11.20
THE GREEN SERIES
PART I

Newsletters

Part I:

Cyprus does not need a new game strategy it needs a new game. If the island is to immerse out of the corruption-ridden negative media blow of the previous weeks and the devastating economic effects and repercussions, it can only do so on a completely brand-new game set-up with new players invited.  There’s no argument that the island’s working population is highly skilled and educated to deal with all kinds of business services no matter the game settings.  The new game should be green energy, it is the future and Cyprus could act as a Mediterranean hub for its promotion, development and production within the EU and the Middle East. The legal infrastructure is fully set up; what we’re missing are the players and a clear strategy.

The European Green Deal marked an extraordinary turning point by the EU towards the implementation and transformation of the EU into a Circular Economy and becoming climate neutral by 2050. Anyone following European affairs will confirm that the Green Deal will be the main pillar on which all new European proposals, legislation and actions of the European Union will be based on. The effects of the COVID pandemic together with effects of climate change have more or less re-affirmed the EU’s decision that the ‘Green’ road is the only road to a future. The green pledge is not only seen as a way to secure a healthy planet for the generations to come but also as a driving force for EU businesses to innovate, invest and be at the forefront of economic development in the decades to come.  It is estimated that Europe needs up to Euro 290 billion in additional yearly investment in order to achieve the targets set by the Paris Agreement. While the EU has committed over Euro 1 trillion in public funding for sustainable investments under the European Green Deal, given the scale of the investment gap, this will need to be supplemented by private investment.

The 2019 EU Environmental Implementation Review for Cyprus states that even though some progress has been made by Cyprus on some green issues such as waste management and water management, the island is slow with regards to adopting green strategies as a way to become a circular economy, but also as a primary objective as a means to stimulate and attract investments which of course will result in both short and long term benefits for the economy as well as the environment. The Cyprus National Energy and Climate plan (NECP) forms in essence Cyprus’s green national policy framework governed by the respective EU legal framework more commonly known as the European Green Deal. The implementation of such energy policy demands drastic and significant investments in energy infrastructure as well as in energy efficiency. Cyprus’s binding national target for example, regarding its share of renewable energy in the final energy consumption by 2020 is 13% and 23% by 2030. It is anticipated that although the overall target of 13% for 2020 will be overachieved, specific targets such as 10% renewable energy sources (RES) in Transport will be more difficult to achieve. Considerable investments and EU funding will be needed in order to achieve the 2030 national targets.

According to the NECP investments for RES will take place in all three sectors (Electricity, Heating and Cooling and Transport). Additionally, EU projects of common interest such as the creation of the EastMed Pipeline, the EuroAsia Interconnector and the EuroAfrica Interconnector which end the energy isolation of Cyprus as an EU member state, and create, the former an electricity highway from Israel to Cyprus to Greece and the latter from Egypt to Cyprus to Greece, whilst also promoting the substantial development of Renewable Energy Sources and the reduction of CO2 emissions, are now steadily moving towards the construction phase. All three projects are pinnacle steps for Cyprus for the role it can play in both transmitting and producing electrical energy produced from renewable sources.

The lack of attractive financing structures is still one of the biggest obstacles in Cyprus for the procurement of green and energy efficiency projects. Established commercial banks usually assess green and sustainable projects as traditional asset-backed loans resulting of course in prohibitive collateral requirements and unaffordable loan terms.  In addition, low awareness, lack of information, lack of effective support and supplementary support schemes as well as lack of any tax incentives are just some of the various barriers in Cyprus for the promotion of climate and energy efficiency projects.

That is why this is the time that the Cyprus government has to step up and make drastic changes. Serious incentive schemes must be created for both local businesses as well as foreign investors if Cyprus is to create and maintain a new stimulus for economic development and investment to carry it for, and why not, for another 30 years at least which is the deadline provided by the EU for becoming a climate neutral zone.

Data supports that about 60% of efficiency investments in Europe rely on self-financing through loans.  So, if Cyprus is to reach the ambitious targets it must do so through opening the market to third party financing and promoting new sources of finance via equity markets, green bonds/loans and sustainability linked loans. Such sustainable financing has boomed in recent years. It is estimated that the global value of green and sustainability linked loans alone in 2019 was USD 163 billion. Green loans are specific in that their purpose is to finance or refinance a specific green project whereas sustainability linked loans are any type of financial instrument for which the financial and/or structural characteristics can vary depending on whether the borrower achieves predefined Sustainability objectives. The main difference between these two types of financing being for the latter the application of proceeds is not a determinant and focuses on performance incentives which if achieved the borrower will benefit from reduced pricing. Various global brands have launched such bonds, take Starbucks for example which has issued a 30-year USD 1 billion Sustainability Bond in 2019 and previous such bonds in 2016 and 2017. Apple Inc. also sold a Euro 2 billion green bond whose proceeds will be applied for the reduction of its carbon footprint, use of greener materials and conservation of energy. Established investment banking institutions such as Goldman Sachs are also focussing on sustainable finance. Goldman Sachs has pledged in its 2019 Sustainability report a target of USD 750 billion in financing, advisory and investing activity in the next 10 years in sustainability themes.

If the Cyprus government takes the initiative for sustainability and the promotion of green and energy efficiency projects it will undoubtedly provide a substantial boost for the local investment funds market. The last years’ upgrade in the legal framework of the Cyprus investment funds aims to establish Cyprus as a Worldwide Investment Funds Hub. Thus, together with reshaped governmental support schemes for green and energy efficiency projects and private sector funding a fresh stimulus may be provided to the Cypriot economy.

The time has come and Cyprus government has to act swiftly and with precision for the promotion of a future with long-term development and investment goals based on sustainable growth. The momentum exists all we need to do is to embrace it, visualise a sustainable future and crystallize it.

 

November 2020

 

Nanette Kalava
Partner – Corporate Department
Kinanis LLC