Transition drivers 2023: policy and finance towards net zero

Amidst the energy crisis and geopolitical challenges, the urgency to scale up clean energy has become central to the debate on transition trajectories. Policy and finance will be critical to these efforts, and key drivers in accelerating the net zero transition in 2023.

We dive into the transition outlook for the rest of the year with leader in European equities, BNP Paribas Exane. We also profile innovations across finance that could leapfrog the net zero economy this decade, and share the latest perspectives from BNP Paribas Low-Carbon Transition Group and sustainable capital markets teams.

Climate Outlook 2023

According to the BNP Paribas Exane ESG research team, there are four narratives likely to steer the agenda, with policy front and centre.

Divergent US and European climate policies

Mid-2022 saw the introduction of the US Inflation Reduction Act (IRA), giving subsidies for clean energy manufacture and deployment. In contrast to the US carrots, the EU has focused on sticks through carbon regulation. In December 2022 the EU agreed tighter carbon market measures and carbon border taxes, helping to lift the EU Emissions Trading System (ETS) carbon price to EUR100/tonne.

The ETS is also set to grow to €150 billion per year by including shipping, aviation and a new market covering road transport and buildings. The divergence in these approaches between the US and Europe could create different consequences across industrial climate and trade policies, although both present a supportive backdrop for clean energy growth this year.

The EU’s IRA response

While the high EU carbon price provides a strong incentive to cut emissions, the US IRA presents significant challenges to Europe including dependence on Chinese supply chains, how to incentivise trillions of Euros of investment to meet 2030 targets, and how to enable European industry to be competitive in the face of high energy and carbon costs.

This month has seen four initiatives under the EU’s new Green Deal Industrial Plan: the Net Zero Industry Act, the Critical Raw Materials Act, State Aid changes and reforms to the Electricity Market Design. These are intended to set targets for domestic production of strategic net zero technologies and raw materials, speed up permitting processes and allow for subsidies to be given to encourage investment. While they mark a shift in European energy and industrial policy, they may not be enough to solve Europe’s problems.

Security and competitiveness remain key challenges

Gas constraints are set to remain in 2023. While gas prices have fallen considerably since November last year, Europe looks to be paying higher prices for power and gas than the US and Asia for the remaining part of this decade.

Decarbonisation remains key, and in the current geopolitical context should be done taking into account the security of supply and its affordability to ensure a fair transition. In terms of investment, Europe is still at the forefront but Americas and APAC are expected to catch-up rapidly.

Sectors in global clean energy will accelerate in 2023

BNP Paribas Exane ESG research predicts that developers that are able to monetise clean energy in Europe at close to market value or engage in transition through securing US tax credits seem set to benefit from climate policies on both sides of the Atlantic.

At the same time, high emissions industrials in Europe with limited decarbonisation plans will face challenging headwinds from a regulatory perspective.

Channeling finance towards transition

Sustainable finance is becoming an integral part of transition strategies. To support companies and investors in their efforts to scale up transition, bespoke solutions for short, medium, long-term transition financing are crucial.

Innovation across finance is essential, and is happening across capital markets, M&A (mergers & acquisitions), advisory and project finance. This has been spurred by regulation, investor appetite, and the mainstreaming of science-based targets into financing strategies.

Landmark finance innovations supported by BNP Paribas teams across all sectors of the economy have included:

Primary capital markets: the Republic of Slovenia became the first Sovereign in Central and Eastern Europe (CEE) to enter the sustainable bond market in 2023, with a €1.25 billion 10-year sustainability bond. The bond was the second and largest of its kind issued by the country and was issued under Slovenia’s updated Sustainability Bond Framework.

Debt advisory: The Dogger Bank Wind Farm, located off the North coast of England will become the world’s largest offshore wind farm when completed in 2026, producing enough renewable electricity to supply 5% of UK demand and power six million homes each year. The landmark £8.0 billion financing deal was delivered by 29 banks and three export credit agencies. BNP Paribas acted as financial advisor on the project and Mandated Lead Arranger.

M&A: Blue Elephant Energy (BEE), a Hamburg-based company, is a renewable energy platform covering developing, acquiring, and operating 67 solar and 13 wind power farms in eight countries across Europe and Latin America. BNP Paribas acted as a core financial adviser to BEE on the trade.

