NORWAY: Future hub for funding of green projects?
Norwegian financial institutions, investment banks and governmental funding institutions have played a significant role in the growth of the shipping and offshore industry, developing a tradition of close partnerships with Norwegian industrial entrepreneurs.
The in-depth knowledge and competence built up by the financing sector through decades of collaboration with the industry, has resulted in the export of this expertise, through the Norwegian (high yield) bond market as one important example, attracting both international issuers and investors.
In 2017, with the offshore and oil service industry still facing very challenging market conditions, the need for new opportunities remains. Combined with the increased attention being paid to developing a more sustainable energy sector following the Paris Agreement in 2015 this has meant that the interest in green developments and projects is increasing in Norway despite its traditional oil and gas roots. Organisations such as Innovation Norway have a strong focus on opportunities within clean energy, to prepare Norway for a future economy that is less dependent on oil and gas exploration and ensure that Norwegian technological solutions can be exported as part of the solution to the global climate challenges. Statoil has also revised its strategy in 2017, increasing the focus on low emissions and carbon efficiency.
At the centre of a number of the green projects is new and innovative/unproven technology combined with a need for (patient) long term financing, a combination where Norway has a proven track record.
The challenge for investors and financial institutions however is to assess the risks involved, the likelihood of successful commercialisation and assess what actual funding is required to achieve a successful outcome.
Some contributions are made through governmental instruments offering support for innovation and development of Norwegian enterprise and industry. Initiatives such as Innovation Norway and Enova offer investment aid schemes and high risk loans for development and optimization of environmental technology. Through the ENERGIX-programme the Norwegian Research Council also provides funding for projects seeking to develop renewable energy, efficient use of energy and energy systems.
However, additional financing is required to ensure the necessary growth and development within the sector.
Norwegian shipping and offshore players are generally funded through a combination of equity, bank financing and bonds. The presence of industrial entrepreneurs and long term industrial investors has been one of the characteristics and strengths for the development of the offshore industry. This same combination will be needed for the development of green projects and with the additional potential factor of government incentives and subsidies, and the securitisation of the same.
Although an underlying sound business model that can lead to acceptable returns and profits is a necessary prerequisite, Norwegian investors in the shipping and offshore industry have not been known to shy away from new opportunities and often they have shown a willingness to take risks in new ventures. This is an approach that fits well with green technology and projects, but it remains to be seen whether the traditional Norwegian industrial players will be willing contribute to the shift towards renewables and green projects. Notably, the latest Norwegian developments within the wind sector have seen a stronger presence and interest from international private investors and players than from their Norwegian peers.
Globally, the need to diversify energy portfolios due to the volatility in the oil prices and an increased attention on sustainability and corporate responsibility has resulted in a growing interest in green investments, including so called climate or green bonds. A green bond is largely the same as an ordinary bond, although it comes with the added need for a second opinion or independent verification before the issue and during the relevant term. This is to ensure that the project is and remains qualified as green. One of the biggest and most re-known providers of such second opinions is Norwegian Cicero.
Traditionally the main player in the Norwegian and Nordic green bond market has been Skandinaviska Enskilda Banken (developing the concept together with the World Bank in 2007/2008), but the last few years have seen an increased interest also from other Norwegian investment banks and the Norwegian bond hub should be ideal to further develop this instrument and means of financing. Reporting and transparency to ensure that the issuers remain compliant with green requirements is key for investors in this segment and Oslo Stock Exchange’s green bonds list is contributing in this respect. Green bonds are also getting further increased traction globally after the Paris agreement, seeing players such as Chinese ICBC issuing its first green bond in October 2017. Oslo Stock Exchange also has a new competitor in the Luxembourg Green Exchange.
If the necessary forces pull in the same direction, the unique combination of the Scandinavian entrepreneurial spirit, a willingness to invest in promising new ventures, knowledgeable investment banks and financial institutions with a strong energy focus may just be the cocktail that is necessary for creating a Norwegian hub ensuring funding for an increased green shift. There are interesting times ahead and there will be considerable benefits for those who follow closely the developments in this key area of green energy.