The global shift toward sustainable energy is crucial for combating climate change, ensuring energy security, and fostering economic resilience. However, this transition requires significant financial investment. Adequate financing is essential to support the development of clean energy infrastructure, enhance energy efficiency, and drive technological innovation.

Investing in sustainable energy also allows economic benefits such as creating jobs, reduces long-term energy costs, and strengthens global competitiveness in the evolving energy landscape.  Financing the energy transition requires private and public sector to work together to close the investment gaps especially in the developing countries.

Importance of Investing in Energy Transition

A report released by Deloitte stated that achieving net-zero greenhouse gas emissions by 2050 will require annual global investments ranging from $5 trillion to over $7 trillion in the energy sector. The firm stressed the importance of innovative financing mechanisms to mobilize private capital, thereby accelerating the development and adoption of green energy technologies.

Additionally, the International Energy Agency (IEA) highlighted the necessary steps needed to increase investments in the clean energy especially in the developing world. It stated that such investments in the “emerging and developing economies declined by 8% to less than $150 billion in 2020, with only a slight rebound expected in 2021. By the end of the 2020s, annual capital spending on clean energy in these economies needs to expand by more than seven times, to above $1 trillion, to put the world on track to reach net-zero emissions by 2050.”

The Energy Transition Commission also mentioned that the annual investments in the high- income economies and China needs to be doubled by 2030 compared to the current levels to build a net-zero economy. It added that investment in the middle- and low-income countries require a 4-fold increase from today’s levels to around $900bn a year by 2030.

Banks As Key Financiers of the Energy Transition

Recently, banks and financial institutions have new businesses to engage in. Decarbonization goals opened new opportunities for financing. According to an article published by CFA Institute, funding the establishment of the renewable energy projects is the direct method for banks to help accelerate the energy transition. This can be done through offering instruments like green loans and green bonds, which support green projects. CFA stated this type of funding is growing as it reached $4.2 trillion by the end of 2023.

Also, banks can provide capital through sustainability-linked loans and bonds, which allow companies their operations more sustainable, including through emissions reduction. It can be provided to businesses who do not have green assets. The report mentioned other methods for financing green projects such as leveraged finance, trade finance and treasury management noting that these tools have been later to the sustainability concept. Moreover, there is the blended finance, which is the use of public sources of capital to attract private investment in developing countries. The report said that this instrument is small but growing in the field of climate finance.

In the same context, an article published by the Banker citing a quote by Marc Borghans, Head of Sustainable Structured Finance at ING, explained that banks may be interested in any promising new technology or business model in clean energy.

He elaborated that the scalability and potential for impact, level of maturity determine their engagement. “Companies involved in this may be corporates or innovative small and medium-sized enterprises (SMEs), where partnerships between the two can improve bankability with investments by corporates validating a SME’s business proposition,” Borghans quoted.  He also noted that banks can help in de-risking the small innovative companies which are in early stage of development.

However, investing in energy transition faces various challenges including high upfront costs, increased risks, inflation, supply chain constraints and high interest rates. An article posted on World Economic Forum (WEF) highlighted “each region faces unique barriers, particularly developing economies, which receive just 15% of global energy transition investment.”

Banks Feuling Energy Transition in Egypt

Responding to stimulating energy transition projects, the Central Bank of Egypt (CBE) released guidelines for sustainable financing in Egypt’s banking sector in July 2021 to facilitate financing of environmentally friendly projects especially in the energy sector. An article published by the American Chamber of Commerce in Egypt explained that the principles of these guidelines, which include building the necessary capabilities and knowledge, enhancing sustainable finance, involving stakeholders, managing climate change risks, applying sustainability principles to internal activities and operations, and reporting.

Egyptian banks innovated more than 24 products and financing programs within the environmental and social sectors, including energy efficiency, renewable energy, agriculture, healthcare, and digital transformation.

Islam Mansour, an expert in the banking sector stated that Egyptian banks launched a small decreasing return of 5% for industrial and service activities and liberal professions “according to the initiative of the CBE. “The amount of the loan ranges from EGP250 ,000 to EGP8 million for financing existing and new projects,” he elaborated.

Also, “banking sector has shown its dedication to implementing Principles for Responsible Banking issued by the United Nations Environment Programme Finance Initiative (UNEP FI), where the compliance rate of the banking sector reached 75% of the sector’s total portfolio,” CBE elaborated.

Mansour added that, “banks in Egypt are financing all types of individual projects, companies of persons, companies, and all activities, as well as environmentally friendly projects and technologies for the purpose of switching to clean energy especially natural gas and solar energy”.

However, he highlighted that the dependence on fossil fuels in emerging and developing countries can consider a challenge for increasing investments in green energy. “For Egypt, the contribution of fossil fuels to electricity production was about 89% in 2023, according to the Egyptian Electricity Holding Company (EEHC). Hence, there is a lack in financial resources for green economy which requires significant investments in areas such as renewable energy, environmental efficiency improvement and waste management. The public sector may have difficulty in providing funding for such projects,” the expert discussed.