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Green financing

Private finance – it is green and it is good business

A large amount of private capital is required in the green transition and solid financing models are vital if the green political goals for the future are to be reached. Good framework conditions, new finance models and risk management can help pave the way in unlocking private finance for sustainable projects.
21 September 2020

Large capital needs

Transforming an energy system and developing new green technologies requires equity. In a recent report from Copenhagen Economics, it has been estimated that investments of more than EUR 85 billion are needed for Denmark to reach its goal of a 70 per cent reduction of greenhouse gas emissions by 2030 (compared to 1990). Similarly, the European Commission anticipates a financing need of EUR 1 trillion by 2030 in order to achieve the European Green Deal. While it may seem unachievable to gather this level of funding, there is, according to the Danish financial sector, no lack of capital for projects based on a sound business model. Instead, the challenge will be to ensure framework conditions globally that can make necessary investments bankable.

Unlocking private finance for green investments

A big source of capital is in the hands of institutional investors such as pension funds but other types of private capital can as well be part of the solution in financing a greener future. This capital can take many forms such as for instance bank loans, mortgage loans and venture capital. Mortgage loans are provided by mortgage credit companies and in essence, mortgages are money being lend to someone to acquire something valuable against which the loan can be secured. The money is then repaid over a set timeframe with interest. Traditionally, mortgage loans have been provided for acquiring for instance a house; however, these loan types can also be used as private equity for green solutions.

Venture capital is another form of private capital, which can play a role in financing the green transition. Venture capital often comes from foundations owned by large companies or private investors and venture capitalists earn profits from injecting money into start-ups and scale-ups. Traditionally, the funding comes with a part-ownership in the company and if it makes money, the venture capital gains a surplus. The investments usually carry a large risk but also a large profit potential.

Risk-managing green investments

Some private equity actors may refrain from investments in green technologies as they in some cases are considered to have an unattractive risk-return profile. The business and finance model known as ESCO (Energy Saving Company) can function as a solution to the risk dilemma. The idea is that a private company or consortium offers to plan and execute an energy renovation or energy optimisation project of for instance an office building, financed through energy savings. The unique part of the model is that the private company behind the ESCO guarantees the energy saving for the owner of the office building and thus handle the risk. In case the project creates a larger saving than anticipated, the private company will profit.

A government can as well support a growing number of investments in the green transition through credit agencies. This can be in the form of for instance bank guarantees for loans, insurances or different types of guarantees such as export credit guarantees.

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