Not too long ago, green investing was associated with a warm moral glow, but it wasn't mainstream--not by a long shot. Increasing climate awareness, a growing shift in policy, and investors demanding socially and environmentally conscious options are transforming this, however, and while it still may not be mainstream, it's working rather quickly toward megatrend status.
Over the past half-decade, ESG (Environmental, Social, and Governance) investing has emerged as the single biggest global megatrend. Every year, more than $3 trillion in new global funds flow into the $30 trillion ESG market.
Meanwhile, green bonds have become the latest craze in the ESG sector, with French asset management company with €1.729 trillion of assets under management, Amundi, now the world's largest issuer of green bonds. The green bond market is truly booming; in 2020, governments and companies issued green bonds worth $297 billion, with the forecasts for this year being $500 billion and $1 trillion in 2022.
And now, the green bond sector has attracted an unlikely customer: Oil-producing countries.
Saudi Arabia, the United Arab Emirates (UAE), and Qatar have all lined up billions of dollars worth of green bonds as they step up their game to fight climate change.
Green Bonds
Tackling the climate crisis won't come cheap, with the United Nations' Intergovernmental Panel on Climate Change (IPCC) estimating that limiting the temperature increase to 2C will require ~$3 trillion of investment every year through 2050. To raise those vast sums, governments and corporations everywhere are increasingly turning to the green bond market.
Green bonds essentially work like regular bonds but with one key difference: the money raised is used exclusively to finance green projects such as renewable energy and green buildings.
With countries around the world stepping up their efforts to reduce carbon emissions, the market for green bonds is booming. For instance, in October, the European Union issued about $14 billion of green bonds, marking the highest amount ever. Proceeds from the bonds will be used to finance projects, including a research platform for the energy transition in Belgium and wind power plants in Lithuania. Orders exceeded the securities available by more than 11 times in the EU deal, highlighting that it can cost less to issue green bonds than the conventional variety.
Oil-producing nations are waking up to this phenomenon, with Saudi Arabia's $430 billion sovereign wealth fund planning to announce its first green debt issuance as it looks to drum up investment for renewable energy and other sustainable projects. One such project is the green megacity of Neom located to the country's north.
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The Saudi government has announced plans to build a $5 billion green hydrogen plant that will power Neom when it opens in 2025. Dubbed Helios Green Fuels, the hydrogen plant will use solar and wind energy to generate 4GW of clean energy that will be used to produce hydrogen.
But here's the main kicker: Helios could even produce hydrogen that's cheaper than oil.
Bloomberg New Energy Finance (BNEF) estimates that Helios' costs could reach $1.50 per kilogram by 2030, way cheaper than the average cost of green hydrogen at $5 per kilogram and even cheaper than gray hydrogen made from cracking natural gas. Saudi Arabia enjoys a serious competitive advantage in the green hydrogen business thanks to its perpetual sunshine, wind, and vast tracts of unused land.
In fact, Saudi Aramco has told investors that it has abandoned immediate plans to develop its LNG sector in favor of hydrogen. Aramco has said that the kingdom's immediate plan is to produce enough natural gas for domestic use to stop burning oil in its power plants and convert the remainder into hydrogen. Blue hydrogen is made from natural gas either by Steam Methane Reforming (SMR) or AutoThermal Reforming (ATR) with the CO2 generated captured and then stored. As the greenhouse gasses are captured, this mitigates the environmental impacts on the planet.
Saudi Arabia clearly has its eyes on a future whereby the economy will stop relying too heavily on oil. Whether or not it will remain committed enough to achieve its long-term goal is another question.
Saudi Arabia's regional peers are at it, too.
This year, the UAE's biggest government-controlled bank issued at least $1.36 billion in green debt, while Reuters revealed in October that Qatar Energy, a state-owned oil company, is planning a green bond issue worth several billions of dollars.
Legit Bonds or Greenwashing?
For many years, Big Oil has been chided for its outsized role in climate change and even pilloried for trying to burnish its green credentials with half-hearted attempts at clean energy investments, aka greenwashing. The recrimination appears well deserved, considering the sector dedicates a minuscule amount of its capital spending to renewable energy despite its operations being responsible for 15% of greenhouse gas emissions.
And now, the likes of Saudi Arabia risk falling into the same trap if their oil production roadmaps are any indication.
After all, Saudi Arabia, the world's biggest oil producer, has announced plans to boost oil production further, from the current 12 million barrels a day to 13 million barrels a day by 2027.
The UAE has an even more aggressive growth plan, with state-controlled oil company ADNOC saying it will increase oil output by 25% to produce 5 billion barrels a day by 2030. Meanwhile, Qatar continues to invest heavily in African oilfields and is building the world's largest liquified natural gas (LNG) terminal.
A recent study by Dutch asset manager NN Investment Partners found that the green bond market is currently fraught with various legal issues, with 15% of all green bond issues "coming from companies involved in controversial practices that contravene environmental standards."
An oil-producing nation can easily violate the spirit of green bonds, for instance, by using fossil fuels to generate 'green hydrogen.' This is hardly a far-fetched idea: Amundi recently threatened to withdraw its exposure to the State Bank of India's green bonds after it emerged that the bank was financing a coal mine in Australia.
Drawing clear lines between pools of money and their expenditure requires a high degree of transparency, something that countries like Saudi Arabia and Qatar are, unfortunately, not famed for. Ultimately, this points to a real and urgent need to develop clear standards and criteria with high granularity as this market escalates.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More