- A huge increase in investment in energy efficiency is required if global energy systems are to be transformed to a more sustainable basis. Energy efficiency has significant and well-documented economic and environmental benefits, especially in regions with a history of cheap energy and high energy intensity. Companies’ energy costs can often be similar to or even higher than their profits. This indicates the significant financial benefits that can accrue from reducing energy costs through improved efficiency.
- To date, less attention has been paid to how these benefits can flow through to financial institutions as a result of reducing the default risk of borrowers. Reducing energy consumption lowers the exposure of companies to volatile energy prices, making their profits more secure and lowering the risk of their defaulting on loans.
- For the selection of companies studied, such a risk reduction could be worth as much as one percentage point (100 basis points) on the cost of debt, making energy efficiency lending a more attractive proposition for banks and reducing the cost of capital for borrowers.
- Over-cautious bank lending for energy efficiency may fail to take this risk reduction effect into account. This creates a role for international financial institutions to offer risk-sharing facilities, such as partial credit guarantees, to help companies and banks realize the benefits of energy efficiency and to help scale up the level of financing in this sector.
- In countries with a supportive environment for energy efficiency, well-designed risk management products can accelerate investment rates and trigger long-term improvements in the pricing of energy efficiency risk by the market.