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Global Perspectives
Accelerating Green Energy Developments and Expanding Investment Opportunities: The Intersection of Finance and Sustainability
As we move into 2023, the global landscape is ripe for transformation, particularly in green energy. Environmental, social, and governance (ESG) factors are shifting the landscape of investment and finance, whilst geopolitical events, regulatory enhancements, and heightened awareness around climate change are creating new spaces for growth and development in green energy.
The urgent need for energy independence came to the fore with the Ukraine conflict in 2022. A heightened global consciousness has resulted in a considerable surge in interest and investment in green energy sources, including nuclear fusion, hydrogen power, and various renewable energy solutions. These innovative areas have seen an influx of investment, which has significantly accelerated the pace of technological advancements in green energy sectors.
With around 140 countries making net zero commitments (not adding to greenhouse gases), many by 2050, attention has turned to the quantum of investment needed to achieve these goals. According to McKinsey & Co, the transformation of the global economy would be universal and significant, requiring $9.2 trillion in annual average spending on physical assets, $3.5 trillion more than today.
This surge in green energy interest and development aligns with the numerous global commitments that many countries have made towards achieving net-zero carbon emissions. The pressure to transition to sustainable energy has never been more intense, and as a result, there is an increasing flow of funds into sustainable energy technologies and innovations. This trend presents fertile ground for private capital, with promising opportunities for investors willing to contribute to a more sustainable future.
Despite some roadblocks, ESG criteria play a pivotal role in investment decisions. In contrast to moves by certain US municipal funds to exclude ESG criteria, the Inflation Reduction Act and the EU Commission's plan to integrate the EU's Sustainable Finance Directive into a new Corporate Sustainability Reporting Directive (CSRD) underscore the critical role that green factors play in modern finance.
This proposed legislation is set to boost corporate sustainability reporting within financial statements, promoting unprecedented transparency and accountability. By providing precise, comparable, and consistent non-financial information, businesses can help investors make informed decisions that align with their values, risk appetites, and sustainability goals.
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At the heart of this European sustainability drive is the development of the EU Taxonomy, a robust classification system for identifying environmentally sustainable activities. This tool is progressing towards defining a universally accepted 'green standard.'
As noted in a recent Goldman Sachs bulletin, this standard plays a significant role in shaping asset management research, informing decisions about capital allocation, influencing the cost of capital, and affecting company valuations. It signifies that the regulatory drive towards green finance remains strong, particularly in Europe and Asia.
Developments elsewhere include introducing a global minimum tax sponsored by the OECD, and the rapid introduction of aligned accounting disclosure requirements from the International Accounting Standards Board. Trust in companies' financial health and commitment to environmental, social and governance goals, including minimum tax contributions, are very much to the fore.
The International Financial Reporting Standards (IFRS) Foundation's recent developments further emphasise this global regulatory push towards sustainability. In 2022 the IFRS established the International Sustainability Standards Board (ISSB) to develop a comprehensive global set of sustainability reporting standards. The first of these, the recently launched IFRS Sustainability Standard S1, has provided general requirements for sustainability reporting.
The Inaugural standards (IFRS S1 and IFRS S2) usher in a new era of global sustainability-related disclosures in capital markets. The measures will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions.
IFRS S1 is expected to significantly change how businesses report their sustainability efforts, making sustainability reporting as critical as financial reporting.
By creating a single, comparable global standard, the IFRS standard is set to enhance the credibility of sustainability reporting and ensure a level playing field for all companies globally, driving greater accountability and transparency in corporate sustainability practices. IFRS S2, in turn, sets out specific climate-related disclosures and is designed to be used with IFRS S1.
Private markets have a big role to play in ‘greening’ the global economy. The US Inflation Reduction Act is designed to provide tax breaks and incentives which require a market based action and investment by the private sector. In Europe ‘Fit for 55’, a reduction in carbon emissions of 55% by 2030 is well underway, and in China the transition to renewables is receiving considerable official backing. China currently has the highest annual investment in energy transition at over $250bn.
International Finance Centres (IFCs) are critical in mobilising and channelling sustainable capital towards green initiatives. Given the significant economic impact of IFCs on many small states and these states' acute vulnerability to climate change, the engagement of IFCs in sustainability efforts is paramount.
The firms operating within and through these centres must closely watch the evolving dynamics of sustainability and climate change to facilitate a meaningful global response.
In conclusion, the green energy landscape and associated investment opportunities are changing rapidly. They are driven by global events, evolving investor preferences, and increasingly sophisticated regulatory requirements.
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Global Perspectives provides regular, on-point commentary on relevant topics in a pithy and accessible way. Our observations and points of view are based on listening hard to clients global needs, priorities and concerns. We draw on insights from every area of our business and collaborate to deliver this global thinking; something that clients tell us is distinctive and sets us apart. If you'd like to find out more, please get in touch.
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About Mourant
Mourant is a law firm-led, professional services business with over 60 years' experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Luxembourg and provide specialist entity management, governance, regulatory and consulting services.
