after. At the mo­ment of writing, in the spring of 2021, it is hardly difficult to envisage the newest “normals” that we have come to know. With its acuteness, the Novel Coronavirus pandemic has served both to overshadow and to bring into stark contrast many of the problems that faced global societies far prior to its arrival. These include not only envi­ronmental concerns but also growing economic inequality digital and social alienation, reckless populism and the acceleration of destabilizing conspir­acy theories. It is clear that the World is becoming more splintered in a time of increased need for cooperation and unity, which makes the case for adaptation and positive action all the more important.

Conscious Capitalism

The growing adoption of corporate social responsibility (CSR) policies is one of the better types of new normality to come from the increasing global awareness enabled through digital interaction. It is no longer possi­ble for successful businesses to ignore the world around them and the best will attempt to get ahead of the curve of conscious action. For Finnish energy companies this refers particu­larly to their relationship with national and international climate targets, their relations with an expanding set of active stakeholders and demands for corporate transparency; these issues converge in the acronym “ESG”, which is bank-terminology for environmen­tal, social and governance criteria.

Financial institutions use ESG criteria as a means of guiding so­cially responsible investment, which includes a large number of financial instruments, such as equities, bonds and loans. Historically, ESG criteria have informed divestment rather than investment, where certain investors and institutions have been unwilling to invest in problematic businesses, such as the fossil fuel in­dustry or tobacco companies. Today, ESG investing takes an active role in channeling funding towards sustaina­ble and green activities in a financial­ly robust way. ESG is also a growing force in global markets, where sustainable and green investment funds outperformed many forecasts even throughout the stormy waters of 2020.

From a business perspective, attracting ESG investment is funda­mentally a form of risk management, as it signals good corporate citizen­ship beyond the traditional balance sheet. Sustainable businesses are at the forefront of recognizing their im­pacts in a broader context, be it envi­ronmental, social or political, and they are thus better protected from market shocks. For an energy company, ESG criteria might be tied to airborne emis­sions, but also to water management, noise and light pollution, HSE, equi­table recruitment and remuneration policies, and to ethical supply chains. None of these issues are a surprise to a responsible actor in the Finnish energy sector; what’s new is how they can affect its access to financing.

Beyond ESG investment through equities, which is currently the most prominent, there exists a growing market in green bonds and loans. Green bonds are strongly character­ized by their bond frameworks, which clearly state the conditions under which the bond has been established and the rules by which its proceeds may be disbursed. Bond frameworks are developed to be compliant with a number of internationally established codes of conduct, such as the UN Prin­ciples of Responsible Investment, the Equator Principles or the aptly named Green Bond Principles. In the future, green bonds can also be developed according to the EU’s Green Bond Standard, which will automatically en­sure that they are eligible for “green” status within the Union.

This is no mean feat, since with the anticipated adoption of the EU’s Green Deal and especially its technical specification, the Taxonomy, energy companies will be subjected to new expectations and limitations. These expectations concern especially how projects are defined as envi­ronmentally friendly. Another option for energy companies is to take out green loans from banks that have already established green bonds in advance. Projects that are nominated for these loans go through an in-bank approval process, where their envi­ronmental credentials are investigated by sustainability analysts and, if they are found compliant with the green bond framework, awarded with green financing. Often, this green financing is also significantly more affordable than its regular counterparts, thanks to its managed risk.

Green Transition compliant engineering

The Green Transition is an all-encom­passing endeavor; it runs through every part of Finnish society, and coming to grips with it is sometimes a daunting task. Changes are suggested, mandated and adopted on multiple levels simultaneously. On one day, we might struggle to rise to meet the EU’s demands, the second we engage with local environmental organizations and obligations, and on the third we must maintain and improve the company’s own generation capacity.

ESG investment offers an alterna­tive for a structured approach to trans­forming regular business into green business, but attracting it requires a broader overhaul of styles of think­ing about engineering. ESG criteria are best met through the readiness, willingness and ability to see beyond the crisis and to commit to effective action to mitigate it. There are no easy answers for how to meet these chal­lenges, but there are some questions we might start with.

Transparency makes responsibility easier

Do you know what you already know? – The basis of ESG finance is knowledge and the key to it is communication. Energy companies generate infor­mation in droves – daily, monthly, yearly. Some of this knowledge is gathered and made public through corporate reports, other parts inform the company’s function and advise its plans for the future. All of it can potentially be used to communicate responsible business practices and good commitments, which have a signaling effect on the surrounding society. The increase in data-led and data-driven business began as early as the 1990s, but it is becoming main­stream only now as more companies are making the slow shift to relying more strongly on the interpretive and interdisciplinary field of data science. One of the many benefits of making use of data streams is increased trust in corporate practices. This translates to better access to both public and private funding, which can potentially make up for some of the perceived failings of the Finnish economy and boost investment into lucrative and sustainable solutions.

Are you trying to do this alone? – The pandemic has taught us that our societies are far more vulnerable than we ever expected. A lesson business might take here from disaster relief and reconstruction is that although centralized large actors are never adept enough to best meet local needs, no one is equipped to handle a catastrophe on their own. Cooperation is arguably the best human quality with regards to community survival, and while companies have obviously gathered around shared interests in the past, they should be open to some of its newer forms now. An example of these is asymmetric business ecosystems, which have formed around data-sharing between large companies and SMEs, another one is international business cluster­ing, which has strong backing from the European Union and is sometimes even a prerequisite for easier access to some of its funding, such as COSME or Horizon Europe. These partnerships may be varied in kind and intercon­nection, but they share an ethos of pooling resources and the commit­ment to a common goal.

