Rapid growth in green projects is driving demand for capital and specialized expertise.
If you want to know how prominent environmental, social and governance (ESG) concepts are in the boardrooms of corporate America, just listen. Companies are eager to tell investors all about it.
Nine out of 10 S&P 500 companies published a sustainability report of some kind in 2019, up from 20% in 2011. Executives are under pressure—driven by consumers at first and now also investors—to change their practices, increase investments that enhance sustainability, and publicly report on those efforts to shareholders and the broader marketplace.
"In this age of stakeholder capitalism, the three most important letters right now are E-S-G," says Kevin Khanna, head of corporate banking at Fifth Third Bank. "Supporting sustainability has become table stakes for any company that wants to compete."
This new reality is particularly true for the energy sector, where developing and expanding sources of renewable energy—namely, solar and wind power projects—have taken center stage, compelled by the rising interest of stakeholders and an evolving regulatory environment motivated by growing concern about climate change.
Renewable Energy Overtakes Coal, Nuclear in Powering the U.S.
Source: The U.S. Energy Information Administration
"Renewables are probably the biggest focus of boardrooms across the energy sector, from utilities to traditional oil and gas companies," Khanna says.
What was once the arena populated by relatively small $20 million deals, primarily led by private equity investors, has now grown into headline-grabbing $2 billion wind farm projects that now also attract the interest of institutional investors. As renewable energy projects increase in scale, so too has the complexity of financing them.
Winning With Watts
Structuring the right financing is an essential component to the long-term success of these projects, according to Bob Marcus, head of capital markets for Fifth Third Bank. And when navigating the renewable energy space, it helps to have experience and deep marketplace knowledge.
Completing successful financing means understanding the full life cycle of each project, from construction to maturity. It also means understanding the scope of work involved in building and operating a project, as well as how best to underwrite the project.
"These are 20-, 30-, 40-year assets that are going to be supported by long-term power purchase agreements," Khanna says. "They are extensive projects with a lot of technicalities and many different stakeholders."
"In this age of stakeholder capitalism, the three most important letters right now are E-S-G."— Kevin Khanna, Head of Corporate Banking, Fifth Third Bank
Through the end of June 2021, Fifth Third has provided more than $6.4 billion in renewable energy lending and capital-raising services since 2012, putting it more than 80% toward its objective of $8 billion in financing by 2025. The bank’s sustainable finance goal includes lending commitments and facilitating the raising of capital for renewable energy—solar, wind, geothermal, biomass and hydropower, says Kevin Lavender, head of commercial banking for Fifth Third Bank.
Along the way, Fifth Third has developed deep sector expertise through a broad range of deals, particularly in solar energy. "We started regionally with smaller projects, where they were the right size for us," Marcus says. "There’s a lot of complexity around how to underwrite them, and it took time to lean in and really understand it all."
Meanwhile, the sector continues to evolve as new technologies emerge, changing the nature of the projects being financed. Oil and gas companies are increasingly turning to electrical fracking equipment and drilling rigs, he says, an example of how industries are finding ways to reduce emissions.
"It’s going to be very fluid in terms of technology and accessing appropriate debt and equity capital, but it’s also going to create an immense number of new opportunities," Marcus says.
Indeed, solar and wind power last year overtook both coal and nuclear power to become the second-largest source of electricity in the United States, behind natural gas. Fifth Third anticipates continued growth in renewables.
"There’s never been this much momentum globally around the shift to renewable sources of energy," says Khanna. "And now we have government policies that are accelerating that change."
As more energy-storage solutions come to market—specifically, through improved battery capacity—there will be even larger expansions in solar and wind power production. A few years down the road, hydrogen could offer new opportunities for on-demand, clean energy as well as additional demand for financing.
The bank is also helping its corporate clients contribute to a cleaner, more sustainable economy by participating in credit facilities with "green" pricing, whereby the borrower pays a lower rate if it meets certain sustainability metrics, and by underwriting sustainability bonds, the proceeds of which are applied to finance green and socially responsible projects.
"There’s a huge focus on changing things for the better, which is going to create a lot of opportunities and a lot of new industries," Khanna says. "We’re in the middle of a historic transition and it’s exciting to watch it happen." Learn more