Equity capital markets: SPIE, a provider of technical engineering solutions for the construction sector, successfully issued €400 million inaugural sustainability-linked convertible bond due 2028. The bond is linked to sustainability targets for 2025 related to greenhouse gas emissions reductions, the share of purchases from suppliers with carbon reduction science-based targets, the proportion of revenues aligned to the EU taxonomy climate mitigation criteria and the proportion of women in key management positions. BNP Paribas acted as Global Coordinator, having led all three sustainability-linked convertible bonds ever issued in the market to date.

To help corporates navigate their sustainability journeys, in 2021, BNP Paribas launched the Low-Carbon Transition Group (LCTG). This brings together over 250 experts across geographies and business lines and supports clients on targeted sustainability advisory and financing solutions across regions and business lines.

More recently, the bank entered a new phase of rapid acceleration towards a low-carbon economy. BNP Paribas has already made a major pivot towards financing the production of low-carbon energies. The Group’s credit exposure to low-carbon energy production was already close to 20% higher than those for fossil fuel production in September 2022.

Scaling up clean energy, phasing down fossil fuel financing, and driving capital towards innovative low-carbon transition solutions remains critical in the coming months and years ahead. The BNP Paribas Low-Carbon Transition Group is mobilising its expertise to support innovation and the transition of BNP Paribas clients, leveraging on the Bank’s integrated model and expertise across debt and capital markets, M&A, and beyond.
Severine Mateo, Head of the Low-Carbon Transition Group

BNP Paribas recognised for Low-Carbon Transition Group expertise

Recognising the value of low carbon transition expertise for our clients, Project Finance International (PFI) named BNP Paribas as Americas Bank of the Year in the beginning of 2023.

The award highlights the Bank’s low-carbon transition expertise in both traditional and new sectors pioneered by LCTG. Several innovative deals across BNP Paribas LCTG geographies were recognised by the leading voice in global project finance intelligence:

In Americas

Edwards Sanborn’s solar storage facility inCalifornia was financed with US$959 million in senior secured credit facilities. BNP Paribas led the construction and term financing together with three other banks. As per PFI, it is the largest single solar and battery energy storage project to be financed to-date. The deal was recognised by PFI as Americas Renewables deal of the year.
Acciona and partners secured non-recourse €1.28 billion loan financing to construct São Paulo’s subway line. The project was recognised by PFI as Americas Transport deal of the year as an example of the largest public-private infrastructure project in Latin America. BNP Paribas acted as financial adviser and sustainability co-agent.

In Europe

Finerge, the Portuguese renewables developer, obtained a €2.3 billion syndicated green loan to construct its 1,251MW advanced pipeline of renewable energy assets on the Iberian peninsula. BNP Paribas acted as Mandated Lead Arranger and Bookrunner. Recognised by PFI as Europe’s Renewables deal of the year.
The Parc Eolien de Guérande, the first offshore wind farm project in France located off the coast of Saint Nazaire and that reached completion at the end of 2022, raised a €2.4bn financing package from a syndicate of lending banks to refinance a construction financing set up in 2019. BNP Paribas acted as financial advisor to the project and top lender.
Tages Helios II closed its €1.1 billion project financing funding the acquisition, refinancing, operations and maintenance of a 341MW wind and solar photovoltaic (PV) portfolio of assets located across Italy. BNP Paribas acted as Green Loan Coordinator. It was recognised by PFI as Europe Portfolio deal of the year.

In APAC

Indian renewables developer ReNew Power financed the country’s largest round-the-clock (RTC) green energy project with a US$985m green loan facility. This represents the first project financing of a renewable generation and battery RTC project. The deal was 1.4 times oversubscribed and BNP Paribas was amongst the banks supporting ReNew Power on the transaction.

In addition to LCTG, BNP Paribas Capital Markets Teams have been recognised as industry leaders in Green Bonds, having placed #1 in the Global Green Bond league table (Corporates & Government), according to Bloomberg rankings for FY2022.

Globally across the BNP Paribas Group – In February 2023, BNP Paribas’ ESG expertise was recognised by IFR and collected ‘Bank of the Year’ and ‘Bank for Sustainability’ awards, alongside several other accolades in IFRs 2022 awards.