While curiosity makes for better CSR

Do you know what is important for your stakeholders? – Businesses and individuals alike really should ask more questions. Not only from ourselves (although we are often drawn to think that’s where the best advice comes from), but also from those around us who do not necessarily share our views. Openness to a wide set of views correlates with better prepared­ness in times of uncertainty, because it allows us to form more accurate assessments of the world. Stakehold­er engagement has been shown to have beneficial impacts on company practices and many banks managing ESG funds are active shareholders. This type of environmental and social awareness is often behind why even energy companies are currently interested in protecting and increasing pollinators. While most of ESG-related performance is still communicated via Key Performance Indicators (KPIs), the actions that have the best con­sequences are not always well-quan­tified. And it is these forms of action that do and will continue to spur sustainability in the energy sector.

How are your most at-risk stakehold­ers doing? – We should also be willing to own our role in the broader society by engaging more openly with struc­tural issues. On a global scale, Finnish society is among the most egalitarian, but even we face social problems, such as energy poverty. Although the standard of Finnish housing is unde­niably good and warrants at least a little national pride, simultaneously, according to EU statistics, the rela­tive share of energy expenditures for Finnish households is significant and abnormally low energy expenditures are recorded for 29.9% of them. These figures may have many explanations, such as alternative heat sources and the methodological challenges in accounting for housing coopera­tives, but the most unfortunate one is restricted energy spending, which has been estimated to affect 60,000– 100,000 households.

By definition, structural problems cannot be solved by any individual actor alone, and the energy sector is no exception. We are an important part of the solution, however, and our awareness and our willingness to speak up are crucial. In order to maintain their credentials, business­es should be able to motivate their actions not only to their shareholders, but – through socially responsible investment practices – also to those directly affected by them.

And tangible things make for a better Green Transition

What are you really doing for the environment? – Regardless of where one stands, energy companies or engineers are never value-neutral. The decision to invest in, design, build and operate a large industrial plant carries implications that all of us can see and appreciate. Therefore, in order to strive for responsibility and sustainability, the actions we take should be as real as the results of our work.

Legal and financial frameworks for green industrial projects are begin­ning to emerge, but businesses that concentrate on meeting the baseline are not well-prepared to compete against those that go beyond. Best practices often vary, and they can be mapped with the help of stakeholder engagement, but it is important for businesses to articulate their goals in concrete terms and to ensure those goals are met. In the age of Twitter activism, genuinely made but broad and vague gestures at sustainability are just as likely to gain the label of “greenwashing” as those made in bad faith. Consumers, decision-makers and financiers are more than capable of judging corporate responsibility, and will do so. It can thus be useful and effective to treat sustainability goals as systematically as one might an engineering project, by formulat­ing practical steps, setting attainable objectives and documenting one’s efforts, successful and unsuccessful, in a transparent way.

Financing and engineering the Green Transition

The Green Transition requires a push for investment and innovation the like of which has not been seen in our lifetime. It may be the most significant New Normal of the 21st century and its burden on any societal actors, the energy sector included, should not be underestimated. Most of the mes­sages we are shown tell us that we are not on the road to success, which has spurred some understandable counterreactions that either attempt to discount the severity of the issue, to redirect the conversation to other tracks or to show that things really aren’t that bad, look. The crisis is here, nevertheless, and once its effects start to cumulate the consequences will concern us all. Fortunately, the ability and the will to act are already evident in the Finnish energy sector and good options to help us undertake the tran­sition are available.

ESG and green finance are exam­ples of a rehabilitated form of cap­italism looking to adapt to an envi­ronment that no longer supports old modes of thinking. Socially responsi­ble investment forms a set of metrics and classifications being developed to better define what sustainable development means for businesses, which can solidify the concept of how to be a responsible actor in one’s field. Attracting ESG financing is a matter of adopting corporate social responsibil­ity thinking as an integral part of one’s business model, which begins with a willingness to challenge some of our most entrenched ideas of the world. But it is worth noting that financing the Green Transition will take us only half of the way.

We must also recognize the need to apply sustainability to the way we consult. Perhaps by virtue of its central position for decarbonization efforts, the energy sector today is a relatively climate-aware part of heavy industry. This sets a challenge for us as design­ers, because in order to best help our clients we must stay ahead of them. The next five years will show the world which technologies will come to dominate the Green Transition, but we as designers and engineers cannot afford to wait that long.

By engaging with ESG and sus­tainability thinking, this article argues above all that meeting reality where it is allows us a more accurate under­standing of it – and a more resilient position alongside it. Engineers should work to meet and even preferably pre-empt environmental, social and gov­ernance issues related to our projects. We already seek to constantly attract, maintain and update our professional knowledge, but we should also open ourselves to the kinds of dialogue that bring us better in touch with the broader society. In a sense, engineer­ing for the Green Transition requires of us what we already do best: solving problems. ESG, sustainability and a broad societal dialogue are what allow us to see those problems better. What we can do to help the transition along is to show and guide our clients to­wards our common goal: for a cleaner, more equitable and more just world for them, us and everyone else.