Alejandro Méndez
CEO
Royal Eagle Capital Partners
/
Expert Contributor

When Being Green Is Not Enough To Fight Climate Change

By Alejandro Méndez | Fri, 09/03/2021 - 08:58

For most people, green is related to balance, nature and rebirth.

Green is also a symbol of prosperity, freshness, and progress. In political discourse, it is commonly tied to ecological and progressive causes.

When we hear green energy, we understand that the energy generated comes from natural resources, such as sunlight, wind or water.

As a source of energy, green power can be produced from renewable energy technologies, such as solar energy, wind power, geothermal energy, biomass, and hydroelectric power.

Each of these technologies works in different ways, whether it is taking power from the sun using solar panels or using large wind turbines or the flow of water to generate energy.

In recent decades, the cost of wind and solar power generation has dropped dramatically. Hydropower technologies also allow the consistent production of green electricity.

These are some of the reasons that the US Department of Energy projects that renewable energy will be the fastest-growing US energy source through 2050.

In addition, according to experts, the green energy industry is one of the best ways to help governments and private companies to comply with the Paris Agreement, signed in 2015.

Under the Paris Agreement, to tackle climate change and its negative impacts, world leaders agreed on the following:

  1. Substantially reduce global greenhouse emissions to limit the global temperature increase in this century to 2 degrees Celsius while pursuing efforts to limit the increase even further to 1.5 degrees.
  2. Review countries’ commitments every five years.
  3. Provide financing to developing countries to mitigate climate change, strengthen resilience and enhance abilities to adapt to climate impact.
  4. The agreement is a legally binding international treaty. To date, 190 countries plus the European Union have joined the agreement.

To be successful in providing financing to mitigate climate change, strengthen resilience and enhance abilities to adapt to climate change, most of the efforts should be targeted to support Small and Medium Enterprises (SMEs) in their respective countries and operations.

Since SMEs are generally underserved by banks and more traditional financial institutions, how can SMEs successfully fight climate change when finance and resources are limited?

To understand the importance of SMEs in the global economy and why it is so important to find financial mechanisms to support the use of green power sources to support their efforts to achieve their climate change goals, global leaders and financial institutions, should consider the following:

  • SMEs account for most businesses worldwide and are important contributors to job creation and global economic development. They represent about 90 percent of businesses and more than 50 percent of employment worldwide.
  • Formal SMEs contribute up to 40 percent of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included.
  • The World Bank estimates that 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world.
  • In emerging markets, most formal jobs are generated by SMEs, which create seven out of 10 jobs.
  • Regarding funding, SMEs in more advanced economies benefited from an influx of alternative investment funding, nontraditional lenders and innovative funding strategies like crowdfunding, to fill the gap. The financing gap for SMEs in developing economies widened even further.

What we see at Royal Eagle is an imbalance in the resources, technology and financing available to produce green power for SMEs in developed markets versus the options found in undeveloped and emerging markets.

Think for a moment: Let’s say that policymakers, financial institutions and SMEs from different economies and markets are having dinner at the same table and discussing climate change but they notice that the ground on one side of the table is uneven. At a certain point, the guests on that side of the table will need to fix the imbalance.

Climate change is considered a global emergency. It is an issue that goes beyond national borders. It requires international cooperation and coordinated solutions at all levels, in developed, undeveloped and emerging markets.

At the end of 2019, we decided to form our first Green Energy Income Fund to acquire and finance renewable energy projects in Texas and emerging markets like Mexico, Costa Rica, Panama, Colombia, and Brazil. Despite the pandemic, which has been devastating to so many industries, companies, individuals, and families, we decided to keep going.

After a long process and with the help and advice of so many people and experts, on July 2021, Cicero Shades of Green AS, the leading global provider of second opinions on green bonds and based in Norway, announced that our US Capital Royal Eagle Green Energy Income Fund was awarded a Dark Green rating, which is their highest rating.

Cicero Shades of Green provides independent, research-based evaluations of green bond investment frameworks to determine their environmental robustness.

Their second opinions are graded Dark Green, Medium Green and Light Green, to offer investors better insight into the environmental quality of green bonds. They also offer assessments of companies, sustainability-linked bonds, and impact reports.

We are very proud to say that the Royal Eagle Green Income Fund is the first fund rated by Cicero.

When we first approached Cicero’s Team with our Renewable Energy Portfolio and the Green Fund Investment Framework, we were very confident of getting a good rating. But after the initial stages of the process, we realized that developing green renewable projects was not enough to be considered a Green Sustainable Company, so the overall rating of the fund was questionable.

In other words, we learned that the projects we have in the portfolio are considered green but as a company, we were not. Additional efforts were needed to comply with the international standards investors and independent third-party companies like Cicero are looking for to invest or issue third-party opinions.

Based on that experience, we developed the Royal Eagle Capital Partners Sustainability Mandate.

The mandate refers to the focus on a portfolio of holdings that will not only deliver strong returns to investors but also support local communities and a global shift to clean energy. It has allowed the fund to identify unique opportunities to invest in SMEs in the markets where we operate.

This Royal Eagle Capital Partners Sustainability Mandate will serve as a set of specific guiding principles that will further the fund’s commitment to ESG standards and quantify the criteria to be considered a “green” investment.

These criteria have been designed in conjunction with 3R Sustainability, a third-party organization with a commitment to advising and measuring the sustainability of projects, companies and global investments. Working with a credible third-party such as 3R has allowed Royal Eagle to objectively quantify the principles that have driven the investment process.

Some of the appropriate metrics and set target objectives included in the Sustainability Mandate are:

  • Annual GHG emissions reduced/avoided in tons of CO2 equivalent
  • Annual renewable energy generation in MWh/GWh (electricity)
  • Capacity of renewable energy plant(s) constructed or rehabilitated in MW
  • Capacity of renewable energy plant(s) serving local/regional transmission systems (MW)
  • Percentage of operations with implemented local community engagement, impact assessments or development programs
  • Identify potential initiatives to address gaps and reach project sustainability goals
  • Prioritize initiatives into an actionable plan

Royal Eagle is excited to further this commitment to supporting stakeholders with fair practices and clean energy, while also clearly outlining for investors the metrics that will be used to guide green investments.

The Royal Eagle Capital Sustainability Mandate is an important step in the continued relationship between Royal Eagle, investors and stakeholders. Not only has Royal Eagle furthered its commitment to develop green and fair projects but the fund has now quantified the requirements and outlined a plan to maintain this commitment over the lifetime of each project.

With this mandate, Royal Eagle Capital Partners can continue down the path of delivering transparent returns to shareholders while also working toward a greener future across the globe.

 

Photo by:   Alejandro Mendez