A Morningstar Event: Navigating the Nuances of Biodiversity and Energy Transitions
Welcome back to the evolving discourse on sustainability. At a breakfast gathering orchestrated by Morningstar Sustainalytics in London yesterday, analysts offered a sobering reminder: tempered expectations are warranted as we approach the impending COP16 UN biodiversity conference in Colombia.
Lindsey Stewart, the director of stewardship research, captured the sentiment with a note of cautious realism. “This marks the third consecutive year where the anticipation for a monumental breakthrough in biodiversity investing has loomed large,” he conveyed, yet he forecasted, “We aren’t quite poised for that breakout just yet.”
Diving into the data, it appears that the landscape of biodiversity-focused investment remains rather sparse. According to Hortense Bioy, head of sustainability research at Morningstar, there are merely 34 equity funds or ETFs concentrated on biodiversity, all hailing from Europe, collectively amassing a mere $3.7 billion in assets. This stands in stark contrast to the impressive $530 billion captured by climate funds and ETFs that Morningstar monitors worldwide. Remarkably, the U.S. had a biodiversity fund, but it has since shuttered its doors.
Meanwhile, as Moral Money Americas kicks off today in the vibrant heart of New York City, I have a story that defies the prevailing narrative surrounding developing nations, which are often depicted as sluggish in their energy transitions. — Lee Harris
Renewable Energy: A Rising Tide in Developing Nations
For years, the trajectory of solar and wind power development in the global south has grappled with stagnation, overshadowed by the rapid advancements witnessed in wealthier nations. The substantial initial investment required for renewables has historically hindered progress, even as many countries in the global south possess abundant sunlight and an insatiable energy appetite, unencumbered by the inertia of outdated fossil fuel infrastructures.
Yet, a paradigm shift is underway. Emerging markets are now witnessing a renaissance in renewable energy. A recent study from the esteemed energy consultancy RMI reveals that both solar and wind generation—measured in terms of overall energy produced and as a proportion of total electricity generation—are outpacing their counterparts in the global north.
Over the past half-decade, renewable energy output in the global south has surged at an impressive compound annual growth rate of 23%, while the richest economies lag behind at a rate of 11%. RMI defines the global south as encompassing Africa, Latin America, and parts of South and Southeast Asia, notably excluding China and substantial fossil fuel exporters.
Seventeen percent of energy demand in the developing world is satisfied by nations where the contribution of solar and wind to electricity generation surpasses that seen in wealthier economies. Countries like Mexico, Brazil, and Morocco lead the charge with promising statistics.
It’s crucial to understand that these comparisons focus on growth rates rather than cumulative installed capacity. This distinction is imperative, as many developing nations have only recently embarked on their renewable energy journeys, starting from a relatively modest base. Although, for now, the global south isn’t outpacing rich countries in total renewable installations, the winds of change could very well turn this narrative on its head by decade’s end, fueled by significant declines in the costs of renewable technologies.
“Despite the global north’s hesitant funding commitments towards the global south, the financial viability of renewable technologies is undeniable,” affirmed Vikram Singh, co-author of the RMI report. “We’re in an era of boom for green energy in the global south,” he asserted with palpable enthusiasm.
The optimistic forecasts can be largely attributed to Chinese investments in renewable technologies, which have driven economies of scale, significantly reducing costs globally. Remarkably, the prices of solar and battery technologies plummeted by 50% in 2023, making them accessible even in burgeoning markets like Brazil and India.
However, challenges remain. Disparities in capital costs persist, with investors still viewing the global south through the lens of heightened risk. In 2022, the weighted average cost of capital for a 100-megawatt solar project in South Africa, Vietnam, Brazil, or Mexico hovered around 11%, starkly contrasting with approximately 5% in developed nations.
In regions where the solar renaissance has taken root, this growth has unfolded despite the unmet promises of development banks to mobilize trillions in blended finance for sustainable initiatives.
Nevertheless, Singh argues that the narrative of the global south as a passive recipient of northern financial assistance may soon fade. In Vietnam, for instance, solar energy is projected to reach "capex parity" with coal by 2024, based on findings from BloombergNEF—predicting that the initial investment costs for solar will equal those for coal.
Some regions have even eclipsed China’s pace of renewable energy adoption. Latin America, for example, achieved the same stage of solar and wind electricity generation as China, yet rapidly accelerated after establishing an initial foothold.
RMI posits that due to various factors, the global south may indeed navigate its energy transition with a swifter momentum than wealthier nations:
Early Adopter Experience: Developed countries incurred the costs first, refining deployment methods while overcoming initial hurdles.
Abundant Sunshine: Many emerging economies bask under more intense sunlight owing to their proximity to the equator.
- Less Legacy Infrastructure: With fewer entrenched fossil fuel assets, emerging markets face fewer barriers in transitioning away from polluting energy sources.
Moreover, the global south finds itself at a geopolitical advantage in this transition, as developing nations exhibit a greater willingness to embrace the most cost-effective renewable technologies, predominantly sourced from China. In contrast, trade tensions in the west could inflate transition costs.
Recent decisions by EU member states to levy tariffs of up to 45% on Chinese electric vehicle imports and the U.S.’s proposals to increase tariffs to 100% spotlight an unfortunate trend. Singh remarked that these restrictive measures diminish competition and hinder the sector’s growth by potentially channeling cutting-edge energy technologies from China to the global south instead.
Yet, a plethora of obstacles still looms on the horizon. At last year’s COP meeting in Dubai, countries committed not only to enhancing clean energy deployment but also to intensifying energy-saving efforts by 2030. “Without efficient energy use, the supply is merely pouring into a leaking bathtub,” Singh cautioned.
Smart Insights
In the wider context, global insurers have overwhelmingly begun to integrate low-carbon transition objectives within their investment strategies, as Brooke Masters reports, signaling a growing recognition of sustainable pathways in their financial frameworks.