Solving the energy transition finance puzzle

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The opportunity for debt investors to promote their own ESG goals, and not have them simply set by equity investors, is clear: sustainability-linked loans are booming, writes Katrina King.

To solve a problem like climate change, you need to crack the energy transition puzzle. And to crack the energy transition puzzle, you not only have to figure out how to build it, but how to fund it.

Conservatively, at least 50 per cent of an infrastructure asset can be financed with debt, which is higher than real estate or private equity assets. For the most stable assets this number can reach as high as 90 per cent.This makes infrastructure debt a prime area of investment opportunity which can help provide a key to unlocking the energy transition puzzle. Yet, it’s a space that is just starting to be on the radar for Australian institutional investors.

The end product is well-structured private debt investments that allow debt investors the opportunity to influence the management of the borrowing company in a way which is aligned with their own goals.Exactly how is this being achieved? Loans to borrowing clients or assets can be structured as green loans , or as a sustainability-linked loans which are general purpose loans with underlying sustainability performance targets, or KPIs.

The benefit of a sustainability-linked loan is in the breadth of opportunities that it can apply to. For example,are all going to be key as each sector navigates its own unique challenges and opportunities on the path to successful climate transition. Careful structuring of these general-purpose loans can also be directed towards broader ESG issues, ensuring greater transparency through KPIs on the non-financial elements of the project.

 

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