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EM Green Bond issuance to be Unaffected by Trump

Few sectors are facing greater uncertainty from the election of Donald Trump as the new US president than green energy and renewables, but experts are sceptical that the self-confessed climate change denier could actually derail the global drive towards sustainability and stifle the rise of green finance, particularly across EM.

Nov 14, 2016 // 6:04PM

“The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive,” tweeted the then businessman and property mogul Donald Trump in November 2012.

Fast-forward to 2016, and the anthropogenic climate change sceptic is now the new US president-elect, and is threatening to nullify the recent Paris climate agreement and cut off subsidies in the renewable energy space.

On the surface, Trump’s ascent is likely to impact the development of green energy projects and climate financing, which has been on the rise globally in recent years, with president Obama leading the way.

But looking more closely, there are two key questions: what will Trump’s policy towards the green energy sector consist of, and how much influence does the US wield on the global energy stage?

The initial market reaction to Trump’s victory offers some insight into what kind of policies he is expected to enact.

Fossil fuels and commodities displayed the biggest gains, buoyed by the president-elect’s reaffirmation to reverse Obama’s signature domestic ‘green’ policies, such as cutting carbon emissions in favour of boosting the mining and oil sectors.

Glencore Plc, the world’s top coal trader, surged more than 7% on Wednesday following the election’s result, while shares of big coal miners such as Anglo American Plc, BHP Billiton Plc and Rio Tinto Plc rose between 2% and 4%. Peabody Energy Corp., one of the largest U.S. coal companies, surged as much as 67%.

Meanwhile, big turbine-makers saw a sharp fall in share prices, with world leader Vestas Wind Systems A/S plunging as much as 13%, with Gamesa Corp. Tecnologica SA and Nordex SE also dropping. Likewise, solar panel makers like SunPower Corp., First Solar Inc. and Canadian Solar Inc fell significantly.

Trump effect

However, this dynamic was observed in the immediate aftermath of the election, and many see it as a knee-jerk reaction to Trump’s earlier (and often contradictory) statements on his economic plan, with fundamentals and long-term strategy in the sector remaining unchanged.

And so far Trump’s proposals have been lacking in detail, with some ideas contradicting others. For example, the candidate promised that, “the shale energy revolution will unleash massive wealth for America, and we will end the war on coal and the war on miners,” but as the two industries are direct competitors, Trump’s stance is ambiguous.

Furthermore, Trump has promised to deregulate the energy sector, removing bureaucratic blocks to innovation and energy exploration, and backtracking on various international climate deals could empower the oil companies to drill on public lands and wildlife areas.

But a lack of drilling sites and low production are not the key issue for the industry - the falling price of oil is. If Trump really is willing to let the market dictate the terms, then renewables, even without government subsidies, are expected to further add pressure on oil, coal and gas.

Solar generation is already a sustainable business model that does not rely on state support: every time solar capacity doubles in the US, costs drop by a quarter. As further progress is made in battery and fuel cell technologies, storing wind, solar and hydroelectric power becomes easier.

Besides, there is some discussion as to what portion of Obama’s policies Trump will have the power to stop, reverse or overturn. US Secretary of State John Kerry recently reaffirmed the current administration’s commitment to the Paris deal, stating that Obama expects for it to come into effect before Trump enters the White House.

De-subsidising green projects could only have a limited impact, as a lot of the financial incentives come from individual states, such as Kansas, Iowa and Texas. In addition, the problem of low oil prices globally is not expected to improve noticeably in the coming years.

Finally, deregulation of the fracking industry, while potentially damaging to the short-term prospects of renewables, is likely to bring about protests of environmental groups and local populations concerned with the potential impact on their communities.

Consequently, for many observers the prospects for renewable energy and green projects remain positive.

“Pricing and availability adjustments mean US consumers will be able to exert influence via choice and purchasing decisions, and the market will develop options and products notwithstanding changes to subsidies,” said Andrew Whiley, communications manager at Climate Bonds Initiative (CBI).

“If the US chooses at a national level to ignore the pursuit of innovation in clean energy, energy efficiency, smart grids and green design, China, India and others will simply enjoy the loss of a potential competitor, fill the void and capture more of the value in coming decades,” he added.

Who can replace the US?

Indeed, the second big question is whether the drive towards sustainable energy can be maintained globally without US leadership, and, in turn, how that will affect the outlook for the sustainable financing market.

While president Obama’s 8-year term has seen the US take the lead in pushing green initiatives across the globe, most other countries now recognise the importance and improved efficiency of sustainable energy projects.

Earlier this year, entrepreneurs from China, South Korea, Russia, and Japan came together to sign a Memorandum of Understanding that seeks to create the Asia Super Grid. The aim is to transmit electrical power from renewable sources from areas of the world that are best able to produce it to consumers in other parts of the world.

“The move to clean energy on a global basis will continue, in part due to further shifts down the cost curve and further improvements in technology and efficiency,” claimed Whiley. “State governments with energy transition plans already in place will continue their paths to a low-carbon economy.”

Both China and Mexico, for example, have suffered from poor air quality and transport congestion, stemming from rapid industrialisation, which has led to a significant shift towards sustainable energy, manifested in growing number of private and state-initiated ‘green’ infrastructure and development projects, that often tap the fixed income markets for funds.

US$76.2bn ‘green’ market

Green bond issuances have been rising steadily around the world over the past decade: according to Bloomberg, this year the climate bond market could reach US$76.2bn – compared to US$48bn in 2015. This dynamic is unlikely to change significantly under Trump.

“The rapid increase in global green bond issuance has never been about leadership from one corner of the globe,” Whiley said. “Investors and issuers will still be looking for green opportunities, and will take climate resilience, adaption and overall sustainability factors into account on risk management and investment decision-making.”

Chinese electric car and wind-power companies are linking up with banks to raise the equivalent of US$8.8bn in green notes this year, moving ahead of the US in the ‘green’ market.

Climate bonds and ‘green’ structured finance schemes have been on the rise in other EMs, particularly in Latin America, where infrastructure development is high on the agenda.

However it has been Europe and Asia that have been global leaders in green bond issuances, with US$17.5bn and US$20bn last year, respectively.

“China is emerging as a major issuer of green bonds and India is exploring their huge potential too,” noted Whiley. “Even Nigeria has indicated they will issue sovereign green bonds in 2017, and we expect other countries will follow suit in time.”

As a result, in the short-term, president Trump’s policies – whatever they will be – could to some extent undermine the global shift towards a low-carbon economy, and may provide a small boost to the oil and gas sector.

But the underlying factors behind this shift – low fuel prices, technological progress, greater availability and efficiency of renewables and a rising awareness of climate change – are unlikely to change.

“The need to attract investment to finance sustainability projects will not change. Ongoing green bond oversubscription (as with good quality vanilla bonds) has demonstrated that institutional investors are always looking for attractive risk and return opportunities,” Whiley concluded. In this respect, certain EMs are world leaders.

Global Mining Energy Mexico Sustainable Finance

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