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 It is tempting to think of climate finance as being all about funding solar plants and wind farms, but in truth a far less widely discussed part of the picture is just as important: energy efficiency.

“Energy efficiency is absolutely essential,” says Samantha Smith at the World Wildlife Fund in Oslo. “If we are going to make a transition out of fossil fuels more or less completely by the middle of the century – which is absolutely possible – we need massive improvements in energy efficiency. We have to use less energy, and the energy we are using will have to be almost exclusively renewable. If energy efficiency isn’t half the total effort, it’s between 25 and 50% of it.”

Energy efficiency has to be part of the overall approach, and climate finance must reflect this. “Basically, green bonds are all about keeping global warming within a 2 degree scenario,” says Christopher Wigley, portfolio manager at Mirova. “There are various ways of approaching this, from renewable energy to green transport, but one of the attractions of energy efficiency is not only does it make ecological sense for the climate, but it also makes economic sense as well. The more energy efficient an issuer’s building, the more money it can save.”

The problem is, “energy efficiency is traditionally hard to finance,” says Smith, “because it’s many small efforts. There’s an initial capital barrier that keeps smaller actors from going into it. Policies have to make financing easier.”

For an example of the efforts and challenges involved, look to Germany. As discussed in the renewable section of this guide, Germany has enormous ambitions around energy through its energiewende, or energy transition, policy. The public face of this internationally is Germany’s considerable progress in wind power, but just as important – vital to the success of the whole thing, in fact – is energy efficiency.


“Renewable energies and energy efficiency are two sides of the same coin,” says Karl-Ludwig Brockmann, in charge of sustainability at KfW Bankengruppe. “The long term targets for the share of renewables in electricity production can only be met if electricity consumption in total can be reduced. And that can only be done through more efficiency. Progress in energy efficiency is behind the path we need to be on to meet our long-term targets.”


It’s not that no progress has been made – Brockmann says that compared to 1990, Germany today needs one third less primary energy per unit of GDP. “So in these 25 years the energy efficiency has become one third better,” he says. “But it’s not enough.”


Getting there requires greater efficiency everywhere from housing to commerce to transport, but what’s interesting is perhaps the way that energy efficiency works at the individual level. In a 2012 sustainability report, KfW committed to provide over Eu100 billion to supporting the energy transition in the following five years, and by the end of 2014 had already deployed Eu60 billion of it. And, while some of KfW’s work is in big-ticket project finance through its KfW IPEX-Bank, the bulk of it is financed through promotional programmes, with thousands of individual loans per year.


For example, when Global Capital interviews KfW, two of the three people on the German end of the call have taken up loans for energy efficiency. “I used it for the modernization of my roof to make it more energy efficient,” says Holst Seissinger, head of capital markets. “If you ask a lot of people in Germany who has a loan for energy efficiency, a lot of them will raise their hands.”


For individuals, Seissinger’s roof is representative of the sort of project the programme reaches: better insulation, better windows, a new boiler. There are investments related to commercial buildings too, from energy efficient new administration buildings to more efficient lighting or heat recovery.


It is perhaps at this grass-roots level that the battle will be won. Smith at the WWF notes an increasingly common system in the US and Europe now, where a utility will front the cost of a home owner adding insulation to their home, or installing renewable energy, and then the homeowner will pay the utility back through the savings in the energy bill. “It’s proven very effective,” she says. “It’s a way of getting people to make their home energy efficient and get over the up-front cost of capital.


“The thing about climate change is there are the big things, like the green bonds and the flight out of coal, but also the small things that are happening at the household and individual level that are just as interesting.”


How about funding? “I think the EIB have shown great leadership,” says Christopher Wigley, portfolio manager at Mirova, which is a long-standing supporter of EIB. “We certainly look at EIB bonds for energy efficiency and renewable energy. Their leadership is not just in being first, or in the amount of issuance, but the diversity of currencies and maturities. They brought a 12-year deal when many others were less than 10.”


KfW’s engagement with green bonds is a recent development. Seissinger says “there is no direct link between our energy efficiency or renewable programmes and our activities in the capital markets,” in the sense that KfW’s work promoting energy efficiency goes back to the second oil crisis in the 1980s, and well predates the invention of green bonds. “It’s part of our history, our DNA, to do financing for green projects.”


Consequently, at first, KfW saw little point in labelling anything as a green bond since it obviously already was, label or not. “Our approach until 2014 was that all KfW bonds are green bonds.”  But, sensing investor attitude changing and believing green bonds could get capital markets more involved in discussions on sustainability, it decided to start issuing green bonds in 2014, since which time it has become a voracious benchmark issuer, and the third largest in the world in outstanding issues, across four currencies (euros, dollars, pounds and Australian dollars).


Doing so not only modestly diversified funding sources, it also shifted the dialogue with existing investors on to sustainability. Furthermore, it didn’t really cost KfW anything to make the switch, since it already had sophisticated reporting systems in place for its renewable projects that pretty much meet expected standards for green bonds anyway.


“We don’t want to give priority only to deep green investors,” says Seissinger. “We believe if we allocate to mainstream investors too, it will stimulate discussions in these main organisations about why they should buy green bonds, and whether capital markets should take over responsibility for environmental and climate protection.” He also believes that, eventually, KfW should get better funding in this way, thought that’s a long-term goal.


Accounting for energy efficiency in a green bond perspective can be challenging, because energy efficiency requires different ways of thinking about reporting. “This is one case where CO2 reporting may not be the best,” says Lars Eibeholm at Nordic Investment Bank, which has issued seven green bonds. “KWh may be a better way to measure energy efficiency, because there you can measure the absolute impact.”


There’s also the need to study the exact impact. Christopher Flensborg at SEB believes that “energy efficiency is a no-brainer”, but also adds that each project needs to be looked at carefully, “because extending something’s lifetime might in some cases more than offset the benefits of doing so. This is an area that needs professional advice, to make sure you are creating advantages rather than the opposite.”



Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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