Capturing the true value of greenfield renewables

Greenfield renewable energy projects are not getting the credit they deserve for their contribution to net zero with current ESG standards failing to recognise their additionality, write Jiska Klein and Emma Tinker of Asper Investment Management

Jiska Klein

With each COP conference, more people realise that the earth is warming rapidly, with massive risks to ecosystems and human beings. Urgent action is needed to reduce our consumption of fossil fuels and shift to renewable sources of energy. The UN estimates that at least $4 trillion a year needs to be invested in greenfield renewable energy projects by 2030 to allow us to reach net-zero emissions by 2050. The only way to make the change from fossil fuels to renewable energy is to speed up the delivery of additional renewable energy capacity. So the goal is simple: we need to attract and invest more capital into renewable energy investments that replace fossil fuels in order to reach our net-zero goals and halt climate change.

Despite the clarity of this objective, there has not been enough investment into the right companies and projects. Investment in pre-existing, brownfield renewable energy projects has been prioritised over new greenfield projects by many investors (because it is easier) and astonishingly by ESG regulatory frameworks (because their definition of net-zero and measured KPIs are wrong).

Emma Tinker

Alongside traditional risk-return considerations, sustainability is becoming increasingly important in institutional investors’ decision-making processes. Sustainability-related information and ESG risks are nowadays standard factors in investment decisions. Through carbon standards like the GHG Protocol, SBTi and PCAF, businesses are stimulated to report on and to reduce their carbon emissions.

These standards are useful tools for companies and investors in their path to decarbonisation, requiring transparency on GHG emissions. Besides these standards, under the EU’s Sustainable Finance Disclosure Regulation, asset managers must collect ESG metrics from their portfolio companies and report on “principal adverse impact indicators”, such as scope 1, 2 and 3 GHG emissions.

But what if this sustainability information is not reflecting the path to net zero fairly? What if it leads to favoring the acquisition of existing renewable energy projects over developing new renewable energy projects? What if it treats actions that make no incremental contribution to achieving net zero the same way as the actions that we require in order for net zero to happen?

Flawed metrics

The ESG metrics that are currently captured by these reporting frameworks, do not accurately present what is needed to deliver on the energy transition. This is because their focus is on “doing no significant harm” rather than on delivering positive benefits or additionality.

Additionality means the delivery of outcomes that would not have happened without a specific intervention. It is a key concept in the evaluation of climate change mitigation projects, used to determine whether a project has real environmental benefits that are additional to business as usual. Without investments that deliver additionality, delivering the energy transition and halting climate change are not possible, since no new capacity will be added to the national grid that displaces fossil fuels.

Under current sustainability metrics, for instance, an investment in the development and construction of a new wind park is not given more recognition than an investment in an existing operational wind farm.

In fact, as the accompanying graphic shows, greenfield stage investments are even being penalised by such metrics since the scope 3 emissions generated during the construction phase are counted against them. As these reporting frameworks do not capture additionality – such as the additional renewable energy capacity added by investing in greenfield stage projects – they are missing crucial information on investors’ efforts to deliver net-zero goals. Despite the clear difference in additionality, both greenfield and brownfield investments are allowed to “claim” the same avoided emissions from the financed project.

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It is both illogical and undesirable that it should be more attractive to invest in a wind park that is already there than to build something new. Currently, these sustainability frameworks are not stimulating the development of new renewable energy capacity and could even hamper the energy transition. It is important to align the reported performance under these frameworks with the actual impact in the real world.

To correct this flaw in the reporting system, we propose three new metrics for measuring investors’ contribution to the development of additional renewable energy capacity, which are: the installed renewable energy capacity; the total amount invested in greenfield renewable energy projects and: the net lifecycle avoided emissions from the installed renewable energy projects.

Capturing additionality by these indicators will elevate greenfield over brownfield investments from a sustainability perspective. It will improve transparency, reduce the risk of greenwashing, and lead to a better understanding of how investors are really contributing to the energy transition during their ownership.

ESG value-add

We believe the concept of additionality should be better reflected in reporting standards and investors’ corporate ESG reporting. All financial institutions should be required to measure and report how they deliver ESG additionality, so it can be included in investors’ decision-making up front. Just as managers must show they actively generate returns (alpha), we believe there should be questions about ESG value-add as a result of a manager’s investment or ownership of the asset.

With metrics that capture additionality, financial institutions can be recognised and rewarded for providing the leadership and capital required to achieve the energy transition and halt climate change – both of which are needed now.

Jiska Klein is senior sustainability manager and Emma Tinker is chief investment officer at London-based Asper Investment Management. This article has been adapted from a white paper Asper published in November 2022, ‘Why current carbon reporting standards fail to incentivize additional renewable energy development’.