GUEST POST: A Global Perspective on Green Financing

Today, we are joined by Li Xu of LXI Capital, for a discussion on green financing

In today’s post, we will be discussing green financing and learning more about regional differences that exist from Li Xu, of LXI Capital and Renewable Finance International.

Introducing Li Xu

After serving many years in traditional oil gas companies, including oil service companies, oil equipment manufacturers, and commodity trading companies, Li launched an independent consulting practice focused on cross-border M&A and international finance. She then developed a practice to focus on renewable project finance advisory in Southeast Asia and Africa. Now LXI Capital mainly focuses on investing in solar and hydraulic projects in the US and Southeast Asia markets.

Li holds a master’s degree in accounting from the University of Iowa and a bachelor’s degree from the Shanghai University of Finance and Economics. She is a CPA in the state of Texas. 

She is a regular speaker regarding renewable investment at global think tanks and industry conferences. 

LXI Capital

LXI Consulting’s accomplished financial executives assist renewable investors in reaching their investment goals. With a proven track record in helping organizations improve and maintain a financially sound business, LXI Consulting is a platform dedicated to assist renewable fund managers and strategic investors.

Most companies LXI Capital works with are renewable and infrastructure developers, advisors, EPC companies, O&M companies, and investors worldwide: pension funds, sovereign wealth funds, PE funds, and strategies.

Renewable Finance International

In addition to her independent consulting practice, Li runs a YouTube Channel, "Renewable Finance International," which connects international investors and local developers.

In the latest installment of Renewable Finance International, we joined Li for a discussion on ESG topics.

A Discussion on Global Trends in Green Financing

To set the stage here, can you tell us how you think about green financing?

At a very high level, green financing is the money invested into green projects, including both debt and equity.

“Green” projects typically refer to renewable or related investments. More mature types of investments could include wind and solar, while newer types of projects include hydrogen and ammonia. (If you are interested in learning more about hydrogen, check out our latest post here).

What makes green financing really interesting is the participation both on the public and private investment side. Investors who participate can include those from government side to large corporations to smaller investors. Generally, all countries have initiatives for carbon neutrality, but green financing may take a different format based on the region. For instance, in Asia and Europe, there is a skew towards debt financing and green bonds.

As someone who has worked in different countries around the world, have you noticed differences in the capital markets in general?

Most of the capital is from the US, Europe/UK, Asia (excluding China), China, and the Middle East. Each region has its character besides IRR.  The IRR requirements are very different among the regions.

Europe/UK are the leading investors coming to renewables and infrastructure investments. They focus on ESG/impacting the most. Meanwhile, European/UK development banks are active in emerging markets and provide debt and equity. EPCM and EPCF are commonly used by them as well.

Japanese and Korean investors are more active in the APAC region, US and Europe. Large renewable/energy strategic investors drive the rest region.  Asian investors have gained more and more awareness of ESG / impacting components during investing.

China is mainly doing the EPCF model. Chinese capital is generally rare in the US market these years.

The US market is purely IRR / economics driven, although lately, ESG has changed from checking the box only to more concrete analysis, process, and documentation. There are limited US private capital investments in emerging markets.

Geopolitics, domestic politics, FX, and FDI rules are important during investing. Many countries do not allow foreign investors to have majority ownership.  The FDI process may take a couple of weeks to a couple of years to set up. Also, some countries have rules about when the investors can exit the assets and how to exit.  

Are there different themes that are more prevalent in different regions?

Europe / UK is leading in energy transition and ESG investment. China, Japan, Korea, and the Middle East have been active for over a decade.

Emerging markets have been very active with large infrastructure projects, and lately, more and more renewable projects.  

The US is the latest comer in the NetZero movement. But the US is one of the largest markets and the fastest growing market. 

How about for sustainable investing – are there regional differences in how investors in different companies think about sustainable investments? What is the role ESG plays?

A lack of standardization in terminology has created confusion over how ESG investing and sustainable investing differentiate, and about which is the best action for investors to take.

Through ESG investing, market participants consider how environmental, social, and governance (ESG) risks and opportunities can impact companies’ performance.

Overall, Europe and the UK have the highest requirements coming to ESG, then Asia and the US remain financially driven with ESG as an add-on. However, the gap is getting smaller over time, with more large public companies becoming more compliant with ESG from their investors. 

Now drilling down into project financing specifically – can you tell us more about how green financing works in different countries? Is there a specific country you think “has it right”?

Each region has its challenges. Developed nations, such as the US, are driven by private capital. In emerging markets, G2G, PPP, and private investments all play a very active role. 

I would say in general north America is a capital-driven market. Especially at this moment, all other sectors are in the correction phase. This is the only shining sector. Renewables are one of the options investors can put their money in right now. Instruments available for early stage (venture investment) to mature (project finance). Available in all sizes. With the IRA – the enthusiasm for renewable projects is astounding right now. From carbon capture to hydrogen, investment is booming.

Canada recently announced a set of tax incentives similar to the IRA.

With the Russia/Ukraine war – western Europe has to make energy independence work. The government has a tremendous incentive to push on the energy transition. Right now, especially with the US market, we have very good tax incentives but a unique situation with US /china geopolitical situation. Solar panels and fuel cells are being directed to European markets. The Europe side is probably the hottest market right now globally.

China is very focused on energy independence. China, Japan, etc. have traditionally been energy import countries., 80-90% of panels are made by Chinese companies. In 2022, the actual installed projects are very low compared to prior years.

In emerging markets, renewables are part of the infrastructure investment bucket. G2G – lots of programs to help these countries to build infrastructure. There are a lot of professionals helping deploy capital from that channel. Asia and African development banks helping deploy the resources. There are governmental private sector types of channels – all of these banks have professional fund managers to deploy this capital. There’s a tremendous amount of private equity fund managers in this space – lots of European investors. Many banks have a mandate for this format and this methodology. All of them – have similar programs for emerging markets.

There’s plenty of private capital – multinational energy companies are big players in emerging markets. There are regional /domestic investors as well. These are strategic investors. There are of course financial investors from Singapore, Hong Kong, and Japan.