Hello from California. Here, like most places these days, small talk starts with the heat. The extreme heat baking this state, and far beyond, is a global phenomenon, writes the FT editorial board. In the EU, as in America, conservative politicians continue to distance themselves from green agendas. There are reasons to be hopeful, writes our colleague Simon Kuper, but only if renewable energy growth accelerates.
For today, I report about the prospects for one of the major sources of renewable energy: solar power. In one of the greatest signs of tension between environmental and social priorities, the US had been restricting imports of Asian solar panels into the country due to a law aimed at helping China’s Uyghur minorities. Chinese repression of the Uyghur population in Xinjiang could constitute “crimes against humanity,” according to the UN. Now there is evidence that the US is loosening its import restrictions so that solar panels can be imported more quickly.
Simon kicks us off today with a report on development impact bonds, a nascent financial instrument that is starting to make waves in Africa. Thanks for reading. — Patrick Temple-West
Few parts of the financial sector have been more controversial than the private equity industry. Yet private equity firms are now making serious efforts to position themselves as sustainability leaders. Is this a marketing ploy — or can this sector play a role in tackling the world’s biggest environmental and social challenges? That question is the focus of our next Moral Money Forum report, and we want to hear from our readers. Click here to fill out our short survey.
A new tool to boost sustainable growth in developing countries
Since 2012, Lagos-based Wecyclers has been building up a network of recycling operations in Nigeria to tackle the country’s huge levels of plastic and other waste pollution. Only about 40 per cent of waste in Lagos is collected, the company’s chief executive Olawale Adebiyi told me — and the resultant clogged drains and waterways are a major driver of malaria and other diseases.
Now Wecyclers is planning to expand into 26 more communities across Nigeria and beyond, thanks to the rise of development impact bonds (DIBs) — a financial innovation that could prove a useful tool for boosting sustainable growth in developing countries.
The Wecyclers transaction is a useful case study in the working of these instruments — which bear little resemblance to conventional bonds, and would perhaps be better described as “outcomes contracts”.
Wecyclers will receive a total of €1.5mn in two tranches from the SDG Outcomes Fund, which was launched by London-based Bridges Fund Management early this year, and aims to promote progress towards the UN Sustainable Development Goals by investing in DIBs.
Wecyclers has agreed on a set of targets for its new wave of operations, including the volume of waste processed, worker pay levels and the number of jobs created. Its progress will be assessed by third-party analysts.
If Wecyclers hits all the targets, then its partner Unilever — which has a large presence in the consumer goods market that drives much of Nigeria’s plastic pollution — will repay the fund in full, plus an additional return. If not, then Unilever will have to pay less — or, if no impact is achieved, nothing at all.
Wecyclers has considerable “skin in the game” itself, Adebiyi told me. It will pay Unilever half the €1.5mn — with varying levels of interest, depending on how many of its targets it hits, or no interest at all if it hits all of them. (Unilever also has the option to convert this debt into shares in Wecyclers.)
Complex as it might seem, this structure offers some compelling features to all three of the parties involved. Wecyclers gets funding on very attractive terms, which get still more attractive the better it performs. Unilever gets an opportunity to offset its serious plastic pollution footprint, with minimal financial risk in the event that the project fails. And for the backers of the SDG Outcomes Fund — philanthropic and development finance institutions — it’s a chance to play a galvanising role for sustainable investment, with the potential for healthy returns.
The SDG Outcomes Fund got a fresh boost this week with injections of capital by the US Development Finance Corporation and British International Investment, of $15mn and $10mn respectively. That adds to funds previously provided by UBS clients through the bank’s Optimus Foundation (which partnered with Bridges to design the fund), and from wealthy individuals and families.
Bridges declined to confirm the assets raised for the fund to date, citing regulatory restrictions on such statements during the active fundraising period. A person close to the fund said that it had raised a total of $66mn to date, with a target of $75mn by early 2024.
The fund has already sealed investments in both Sierra Leone and Ghana, where it will finance school projects by social enterprises — receiving payouts from the countries’ governments, and from Unicef’s Education Outcomes Fund, if literacy and numeracy targets are hit. It’s now exploring further investments in Turkey, India and Kenya, tackling challenges from health to employment.
“The main driver [for investors in DIBs] is the desire to achieve better outcomes,” Mila Lukic, a partner at Bridges, told me. “If you’re only paying for inputs, you’re assuming that those inputs always work.” (Simon Mundy)
Solar stocks: Fun in the sun
For much of this year, the US solar industry has been hampered by a 2021 law that limited imports from China’s Xinjiang region. The US Uyghur Forced Labor Prevention Act stops US-bound imports traced to Xinjiang for extra scrutiny, limiting imports that might have originated in the territory due to concerns about large-scale human rights violations.
This action had consequences for the Biden administration’s clean energy efforts. Utility-size solar installations fell by almost one-third in 2022 from a year earlier, according to the Solar Energy Industries Association. Commercial and residential solar projects have also been plagued by backlogs, the industry group reported.
But now, there is evidence that the Biden administration has loosened restrictions on solar panel imports. In a report this week, Morgan Stanley reported new data from the US Customs and Border Protection, which showed that electronics imports (including solar panels) jumped to a 2023 high of $175.6mn in June.
Solar companies have also reported that their foreign-made panels have been released by the CBP, the bank said. With this new information, Morgan Stanley estimated that solar panels installed by electricity utilities could jump by almost half this year compared with its previous forecast.
As a result, solar company share prices have been as hot as the weather this month. Sunrun and Sunnova, two of the biggest US solar power providers, are up 21 per cent and 23 per cent respectively, in part due to good news from the CBP. Both group’s shares have now pulled ahead of where they languished during the depths of the Silicon Valley Bank crisis in March. Both companies were hit hard by fears that financing would retreat after SVB collapsed. Those fears never materialised.
Houston-based Sunnova has quietly carved out a niche for itself by offering battery storage as well as solar electricity. The company’s shares are now beating the S&P 500 for the year. Barclays last week said Sunnova’s shares still have room to run as solar equipment prices are falling, meaning more installation is likely for the rest of this year.
Clean energy companies are notorious for wild stock market bubbles and busts, but it is encouraging to see solar companies enjoying a moment in the sun that could give heart to renewable energy investors this summer. (Patrick Temple-West)
Smart read
Take a look at the FT graphic on heat domes — the new menace from global warming. If you weren’t sweating already, our colleagues reported that “heat domes can be self-reinforcing, since dry hot ground can heat up faster as a result of the lack of moisture that might otherwise evaporate and help cool the atmosphere.”
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