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The latest edition of SEB’s The Green Bond report explains why the war in Ukraine may at first delay the clean energy transition and increase emissions, but ultimately will lead to an even faster acceleration in the pace of the transition as a push for energy independence amplifies the boost from low cost and climate risks. The report also looks at the challenging start to the year for sustainable financing, with the first quarter seeing a decline in sustainable debt issuance and sustainable assets underperforming in secondary markets.

“The war in Ukraine is above all a human tragedy, but it will also have a major impact on the outlook for the energy transition given the fact that Russia is the world’s largest fossil energy supplier,” says Thomas Thygesen, Head of Research, Climate & Sustainable Finance, at SEB.

“Even though we will have to use more coal and oil in the next year or two to compensate for acute shortages as a result of the war, which is likely to lead to higher CO2 emissions in the near term, these tragic events are now also resulting in the convergence of three powerful drivers for transition investment.”

First, the political motivation for investing in renewables has changed as the war exposed Europe’s vulnerability and reliance on external suppliers of energy. Energy policy has thus essentially become part of security policy focused on securing energy independence, with renewable energy and nuclear power the main sources of energy that are not dependent on access to fossil materials.

Secondly, the economic case for renewable energy has strengthened tremendously following the supply shocks related to the war in Ukraine.

The high cost of fossil-based energy relative to renewable energy means countries can significantly reduce the cost of energy by accelerating the transition. The final argument for clean energy transition investment is the one that has been there all along – the need to prevent an irreversible climate disaster by reducing CO2 emissions.

Sustainable Financing for clean energy transition

The report also looks at the challenging start to the year for sustainable financing and the clean energy transition, after the first quarter saw the first year-on-year decline in sustainability debt transactions since at least 2016. According to preliminary figures reported until 1 April, a total of USD 255.9 billion in new labeled bonds and loans were transacted from January to March 2022, which marks a more than 30 percent decline from the USD 416.3 billion that was transacted in the same period last year.

“This is the first decline in at least six years but it is likely to be a temporary reaction to geopolitical turmoil,” says Gregor Vulturius, Advisor at Climate & Sustainable Finance at SEB. “We expect issuance to pick up again in the coming months, not least for social bonds that may help fund spending to support those afflicted by war.”

“There are also signs of a change in the pricing of sustainable assets,” says Thomas Thygesen. “For bonds, lower ‘greeniums’ reflect lower realized returns and higher realized risk. In equities, the clean energy index has de-rated after what looks like a liquidity bubble, but still looks expensive. We think this is a healthy repricing to more realistic assumptions about future returns.”

About The Green Bond report

SEB, which together with the World Bank developed the green bond concept in 2007/2008, publishes the research publication The Green Bond 5-6 times a year. It strives to bring readers the latest insight into the world of sustainable finance through various themes, such as the clean energy transition. Even though the report covers all kinds of products and developments in the sustainable finance market, we have decided to keep its historic name – The Green Bond – as a tribute to our role as a pioneer of the green bond market. You can find The Green Bond report here.